BOOKOF Proceedings With-Cover

ICODECON, 2-4.10.2015, Kalamata, Greece.
Conference proceedings, ISBN 978-618-82146-1-3
Conference proceedings of
1st International Conference of Development and Economy (ICODECON)
Conference Theme: The advantages and disadvantages of Economic Crises

2-4 October 2015, Kalamata
Editors: D. Petropoulos & G. Kyriazopoulos ,
January 2016.
Technological Educational Institute (TEI) of Peloponnese,
Antikalamos, 24100, Kalamata, Greece
www.teikal.gr
info: info@icodecon.com
ISBN 978-618-82146-1-3
2
ICODECON, 2-4.10.2015, Kalamata, Greece. Conference proceedings, ISBN 978-618-82146-1-3
1st International Conference of Development and Economy (ICODECON)

2-4 October 2015
Elite City Resort, Kalamata, Greece.
Conference Theme:
The advantages and disadvantages of Economic Crises
Conference site: www.icodecon.com

info: info@icodecon.com
Under the auspices of:
3
4
Organizers
University of national and World economy,

Sofia, Bulgaria
Technological Educational Institute www.unwe.bg/en
(TEI) of Peloponnese,
Kalamata, Greece
www.teikal.gr
Alexandru ioan Cuza University, Technological Educational Institute of Western

Iasi, Romania. Macedonia, Kozani, Greece
www.uaic.ro http://www.teiwm.gr/index.php?lang=el
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MAJOR SPONSOR OF THE CONFERENCE
http://www.kareliafoundation.org.gr/
The George and Victoria Karelias Foundation is the result of the ambition of George
Karelias to transform his lifetime values into a lasting heritage.
Born in Athens on March 14 1929, George Karelias studies Economics and Business
Administration at George Washington University in the United States of America. During
this time he also furthered his studies in Fine Art. In 1959, he settled in Kalamata and joined
the family business. During a long and illustrious career, distinguished by creativity and
innovation, he made his personal mark on the development of the Greek tobacco industry.
A businessman, but also an artist, George Karelias was known for his exceptional talent for
drawing and his great love of books and history. He never missed an opportunity to
contribute to the cultural and economic advance of the Region of Messina, where he lived
until his death in April 2000. A man of boldness, sensitivity and vision, generous yet
personally modest, he decided in 1993 with his wife Victoria, to establish a public benefit
foundation called the “The George and Victoria Karelias Foundation” to promote the greater
common good through education and research.
Today, the foundation is actively led by Victoria Karelias, who as President contributes her
personal dynamism, passion for life and vision to the achievements of the foundation. In
addition to this role, Victoria Karelias is Chairman of Karelia Tobacco Company, and
President of several Greek cultural organizations
The George and Victoria Karelias Foundation continues the work of George Karelias,
faithfully following his vision and values: a better quality of life for Greek citizens through
the improvement of the educational, research and economic achievements of the country.
For its goals and vision to become reality, the George and Victoria Karelias:
Supports individuals or groups who are establishing leading roles in the fields of Education
and Research
Organizes educational programs and sponsors conferences for the development of the Greek
economy and its promotion both nationally and internationally
Regularly creates business publications that present the latest results of specialized economic
research.
Student scholarships. The George and Victoria Karelias Foundation encourages every effort
to acquire knowledge by selecting from among the most distinguished graduates of Greek
origin and supporting them to continue their post-graduate education either at home or
abroad.
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The Conference Scientific Committee:

President
Dr. Petropoulos P. Dimitrios, Assoc. Prof. TEI of Peloponnese - Greece
Vice President
Dr. Kyriazopoulos Georgios, Lecturer TEI of Western Macedonia - Greece
Members
Dr. Aggelopoulos Stamatis, Assoc. Prof. Alexander TEI of Thessaloniki – Greece
Dr. Aghiorghiesei Daniela, Prof. University Alexandru Ioan Cuza - Romania
Dr. Alexandru Tugui, Prof. University Alexandru Ioan Cuza - Romania
Dr. Anastasiei Bogdan, Assoc. Prof. University Alexandru Ioan Cuza - Romania
Dr.Antoniadis Ioannis, Assist. Prof. TEI of Western Macedonia – Greece
Dr. Asandului Laura , Prof. University Alexandru Ioan Cuza - Romania
Dr. Baciu Livia, Prof. University Alexandru Ioan Cuza - Romania
Dr. Bedrule-Grigoruta Maria Viorica, Prof. University Alexandru Ioan Cuza - Romania
Dr. Bertea Patricia Assist. Lect. University Alexandru Ioan Cuza - Romania
Dr. Bitsani Eugenia, Prof. TEI of Peloponnese - Greece
Dr. Bobalca Iuliana Claudia, Assoc. Prof. University Alexandru Ioan Cuza - Romania
Dr. Burny Philippe, Prof. University of Liege - Belgium
Dr. Chionis Dionisios, Prof, Democritus University of Thrace - Greece
Dr. Chiper Sorina, Lect. University Alexandru Ioan Cuza - Romania
Dr. Clipa Raluca, Lect. University Alexandru Ioan Cuza - Romania
Dr. Ciortescu Elena, Lect. University Alexandru Ioan Cuza - Romania
Dr. Ciulu Ruxandra, Assoc. prof. University Alexandru Ioan Cuza - Romania
Dr. Cocarta Luminita Andrei, Prof. University Alexandru Ioan Cuza - Romania
Dr. Dinu Airinei, Prof. University Alexandru Ioan Cuza - Romania
Dr. Drimpetas Evaggelos, Assoc. Prof, Democritus University of Thrace - Greece
Dr. Dritsaki Chaidi, Assoc. Prof. TEI of Western Macedonia - Greece
Dr. Dritsaki Melina, Assoc. Prof. in University of Warwick - United Kingdom
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Dr. Filos Ioannis, Assoc. Prof. Panteion University - Greece

Dr. Firtescu Bogdan, Assoc. Prof. University Alexandru Ioan Cuza - Romania
Dr. Galanos Georgios, Lecture Democritus University of Thrace - Greece
Dr. Georgescu Iuliana, Prof. University Alexandru Ioan Cuza - Romania
Dr. Geronikolaou Georgios, Lecturer in Democritus University of Thrace - Greece
Dr. Giannakas Konstantinos, Prof. University of Nebraska-Lincoln - USA
Dr. Hatzinikolaou Dimitrios, Assoc. Prof. University of Ioannina - Greece
Dr. Hazak Aaro, Prof. Tallinn University of Technology - Estonia
Dr. Iacobuta Andreea, Assoc. Prof. University Alexandru Ioan Cuza - Romania
Dr. Ifrim Mihaela, Lect. University Alexandru Ioan Cuza - Romania
Dr. Isan Vasile, Prof. University Alexandru Ioan Cuza - Romania
Dr. Istrate Costel, Assoc. Prof. University Alexandru Ioan Cuza - Romania
Dr. Ivanova Nedka, Prof. of UNWE - Bulgaria
Dr. Jemna Danut, Prof. University Alexandru Ioan Cuza - Romania
Dr. Kazakos Panos, Prof. University of Athens - Greece
Dr. Karafolas Simeon, Prof. TEI of Western Macedonia - Greece
Dr. Kopeva Diana, Prof. of UNWE – Bulgaria
Dr. Koutroukis Theodoros, Assist. Prof. in Democritus University of Thrace - Greece
Dr. Lazos Grigorios, Senior Executive in the Ministry of Economics - Greece
Dr. Liargοvas Panagiotis, Prof. University of Peloponnese - Greece
Dr. Lupu Dan, Assist. Lecturer, University Alexandru Ioan Cuza - Romania
Dr. Maha Liviu, Assoc. Prof. University Alexandru Ioan Cuza - Romania
Dr. Makris Ilias, Assoc. Prof. TEI of Peloponnese - Greece
Dr. Manolica Adriana, Assoc. Prof. University Alexandru Ioan Cuza - Romania
Dr. Maroudas Theodoros, Chief Executive in the Ministry of Economics - Greece
Dr. Mavridakis Theofanis, Assoc. Prof. TEI of W. Greece - Greece
Dr. Maxim Laura, Lect. University Alexandru Ioan Cuza - Romania
Dr. Mircea Georgescu, Prof. University Alexandru Ioan Cuza - Romania
Dr. Mironiuc Marilena, Prof. University Alexandru Ioan Cuza - Romania
Dr. Mishev Plamen, Prof. DSc. of UNWE - Bulgaria
Dr. Mitocaru Simona, Lect. University Alexandru Ioan Cuza - Romania
Dr. Munteanu Corneliu, Prof. University Alexandru Ioan Cuza - Romania
Dr. Mursa Gabi Assoc. Prof. University Alexandru Ioan Cuza - Romania
Dr. Nader Alber Assoc. Prof. Ain Shams University, Cairo, Egypt
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Dr. Nestian Stefan Andrei, Assoc. Prof. University Alexandru Ioan Cuza - Romania
Dr. Nikolaidis N. Vasilios, Assist. Prof. TEI of Peloponnese - Greece
Dr. Nita Valentin, Prof. University Alexandru Ioan Cuza - Romania
Dr. Onofrei Mihaela, Prof. University Alexandru Ioan Cuza – Romania
Dr. Oprea Florin, Assoc. Prof. University Alexandru Ioan Cuza - Romania
Dr. Panagou Vasilios, Prof. of TEI of Piraeus - Greece
Dr. Papadogonas Theodore, Assoc. Prof. TEI of Halkida - Greece
Dr. Papadopoulos Savvas, Bank of Greece - Greece
Dr. Papageorgiou Athanasios, Prof. TEI of Peloponnese - Greece
Dr. Papakonstantinidis Leonidas, Prof. TEI of Peloponnese - Greece
Dr. Papoudaki Foteini, Assoc. Prof. TEI of Peloponnese – Greece
Dr. Pascariu Gabriela Carmen, Prof. University Alexandru Ioan Cuza - Romania
Dr. Pintilescu Carmen, Prof. University Alexandru Ioan Cuza - Romania
Dr. Pohoata Ion, Prof. University Alexandru Ioan Cuza - Romania
Dr. Politis Evangelos, Prof. TEI Western Greece - Greece
Dr. Popescu Cristian, Assoc. Prof. University Alexandru Ioan Cuza - Romania
Dr. Poufinas Thomas, Lect. in Democritus University of Thrace - Greece
Dr. Pragidis Ioannis-Chrisostomos, Lecturer in Democritus University of Thrace Greece
Dr. Prodan Adriana, Prof. University Alexandru Ioan Cuza - Romania
Dr. Prontzas Evangelos, Prof. Panteion University - Greece
Dr. Rezitis Anthony, Prof. University of Patras - Greece / University of Helsinki - Finland
Dr. Roman Cristina Teodora, Assoc. Prof. University Alexandru Ioan Cuza - Romania
Dr. Roman Angela, Assoc. Prof. University Alexandru Ioan Cuza - Romania
Dr. Sarafopoulos Georgios, Assoc. Prof. in Democritus University of Thrace - Greece
Dr. Sariannidis Nikolaos, Assoc. Prof. TEI of Western Macedonia - Greece
Dr. Sasu Constantin, Prof. University Alexandru Ioan Cuza - Romania
Dr. Siskos Evangelos, Prof. TEI of Western Macedonia - Greece
Dr. Spiliopoulos Odiseas, Assoc. Prof. TEI of Peloponnese – Greece
Dr. Spyromitros Eleftherios, Assist. Prof. in Democritus University of Thrace - Greece
Dr. Stavroyiannis Stavros, Prof. TEI of Peloponnese - Greece
Dr. Tiganas Claudiu, Lect. University Alexandru Ioan Cuza - Romania
Dr. Toderascu Carmen, Lect. University Alexandru Ioan Cuza - Romania
Dr. Tugulea Carmen Oana, Assoc. Prof. University Alexandru Ioan Cuza - Romania
Dr. Voicilas Dan-Marius Assoc. Prof. in Romanian Academy - Instit. of Agric. Economics -
Romania
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Dr. Zait Adriana , Prof. University Alexandru Ioan Cuza - Romania

Dr. Zait Dumitru, Prof. University Alexandru Ioan Cuza - Romania
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The Conference Organizing Committee:

President
Vice President
Members
Dr. Chiper Sorina, Lect. University Alexandru Ioan Cuza - Romania
Dr. Dritsaki Chaidi, Assoc. Prof. TEI of Western Macedonia - Greece
Dr. Dritsaki Melina, Assoc. Prof. University of Warwick - United Kingdom
Dr. Geronikolaou Georgios, Lecturer in Democritus University of Thrace - Greece
Dr. Hazak Aaro, Prof. Tallinn University of Technology - Estonia
Dr. Makris Ilias, Assoc. Prof. TEI of Peloponnese - Greece
Dr. Mishev Plamen, Prof. DSc. of UNWE - Bulgaria
Dr. Nikolaidis N. Vasilios, Assist. Prof. TEI of Peloponnese - Greece
Dr. Papageorgiou Athanasios, Prof. TEI of Peloponnese - Greece
Dr. Papakonstantinidis Leonidas, Prof. TEI of Peloponnese - Greece
Dr. Papoudaki Foteini, Assoc. Prof. TEI of Peloponnese – Greece
Dr. Rezitis Anthony, Prof. University of Patras - Greece / University of Helsinki - Finland
Dr. Spiliopoulos Odiseas, Assoc. Prof. TEI of Peloponnese – Greece
Dr. Spyromitros Eleftherios, Assist. Prof. in Democritus University of Thrace - Greece
Dr. Stavroyiannis Stavros, Prof. TEI of Peloponnese - Greece
Organizing Assistants
Anastasopoulos Christos, General Hospital of Messinia - Greece
Athanasopoulou Elena, TEI of Peloponnese - Greece
Dalipaj Bledi, Sybraxi Business Consultants - Greece
Doussis Sheila, Alfa Training Center of Kalamata - Greece
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Germpana Eirini, TEI of Peloponnese - Greece

Fatouros Dimitrios, TEI of Peloponnese - Greece
Georgountzos Antonios, TEI of Peloponnese - Greece
Karamitrou Konstantina, Institute of Professional Training Kalamata - Greece
Kostriva Anna, TEI of Peloponnese - Greece
Kottaridi Klimentia, TEI of Peloponnese - Greece
Liakoura Georgia, TEI of Peloponnese - Greece
Liggitsos Alexandros, TEI of Peloponnese - Greece
Mouzakidi Aggeliki, University Alexandru Ioan Cuza - Romania
Petropoulos Stavros, Kingston University of London
Saravelakis Kostas, TEI of Peloponnese - Greece
Communication in English
Msc. Tsompanou Olga
Skype Directions
Aggouras Georgios, TEI of Peloponnese - Greece
Galiotos Kostas, TEI of Peloponnese - Greece
Papaioannou Pantelis, TEI of Western Macedonia - Greece
Secretary
Liakoura Georgia, TEI of Peloponnese – Greece
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FOREWORD
In an international situation of intense quest, dispute, but also anguish for the future,
the TEI of Peloponnese participates in the ambivalent economic scene, organizing the first
“International Conference of Development and Economy”. Participate in the search and in
persistent and painstaking work of scientists and researchers in the field of Economics and the
need for themselves, to express their opinions, scientific findings and their suggestions.
The TEI of Peloponnese - a regional institution of higher education in Greece, in the

heart of the Peloponnese -actively participates in national and international level, in the areas
covered in the disciplines of its scientific fields. The organization of this Conference is part of
our outreach policies and the search for new partnerships in the international arena.
I would like to express my congratulations to the Organizing Committee and

especially to the fellow Professor D. Petropoulos, on the initiative of the organization and the
excellent preparation of the Conference
I wish you every success in your work.
Prof. Dimitris Velissariou
Rector
TEI of Peloponnese
13
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The I.CO.D.ECON (International Conference of Development and Economy) is a

coordinated effort of the Technological Educational Institute of Peloponnese (Greece) and
the collaboration of University of National and World Economy, Sofia (Bulgaria), the
University Alexandru Ioan Cuza, Iasi (Romania) and the Department of Accounting and
Finance of the Technological Educational Institute of Western Macedonia (Greece), for
extrovercy and promotion of scientific knowledge as a main tool for discovering
opportunities at a time when the international community is plagued by the financial crisis.
The conference is held under the auspices of the Greek Ministry of Education -
Ministry of Culture and the Ministry of Economy - Infrastructure - Shipping - Tourism of
Greece, and under the auspices of the Economic Chamber of Greece.
This international conference aims to cover even a small gap in the expression of
scientific knowledge at international level and become the starting point for discovering and
presenting solutions in the fields of development and economy for a better tomorrow.
Nevertheless, science and especially research, assessments, approaches with scientific
background and oriented interpretation, evaluation of economic phenomena, and the deposit
of scientific proposals and positions on key and specific issues (theoretical and practical)
cannot be exhausted and there will always be room for new relevant scientific presentations
and events.
Also ICODECON, wanting to give more emphasis on young scientists, has established
the Prize for the best scientific research. We believe it is important to promote and support
young researchers.
The ICODECON is implemented in a period of prolonged global economic crisis,

which has affected in different ways the international economy, creating new data at all
levels. This fact is reflected in papers submitted to the Conference.
The effort for the implementation of the 1st International Conference is characterized
largely by success with more than 160 scientific papers submitted by both professors and
young scientists from 33 countries and 5 continents. I would like to express my gratitude to
them, for their very interesting proposals and their choice to present their original work and
research at ICODECON.
On this occasion I would like to thank the Administrations of the four educational
institutions, all Members of the Scientific Committee for their contributions, the members of
the Organizing Committee and the Organizing Secretariat and all those who contributed to the
realization of this International Conference. I would also like to thank two excellent
professors Mr. Chionis and Mr. Drympetas, who along with the Head of Parliament Budget
Office prof. Liargovas Panagiotis are the central scientific speakers of this international
conference.
This book of proceedings (in cd form) contains the full papers which were presented at
the conference. The full papers were evaluated and peer reviewed by academics of the
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relevant fields, members of the scientific committee of the conference. After the fruitful
comments and suggestions made by the reviewers, the authors of the papers which were
accepted for publication submitted the revised papers to the editors of the proceedings’ book.
The high quality of the papers submitted to the conference is also proven by the
number of conference papers which are accepted for publication in scientific journals, which
are partners to the Conference ( mainly Research in Economics and Business: Central and
Eastern Europe (REB), Business & Enterpreneurship Journal and Advances in Management
and Applied Economics). These papers are not included in this book, for copyright reasons.
At the end I would like to thank and make particular reference to the George and
Victoria Karelia Foundation, with the support of which we were able to realize with dignity
this international scientific conference, an important event for the city of Kalamata.
Dr. Dimitrios P. Petropoulos
Associate professor
President of the Organizing and Scientific Committee of the Conference
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Table of contents
The impact of FDI outflows on the Unemployment Rate in the source countries ................... 21
Issatay Doskaliyev ............................................................................................................................. 21
The institutional reforms in the EU and the new financial mechanisms in the Eurozone after
the debt crisis ............................................................................................................................ 29
Psychalis M. ...................................................................................................................................... 29
Sectors attracting venture capital in Poland and other European countries ............................. 45
Elżbieta Grzegorczyk......................................................................................................................... 45
Terms of trade of EU member countries in the context of changing primary commodity
prices ........................................................................................................................................ 58
Witkowska, E. A. ................................................................................................................................ 58
Importance of Export Led Growth in Transition Economies: Some Firm Level Evidence from
Serbia ........................................................................................................................................ 71
Bozidar Cerovic & Sanja Mitic ......................................................................................................... 71
Implementation of plastics tax in Ghana: Cost-effectiveness analysis .................................... 83
Kombat A. M. .................................................................................................................................... 83
A (successful) story of Poland’s transformation and European integration. What can be
advised to follow, and what – warned to avoid? ...................................................................... 92
Benon Gaziński .................................................................................................................................. 92
Soil resources and the role in agriculture sector of Greek Economy. .................................... 104
Ch. Paschalidis1, D. Petropoulos1, D. Paschalidis3 I. Chouliaras2, P. Sinioros4 and S. Sotiropoulos7
......................................................................................................................................................... 104
Principal Component Analysis of Wetland Functions and Values: The case of Wetland Agras-
Vritta-Nisi............................................................................................................................... 107
Apostolidis Georgios ....................................................................................................................... 107
Price and Quality Export Competitiveness in Bulgarian Agri-food Industry ........................ 119
Nikolay Sterev, Dimitar Blagoev, Paskal Zhelev, Diana Kopeva ................................................... 119
Impact of the new Common Agricultural Policy (2015-2020) on the value of direct payments
and on farmers’ income in Wallonia (South of Belgium) ...................................................... 131
Ph. Burny1,2 and F. TerronesGavira2............................................................................................ 131
Entrepreneurship and the state of SMEs in Poland. An example of central Poland .............. 136
Małgorzata Jabłońska ..................................................................................................................... 136
Fourth Anti-Money Laundering Directive – New Requirements and Challenges for Bulgarian
Accountants and Auditors ...................................................................................................... 145
A.Filipova-Slancheva ...................................................................................................................... 145
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The relationship between the declared income and gross domestic product: A key factor in
identifying tax evasion in the Greek economy. ...................................................................... 154
Lazos Grigorios, Maroudas Theodoros .......................................................................................... 154
Is audit quality Implied by Accruals Quality associated with Audit fees and Auditor Tenure?
Evidence from China .............................................................................................................. 159
Kikhia Hassan & Albitar Khaldoon & Jin Ping Zhang ................................................................. 159
Women on “board”: Economic turmoil and the presence of women in positions of influence
in Greece ................................................................................................................................ 174
Anastasiou, S.1, Siassiakos, K2., Dermatis, Z.3 and Lazakidou, A.3 ................................................. 174
“Metalmanu, A Cluster of Metal Businesses in Western Macedonia, Greece” ..................... 183
C. Voulgaraki, A.Maropoulos, S.Papanikolaou, D. Stimoniaris and S. Maropoulos ...................... 183
Exploring the Relationship of Youth Entrepreneurship, in the light of entrepreneurial lectures
in tertiary education, intentions and cultural background ...................................................... 193
Bampasis Eleftherios ....................................................................................................................... 193
Service-Oriented Systems and Service Level Agreements applied in Health Information
Technologies .......................................................................................................................... 204
Stella Christopoulou1, Theodore Kotsilieris2, Ioannis Anagnostopoulos3 and Vasiliki Dimopoulou4
......................................................................................................................................................... 204
Operating within Legislative Restrictions. Marketing Funds for Urban Restoration Supporting
the Fight against Aesthetic Pollution. .................................................................................... 219
Odysseas N. Kopsidas1, Leonidas Fragkos-Livanios2 ..................................................................... 219
A new index to measure the human well-being in Wallonia and its communes (South of
Belgium) ................................................................................................................................. 231
Burny P............................................................................................................................................ 231
Dealing with Communication Barriers in Business Meetings - Focus on Intercultural Aspects
................................................................................................................................................ 237
Ciortescu E. and Cecal A. ............................................................................................................... 237
The Effects of Endorsement Sources towards Perceived Credibility .................................... 242
Cara C. and Tocila T....................................................................................................................... 242
Estimating Greek financial crisis impact on port authorities’ revenues: The case of a regional
cruise homeport. ..................................................................................................................... 252
S. Troumpetas1, C. Beneki2, D. Giannias1 & P. G. Eliopoulos3 ..................................................... 252
Domestic Tourism: Is this a chance for regional development of Thessaly under financial
crisis? ...................................................................................................................................... 265
D. Kyriakou1, N. Blanas2, D. Belias3 and A. Koustelios3 .............................................................. 265
Macroeconomic developments in Turkey, 1980-2001 .......................................................... 275
Ozlem Aytac..................................................................................................................................... 275
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Exchange-Rate-Based Stabilizations: A Literature Review ................................................... 276

Ozlem Aytac..................................................................................................................................... 276
19
20
The impact of FDI outflows on the Unemployment Rate in the source countries
Issatay Doskaliyev
Nazarbayev University, Kabanbay batyr, 53, block 23, room 613,
issatay.doskaliyev@nu.edu.kz
Abstract
Over the past three decades the global trends in foreign direct investment (FDI) have been constantly
increasing. Whereas FDI outflows have played a positive role in generating economic growth in developing
countries, some feel that it plays a negative role in exporting jobs from the source countries to the host
countries. This study is motivated by the puzzle in scholarly literature that outflows from high-wage countries
serves as an instrument for exporting jobs to low-wage countries. In this paper why FDI outflows from
“advanced economies”, leading to decrease in GPDI (Gross Private Domestic Investment), do not lead to job
losses will be explained. It is somewhat paradoxical that with the decline of domestic investment in “advanced
economies”, the employment rate does not decrease. The empirical data is based on the relationship between
FDI outflows and the employment rate. It is clear that because of expansion of sales FDI outflows complement
exports and, consequently, lead not to losses of jobs but to their protection in “advanced economies”.
KEYWORDS: FDI, unemployment rate, source countries, ‘advanced economies’.
INTRODUCTION
Over the past three decades the global trends in foreign direct investment (FDI) have been
constantly increasing. Whereas FDI outflows have played a positive role in generating economic
growth in developing countries, some feel that it plays a negative role in exporting jobs from the
source countries to the host countries. This study is motivated by the puzzle in scholarly literature that
outflows from high-wage countries serves as an instrument for exporting jobs to low-wage countries.
In this paper the issue of why FDI outflows from “advanced economies”, leading to decrease in GPDI
(Gross Private Domestic Investment), do not lead to job losses will be explained. It is somewhat
paradoxical that with the decline of domestic investment in “advanced economies”, the employment
rate does not decrease. The empirical data is based on the relationship between FDI outflows and the
employment rate. It is clear that because of expansion of sales FDI outflows complement exports and,
consequently, lead not to losses of jobs but to their protection in “advanced economies”.
In the next section information on literature will be provided that is used to explain a
new theoretical argument that will clarify the crucial role of FDI outflows in the reduction of the
unemployment rate in the home country. The theory is empirically tested using a sample of “advanced
economies” by International Monetary Fund for the years 1960 to 2011. However, the FDI outflows
data on such units of analysis as Taiwan and San Marino was not available. As a result, the theory is
empirically tested using a sample of 33 “advanced economies” instead of 35. Yet a strong negative
relationship between independent and dependent variables was not found. In the end of the paper,
findings and factors that hampered conducting the research will be briefly discussed.
LITERATURE REVIEW
There are a lot of academic materials that focus on the influence of FDI outflows on the
source countries. The reason is that with the development of technologies and increasing globalization,
the list of factors that influence FDI outflows has been significantly increased. However, the purpose
of this paper is to analyze the trends using the most appropriate empirical works. The foundation for
the recent literature was laid by Dunning (1958) in his book “American Investment in British
Manufacturing Industry”. He claimed that the determinants of FDI outflows can be explained by
organizational features of Multinational Enterprises. MNEs analyze all factors, which can influence on
FDI outflows, before making investment into the target country. These determinants were more
thoroughly explored by other respectable researchers.
In his empirical analysis, Culem (1988) notes that such key characteristics of the market as its
size, openness, labour costs and its technological level determine FDI decisions. For example, low
21
technological development of the host country will discourage FDI inflows. Blomström and Kokko
(1997) evaluate the influence of such factor as borrowing costs on FDI flows. According to them, if
borrowing costs in the host country are lower than in the source country, the source country will
finance investment through borrowing from the host country. Hatzius (1997), analyzing financial
markets of the United Kingdom and Germany, found that comparatively low exchange rates in the
target countries attract foreign investors. The body of literature has pointed to a number of research
conclusions that determine the relationship between FDI outflows and employment rate.
1) The relationship between FDI outflows and domestic investment. Feldstein (1994)
found a negative relationship between FDI outflows and domestic investment. Specifically, he claims
that a one unit increase in FDI outflows leads to one unit decrease in domestic investment.
2) The relationship between FDI outflows and exports.
According to Jost’s findings (1997), there is a strong complementarity between these two
variables. FDI outflows enable to expand production through affiliates, and, thus, complement exports.
3) The relationship between FDI outflows and unemployment rate.
Brainard and Riker (1997) found that FDI outflows from the developed countries to the
developing countries complement rather than substitute exports. This means that FDI outflows do not
result in an increase in unemployment rate in the source country. Also, Muck and Demirsil found that
FDI outflows can lead to decrease in unemployment rate in some countries.
THEORY
The paper aims at explaining the paradox that for “advanced economies” FDI outflows
lead not to job losses but to their protection. Theoretically, there is an indirect relationship
between FDI outflows and gross capital formation. The higher FDI outflows, the lower gross
capital formation (Al-Sadig 2013). This can be explained by the fact that the source countries,
making direct investments in foreign countries, deprive themselves of these investments.
Correspondingly, insufficient investment in domestic infrastructure must lead to job losses.
However, in practice, outflows from the developed countries complement exports by
expanding trade channels (Andersen and Hainaut 1998). In turn, this leads to the decline of
unemployment rates in the source countries.
These research conclusions lead me to the following hypothesis.
Hypothesis: FDI outflows from “advanced economies” do not lead to the decline in
the unemployment rate.
We can see an example of the theory illustrated in the Republic of Korea (one of “advanced
economies”). Analyzing the period from 2005 to 2007, one can see that FDI outflows gradually
increase from 0.8% to 1.9%. This leads to decrease in gross capital formation from 30% to 29%.
Theoretically, decrease in gross capital formation must lead to increase in the unemployment rate;
however, in practice, the Republic of Korea had an increase in its unemployment rate from 3.7% to
3.2%. In the next section the test whether we can make inductive inference from this example will be
tested.
DATA AND SAMPLE

To determine the possible relationship between independent and dependent variables I use
tables. To determine if two sets of data are significantly different from each other t-test is used because
it is an appropriate tool to compare two means for the reasonably large sample n≥25. The statistical
software used is STATA 12.
To test the theory sample of 33 “advanced economies” by IMF (the data on San Marino and
Taiwan is not provided by World Bank) for the period 1960 to 2011 will be used. The dependent
variable is an unemployment rate. The data come from the World Bank’s compilation of data. The
unemployment rate is defined as “share of the labor force that is without work but available for and
seeking unemployment” (World Bank). For each level of FDI outflows, arithmetic mean of
unemployment rate is calculated. Descriptive statistics for the variables are displayed in Table 1,
which shows that 6.618% is the average unemployment rate for “advanced economies”.
22
Table 1: Descriptive Statistics for the Variables of Interest, 1960-2011
Min Max Mean Med Mode Var SD Obs

FDI outflows (in
%) 0 394.72 14.55 2.029 NA 4529.377 67.301 33
Unemployment
rate (in %) 0 16.25 6.618 6.338 NA 10.722 3.274 33
The univariate distribution for the independent variable is illustrated in Figure 1. Here one can
see that in the period from 1960 to 2001 countries with “advanced economies” did not tend to direct
investments in other countries. However, an impressive rise in FDI outflows occurred in 2002
(19,555%). Then, in 2007, it reached the highest point, 23,874%. This shows that with the increasing
globalization “advanced economies” become more and more interested in making investments in other
countries.
The independent variable of interest, FDI outflows, is defined as “an investment that is made
to acquire a lasting interest in an enterprise operating in an economy other than that of the investor, the
investor’s purpose being to have an effective voice in the management of the enterprise” (IMF). The
variable is operationalized using data from World Bank, which represent FDI outflows as the
percentage of GDP.
Figure 1: The univariate distribution for FDI outflows, 1960-2011
FDI outflows are divided in the corresponding groups: low (<1.1%), medium (1.1% - 3.5%),
and high (>3.5%). For each group, the average unemployment rate is calculated. According to Figure
1, the relationship between FDI outflows and unemployment rate is not entirely direct because
unemployment rate for medium FDI outflows is not consistent with the hypothesis that the higher FDI
outflows lead to the lower unemployment rate in the source countries. However, the other part
confirms the hypothesis. In particular, unemployment rate for those “advanced economies”, which
have high FDI outflows, is less by 1,717% than unemployment rate for “advanced economies”, which
have low FDI outflows.
23
Figure 2: The bivariate relationship between FDI outflows and unemployment rate in “advanced
economies” by IMF, 1960-2011
EMPIRICAL FINDINGS
The first hypothesis is tested in Tables 2, 3, and 4. Determining the relationship

between average unemployment rates for low and medium FDI outflows, medium and high
FDI outflows, and, finally, low and high FDI outflows, one can see that in two of three cases
the null hypothesis is not rejected (.278<2.109 and 1.784<2.160). T-test indicates rather weak
relationship between FDI outflows and unemployment rate that is not statistically significant
(p=.78 and p=.09). The analysis for the relationship between unemployment rate for medium
and high FDI outflows shows a low probability (p=.028) that the relationship happened by
chance.
Table 2: The Relationship between Unemployment Rate for low FDI outflows and Unemployment
Rate for medium FDI outflows, 1960-2011
Unemployment Rate for Unemployment Rate for

low FDI outflows medium FDI outflows
Mean 7.789167 7.383222
t obtained .278571
P(T<=t) two-tail .783934
t critical two-tail 2.109816
24
Table 3: The Relationship between Unemployment Rate for medium FDI outflows and
Unemployment Rate for high FDI outflows, 1960-2011
Unemployment Rate
for medium FDI Unemployment Rate
outflows for high FDI outflows
Mean 7.789167 5.059778
t obtained 2.384752
t Critical two-tail 2.100922
Table 4: The Relationship between Unemployment Rate for low FDI outflows and Unemployment
Rate for high FDI outflows, 1960-2011
Unemployment Rate Unemployment Rate

for low FDI outflows for high FDI outflows
Mean 7.383222 5.059778
t obtained 1.784114
Then, the control variable for GDP per capita is used. Sajid Rahman Khattak, analyzing an
empirical relationship between FDI outflows and economic output in Pakistan, has noted that GDP has
direct influence on outflows, as high GDP leads to high FDI outflows. So, making an inductive
inference that Pakistan’s case can be applied to the other countries, a control variable for GDP per
capita is used. Then, I divided “advanced economies” into two groups: less “advanced economies” and
more “advanced economies”. For each group, I calculated average unemployment rate. I assumed that
the higher the development of the country, the lower unemployment rate. However, this hypothesis
was not confirmed. For all cases of less “advanced economies” group, null hypotheses were not
rejected (.529<2.571, .669<2.571, and .273<2.776). In addition, the probabilities that the relationships
happened by chance are very high (p=.619, p=.533, and p=.798).
Table 5: The Relationship between Unemployment Rate for low GDP per capita and Unemployment
rate for medium GDP per capita for less “advanced economies”, 1960-2011
Unemployment Rate for Unemployment Rate for

low FDI outflows medium FDI outflows
Mean 9.49925 8.113
t obtained .5294
25
Table 6: The Relationship between Unemployment Rate for medium GDP per capita and
Unemp6loyment rate for high GDP per capita for less “advanced economies”, 1960-2011
Unemployment Rate
Mean 9.49925 7.455
t obtained .669014
rate for high GDP per capita for less “advanced economies”, 1960-2011

Mean 8.113 7.455
t obtained .273116
For two out of three cases of more “advanced economies”, null hypotheses were also not
rejected (1.803<2.776 and .582<2.365). The probabilities that the relationships happened by chance
are very high (p=.582 and p=.579). However, in comparison with the group for less “advanced
economies”, the group for more “advanced economies” shows less weak relationship between FDI
outflows and unemployment rate. In particular, the research hypothesis was confirmed in the case of
medium and high FDI outflows (3.169>2.228).
rate for medium GDP per capita for more “advanced economies”, 1960-2011
Unemployment Rate
outflows for low FDI outflows
Mean 7.363571 4.714
t obtained 1.802786
26
Table 9: The Relationship between Unemployment Rate for medium GDP per capita and
Unemployment rate for high GDP per capita for more “advanced economies”, 1960-2011
Unemployment Rate
Mean 7.363571 4.3318
t obtained 3.168974
rate for high GDP per capita for more “advanced economies”, 1960-2011

Mean 4.9652 4.3318
t obtained .581948
CONCLUSION
The purpose of this paper is to explain the paradox that the FDI outflows do not negatively
affect unemployment rate in “advanced economies”. From the empirical analysis, one can conclude
that there are no convincing explanations on this paradox. So the hypothesis that FDI outflows do not
lead to job losses in the source countries did not confirm. However, some points are worthwhile
mentioning in this part.
After the research, evidence was not found that a negative relationship between FDI
outflows and unemployment rate exists. So if policy makers of “advanced economies” want to
decrease unemployment rate in their countries, they should find alternatives to FDI. With the
introduction of control variable, any relationship between GDP per capita and unemployment rate was
not found.
Unfortunately, more convincing evidence on relationship between FDI outflows and
unemployment rate could be hampered by the subjective research. In particular, I made my own
assumptions that the interval for low FDI outflows is below 1.1%, for medium FDI outflows – from
1.1% to 3.5%, and for high FDI outflows – above 3.5%. If different researchers made this empirical
analysis, the results would not be the same. Another problem is that not all necessary information was
available for the research. For example, the FDI outflows data on such units of analysis as Taiwan and
San Marino was not available.
REFERENCES
Al-Sadig, A. 2013. “Outward Foreign Direct Investment and Domestic Investment: the Case of
Developing Countries”, IMF Working Paper: 7-8.
Andersen, P. and P. Hainaut. 1998. “Foreign direct investment and employment in the industrial
countries”. Bank for International Settlements. BIS Working Papers No. 61, Basle: Abstract.
Blomström, M. and A. Kokko. 1997. “Regional Integration and Foreign Direct Investment”, CEPR
Discussion Paper, No. 1659.
27
Brainard, S. and D. Riker. 1997. “US Multinationals and competition from low-wage countries”,
NBER Working Paper, No. 5959.
Culem, C. 1988. “The locational determinants of direct investments among industrial countries”,
European Economic Review: 885-904.
Dunning, J. 1958. American Investment in British Manufacturing, George Allen and Unwin, London.
Feldstein, M. and C. Horioka. 1980. “Domestic saving and international capital flows”, Economic
Journal: 314-29.
Hatzius, J. 1997. “Foreign direct investment, capital formation and labour costs: evidence from Britain
and Germany”, Centre for Economic Performance Discussion Paper, No. 336.
Khattak S.R., Iqbal N., Khattak M., and Qadeer A. 2012. “Empirical Relationship Between Foreign
Direct Investment and Economic Output in Pakistan”, Interdisciplinary Journal of Contemporary
Research in Business, No. 4: 860.
Mucuk, M. and Demirsil M., 2013, “The effect of Foreign Direct Investment on Unemployment:
Evidence from Panel Data for seven developing countries”, Journal of Business, Economics and
Finance, No.3: 53-66.
Shaari, M., Hussain, N., and Halim, M., 2012, “The Impact of Foreign Direct Investment on the
Unemployment Rate and Economic Growth in Malaysia, Journal of Applied Sciences Research, No. 9:
4900-4906
The World Bank, FDI Outflows, accessed April 3, 2013, URL:

http://data.worldbank.org/indicator/BM.KLT.DINV.GD.ZS.
The World Bank (2013). GDP per Capita. accessed April 3, 2013, URL:
http://data.worldbank.org/indicator/NY.GDP.PCAP.PP.KD?page=1&order=wbapi_data_value_2008
%20wbapi_data_value%20wbapi_data_value-first&sort=asc
Zeb, N., Qiang F., and Sharif M., 2014. “Foreign direct investment and Unemployment Reduction in
Pakistan”, College of Economics and Business Administration, Chongqinq University.
28
The institutional reforms in the EU and the new financial mechanisms in the Eurozone
after the debt crisis
Psychalis M.
Eirinis st. 62, p.c 15121, psyxalism@hotmail.com
Abstract
The economic governance in the Eurozone and the EU is not the same after the crisis. The results of the
financial crisis changed the EU’s way of thinking about addressing issues such as the public debt service, the
banking system functioning, the ECB’s role and the depth of its intervention. When R. Mundell (1961) developed
the theory of optimum currency areas the Eurozone was certainly not in his mind, while the same view is
maintained by P. Krugman (2009) too. However, the EU financial and economic sector is entirely different
today. After tens of EU bodies meetings there is now a number of new rescue mechanisms, institutions and
regulations. But, are all these changes well enough to get the Eurozone out of the crisis? Certainly not, but they
had never been given in the past as well. The “moral hazard” and the lack of a last resort lender did not finally
work as the EU leaders thought. The Eurozone is the core of the EU and it is slowly evolved, step by step, from
an economic to a political union. The EU has at its disposal the European Stability Mechanism (ESM) with a
lending capacity of over half a billion euros, while there have been also other mechanisms like the EFSF and the
EFSM, with the total sum of granted loans by these three mechanisms to date being amounted to over 350 billion
euros. Additionally, the EU heads rapidly for a banking union through the establishment of new institutions like
the Single Resolution Fund (SRF), the Single Resolution Mechanism (SRM) and the Single Supervisory
Mechanism (SSM), which will supervise over 180 systemic banks in the Eurozone. Furthermore, the ECB used
non-standard monetary policy mechanisms in order to support countries and banking institutions. The best
known mechanism is the Quantitative Easing (QE) programme worth about one trillion euros. The new model of
economic governance moves to a progressive direction, but the size of the instruments may not be enough for the
EU to exit the crisis.
Keywords: economic governance, institutional reforms, Eurozone
1. Introduction
This article is trying to highlight the institutional reforms promoted in the EU and the
Eurozone, which aimed at the debt crisis resolution as well as the economic and political deepening.
At the same time, it is noting the structural weaknesses that did not allow the EU and the Eurozone to
deal immediately with the financial crisis.
The global economic crisis burst out in September 20081 in the USA –like in October 1929–
and a short time later shifted to the Old Continent. Chart 1 shows the evolution of GDP at current
prices in the USA, the Eurozone, the EU, China and Russia. It is easily understood that the USA
economy recovered much faster than anticipated and in 2010 it exceeded the GDP of 2008, whereas
the Eurozone and the EU countries –though having achieved positive growth rates since 2011– have
not reached yet the maximum GDP of 2008. The European edifice and more specifically its heart,
namely the member states of the Economic and Monetary Union (EMU), did not manage to exit
recession quickly, while, according to Charts 2 and 3, their growth and unemployment indexes2 are
even now worse than those of the USA and China.
1
Although many economists had marked the real estate market recession since 2007 and the relative problems in
the mortgage loan market due to high leverage that was transmitted to the financial sector, the international
literature recognizes as the beginning of the global economic crisis the 15 th of September 2008, the date when
Lehman Brothers –the USA’s fourth largest investment bank– announced its bankruptcy.
2
According to figures of the World Bank, the unemployment rate for June 2015 in the USA was 5.3%, whereas
in the Eurozone it was 11.1% and in the EU 9.6%. Respectively, the growth rate for the first quarter of 2015 in
the USA was 2.9% compared to 1% in the Eurozone and 1.5% in the EU.
29
Between 2011 and 2015 the euro depreciated by 30% against the US dollar3, while the
Eurozone GDP increased marginally during the years 2009-2014 compared to the USA GDP, which
soared over 18% in the same period. All the above-mentioned evidence supports the view that the euro
edifice has not managed yet to exit the vicious circle of the economic crisis, the monetary uncertainty
and the financial instability.
Nevertheless, is the EU of 2008 the same with that of 2015? The answer is negative; of course,
the EU is not the same; it is very different in economic, social and political terms. The time of the EU
evolution since its establishment runs very slow, but during the last five years of the crisis the political
time has been shrunk and many changes in the EU have been made, at least when it comes to
economic governance and financial sector function.
Finally, is the EU a shaky edifice that slowly collapses? Likewise, the answer to this question is also
negative. The relative figures show that in 2014 the EU GDP remained the highest in the world (18.46
billion dollars), while it represented 29.78% of the global economy, which is a bit less than 1/3 of the
global GDP, despite the fact that the EU constitutes just 7% of the global population4.
1.1 Economic governance in the EU

The EU is not just a union of states; it is a sui generis entity, something much more than a
confederation and way too much beyond a federation. The economic governance differs from the
monetary governance5. The economic governance, which is the pillar of the EMU, includes the EU
rules implemented by the states, but the economic policy remains at national level. On the contrary,
the monetary policy has shifted to European level. According to theorists of this field (Barro and
Gordon, 1983), the quality of monetary union depends on the rules, the prudence and the reputation of
the central bank. As can be seen next, central bankers Trichet and Draghi maintained the ECB’s
quality level at the highest possible standards and stabilized the monetary union amid debt crisis. On
the other hand, some economists (Krugman, 2009), who claimed before 1999 that the EMU had not
been fulfilling the conditions set by the theory of “Optimum Currency Areas” (OCA) and that it could
hardly cope with an asymmetric economic shock, were at least partly confirmed.
1.2 Was the Eurozone prepared to deal with the crisis?

The OCA theory (Mundell, 1961) argued that the adoption of a common currency from at least two
states or a group of states, such as those of the Eurogroup, is legitimate since it would create more
economic benefits than damages for them. The main criteria6 for an optimum currency area are the
capital and workforce mobility7, the symmetric business cycles89 as well as the wage and price
flexibility. Many economists (Krugman and Obstfeld, 2009, Gros and Thygesen, 1992) opposed the
view that the Eurozone is an optimum currency area by stressing the ECB’s weakness to deal with
3
On 03.05.2011 the EUR/USD exchange rate was at 1.48, whereas on 11.03.2015 it was at 1.05.
4
All these data are collected from the highly recognized and reliable databases of the World Bank and the
Eurostat.
5
The body in charge of the economic governance in the EU is Ecofin and in the Eurozone is Eurogroup, while
for monetary governance issues the competent body is the ECB.
6
It is noted that the absence of certain circumstances can be addressed by the creation of a common budget
(social transfers), which is the core of the confederalization. The EU budget amounts to 1.5% of the EU GDP
compared to the USA budget, which amounts to 33% of the national GDP.
7
A recent study (Gáková and Dijkstra, 2010) proved that the US workforce mobility from state to state is about
3%, whereas that of the EU is only 1.2% even during the crisis.
8
A recent study (Antonakakis, Chatziantoniou and Filis, 2015) showed that the expansion of the debt crisis in
the Eurozone can be explained by the business cycle crisis in regional countries (spillover effect). The debt crisis
resolution can be achieved through a right macroeconomic policy, which will aim at the stabilization of regional
economies and their economic development.
9
According to the analysis of credible economists (Degiannakis, Duffy and Filis, 2014), the EU member states
and even more these of the Eurozone have neither similar business cycles nor a sufficient community budget and
as a result there are serious problems for them in dealing with the crisis.
30
asymmetric shocks caused by the economic crisis. Added to that, the moral hazard in the Eurozone
(Krugman, 2009) not only prevents states from being rescued by other states or the ECB10, but also left
the monetary union exposed to a crisis nobody would (like to) imagine, since there was actually no
emergency plan. A significant part of the economic crisis was due to the public debt surge and the
inability of some governments to borrow so as to serve their obligations. Consequently, there were no
appropriate mechanisms to deal with the debt crisis. A recent study (De Grauwe, 2013) holds that
there were economic distortions and obstacles at national level before and after the monetary union,
which did not allow the economic and monetary integration. Furthermore, after the monetary union
there was neither fiscal discipline nor implementation of the monetary rules, since the Stability and
Growth Pact was not implemented and, to make matters worse, the fiscal rules were loosened in
“good” economic times. Additionally, due to the monetary union states lost their tools of economic
equilibrium policy in order to deal with the shocks and the economic crisis.
2. The EU takes one step forward – Establishment of the European support

mechanisms
The Eurozone was designed without any provision of a financial assistance mechanism to
deal with the moral hazard (Osman, 2012) as opposed to the EU, which provides the BoP11 assistance
to the non-Euroarea member states; a mechanism with quite limited financial potential, though.
However, when the debt crisis problem arose, the EU responded very fast –at least, according to its
standards– to the exclusion of Portugal, Ireland and Greece from markets. The borrowing cost of these
countries soared after 2008, as Chart 4 confirms, so that any public debt refinancing and state budget
primary deficit covering became impossible. The EU established in May 2010 the European Financial
Stabilization Mechanism (EFSM)12 and in June 2010 the European Financial Stability Facility
(EFSF)13, which stopped its operations in June 2015, for it was succeeded since October 2012 by the
European Stability Mechanism (ESM), which is a permanent support mechanism with a share capital
of 60 billion euros. One of the differences between the EFSF and the ESM is that while the former
constitutes a company having states as shareholders, being subject to private law and being located in
Luxemburg, the latter is an intergovernmental organization, something much more than a company
even at a semantic level for the prestige of the Eurozone and the process of its political deepening.
Moreover, while the establishment of the EFSM is provided by the EU treaties and it can grant loans
under the EU budget guarantee, the establishment of the EFSF and the ESM, on the contrary, is not
provided by the treaties and the way of their granting loans is completely different from that of the
EFSM. The aim of these mechanisms is to secure the EMU financial stability by supporting the
Euroarea member states. Charts 5 and 6 and 7 show where the funds of rescue mechanisms have
channeled into. Chart 7 confirms the fact that the EFSF granted Greece the biggest financial
assistance, whereas rest countries were granted less funds. It is noted that the joint financial assistance
provided by the EFSM and the ESM was about 700 billion euros.
Chart 8 presents the change in interest rate spreads from June 2012 till February 2013 –using the
German government bond rate as a benchmark– the period during which strong interventions were
made towards the support of countries like Greece and Portugal. As it is easily understood, the EU’s
establishment of support mechanisms changed the adverse situation of the governments in terms of
10
The ECB is not allowed by its statute to become a lender of last resort.
11
The Balance of Payments (BoP) allows the non-Euroarea member states to be granted medium-
term loans in order to cover their financial needs. Recently, Romania, Latvia and Hungary –in
cooperation with the IMF– made use of this assistance programme. However, the size of the
mechanism is quite limited in case of a general crisis.
12
The EFSM was established by the 28 EU member states in May 2010. Its lending capacity amounts
to 60 billion euros, which are under the EU budget guarantee. The EFSM provided financial
assistance to Portugal and Ireland with 26 and 22.5 billion euros respectively, while in July 2015 it
granted Greece a seven billion euro bridge loan.
13
The EFSF was established exclusively by the 17 Eurozone member states. Its lending capacity
amounts to over 450 billion euros. The EFSF granted Ireland a 17.7 billion euro loan, Portugal a 26
billion euro loan and Greece a 130.9 billion euro loan.
31
financing their own obligations and appeased the markets, while all the countries that were in bailout
programmes, except for Greece, are now borrowing from the international markets.
The present debt crisis highlighted an innate weakness of the Eurozone, which is the absence of
financial assistance mechanisms for the Euroarea member states. On the other hand, the EU responded
very quickly to the rising problem and established three mechanisms. Currently, the lending capacity
of these mechanisms is about half a trillion euros, while until now 368.5 billion euros have been
granted. Table 4 presents the amounts that each mechanism lent to Euroarea member states.
3. The conservative ECB and the change of tack

The ECB is a conservative bank, since its fundamental task lies in maintaining price
stability, that is keeping a low inflation rate14, while according to the theoretical controversy of central
bankers “Rules vs Discretion” (Barro and Gordon, 1983, Gordon and Leeper, 2006), the ECB was in
favor of rules and against discretion contrary to other banks, like the US Federal Reserve (FED), in
which price stability is associated with growth and employment. The ECB was built on Bundesbank
model and thus it must not be considered accidental that its headquarters are in Germany. Perhaps it is
more conservative than Bundesbank itself. The innate weakness of the Eurosystem to deal with the
debt crisis is noticed from the difference in the evolution of Spain’s and UK’s bond prices. While
Spain’s macroaggregates were in much better situation than those of the UK (De Grauwe, 2011), the
borrowing cost for Spain rose during the crisis, whereas for the UK remained constant and then fell, as
depicted in Charts 9 and 10. This happened because markets took for granted that the ECB would have
difficulty in assisting Spain, as opposed to the Bank of England (BoE) that responded immediately by
using monetary policy instruments to deal with a potential liquidity crisis of the UK government.
But, did the ECB really stay inactive during the economic crisis? The ECB shifted the monetary policy
after the crisis from the initial target of price stability to the targeted fight against the output gap. The
ECB often exceeded its powers15 in order to restrain the debt crisis (Pronobis, 2014). The ECB used
standard monetary policy instruments for crisis management, such as the open market operations 16.
However, the crisis was not possible to be addressed only by standard instruments and as a result the
ECB used to a large extent non-standard financing instruments, mainly through asset purchase
programmes17 (APP), since the monetary policy transmission mechanism was disrupted due to
dysfunctions in market segments.
On 26.07.2012, during the Global Investment Conference in London, Mario Draghi stated that
“the ECB is ready to do whatever it takes to preserve the euro.” The reality confirmed that the ECB, in
14
According to article 127 (1) TFEU of the Lisbon Treaty, the ESCB’s fundamental task lies in maintaining
price stability.
15
According to article 123 of the Lisbon Treaty, which replaced article 104 of the Maastricht Treaty, “overdraft
facilities or any other type of credit facility with the European Central Bank or with the central banks of the
Member States in favour of Union institutions, bodies, offices or agencies, central governments, regional, local
or other public authorities, other bodies governed by public law, or public undertakings of Member States shall
be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of
debt instruments.” The importance of article 123 should be reminded throughout the discussion for the ECB’s
attitude and involvement in the debt crisis resolution process.
16
The open market operations are short-term (main refinancing operations – MROs) and long-term (long-term
refinancing operations – LTROs), while the ECB’s biggest move was a three-year LTRO programme of one
trillion euros in December 2011 and February 2012.
17
The non-standard financing instruments are used when the monetary policy cannot be implemented through
standard financing instruments, namely in periods of economic crisis and financial instability. Such instruments
are the following: a) the covered bond purchase programme (to date, two programmes have been completed –the
CBPP1 and the CBPP2– and on 04.03.2015 the ECB decided to launch a third programme, namely the CBPP3),
b) the asset-backed securities purchase programme (ABSPP), c) the secondary market public sector purchase
programme (in fact, the PSPP is the quantitative easing programme which was decided by the ECB Governing
Council on 22.01.2015 and was specified by the EU decision 2015/774), d) the bond repurchase programme
(OMT), e) the security purchase programme (according to Eurosystem evidence, the ECB possesses through the
SMP programme Spanish, Italian, Portuguese and Greek government bonds worth about 218 billion euros. The
asset-backed securities and the cover bonds are used for the banking system liquidity support.
32
cooperation with the other EU bodies, exceeded itself. It took decisions that surprised the international
community. The quantitative easing program announcement on 22.01.2015 –a government bond
purchase programme of 60 billion euros per month till September 2016 (over one trillion euros in
total)– impressed even the most optimist politicians and economists.
It can be said that, according to the ECB statute, the interventions of the central bank moved
across and maybe beyond the borderline of its territory as far as the direct and indirect financing of
states and financial institutions is concerned. Nevertheless, its decisions were not contrary, but
according to the political decisions made by the Euro Summits. It is no surprise that the Court of
Justice of the European Union (CJEU), through a broad and progressive interpretation of the Treaty on
the Functioning of the European Union (TFEU), ruled in favour of the ECB with its judgment in case
C-62/14, concerning secondary market government bond purchases for countries with serious
financing problems, which actually means indirect financing of governments. This judgement also
paved the way for the quantitative easing programme (Quantitative Easing – QE). It is noted that the
action against the ECB was brought by the Federal Constitutional Court of Germany, which, based on
its own judgments, ruled that the ECB’s interventions were illegal.
The ECB in cooperation with the European Commission (EC) contributed to all government
support programmes. A decision of great importance for Greece was that of the Eurogroup on 21st
February 2012, which stated that the ECB in association with the European central banks that possess
Greek government bonds (SMP and ANFA holdings) will return these bonds to Greece in their
purchase value and not their nominal value. This decision meant for Greece 6.3 billion euros net
profit.
Additionally, in 2012 and 2015 the ECB provided the Greek banking institutions, through the
Emergency Liquidity Assistance (ELA), with a liquidity support of over 100 billion euros, even
though there was no bailout programme and only with the prospect of signing one in order for them
not to collapse (Götz, Haselmann, Krahnen, Steffen, 2015). Due to these choices the ECB was accused
by several economists of operating as a lender of last resort as well as of putting in danger its solvency
by supporting the Greek banking system, while it has been recommended that the ECB’s decisions and
their rationale should be clear and well-grounded.
According to the ECB report (2015), banks have lowered the credit rating level for granting
loans to businesses and individuals by 13% since the beginning of 2015 so as to increase the number
of granted loans and boost the liquidity in an environment of monetary policy easing, given that some
countries of the Eurozone are even now still in deflation (July 2015 – Greece: 2.2%).
Finally, the need for the ECB to take officially the role of the last resort lender is stressed,
while it is recommended that more active policies must be forwarded in order that Euroarea avoids
asymmetric business cycles (De Grauwe, 2013).
All the aforementioned evidence clearly demonstrate that the ECB had serious weaknesses in
dealing with the crisis, which emanate from its statute, its targets, its available tools and its
conservatism that many ECB officers supported. The crisis restraining mechanisms were limited and
the standard mechanisms were not adequate to deal with the problem. Despite its weaknesses, the ECB
managed to keep the Eurozone alive and banks well recapitalised and firm, while there was also an
obvious support to governments facing problems18 (Kouretas, Drakos, 2015). All these achievements
were made by using instruments, programmes and mechanisms that were agreed at political level and
implemented at techno-monetary level. Now the challenge for the ECB is to act in such a way that it
reduces the output gap and enhances the consumer instinct trust (De Grauwe and Macchiarelli, 2015).
4. The road towards the European Banking Union
The government support to banks led many countries to the dramatic increase of their public debt,
18
The ECB purchased from the secondary market until the end of 2012 government bonds and provided
assistance to banking institutions with the total sum of 320 billion euros, which equalled 3.5% of the Eurozone
GDP, as opposed to FED and BoE, whose interventions in the US and UK economies equalled over 25% of their
GDP.
33
while the fear of crisis transmission from one country to another restricted cross-border bank
activities, thus slowing down growth and confining commerce strictly to national markets. The
fragmentation in all parts of the chain, like in the financial markets, hinders growth, commerce and
cooperation (Farhi and Tirole, 2014). The EU should have acted immediately in order to deal with the
financial fragmentation, the uncontrolled European bank sector and the serious divergences in bank
resolution and supervision rules, which led to lack of trust and market instability. The European
Council of Heads of State and Government in cooperation with the European Parliament, the
European Commission and the European Central Bank took a series of decisions1920 which enhance the
ECB’s supervisory role21, while they also set the institutional pillars required for the banking union.
The starting point was the common decision taken by the Ecofin and the Eurogroup on
18.12.2013, when they agreed the establishment of the Single Supervisory Mechanism (SSM), which
was put in force on 04.11.2014. The ECB will supervise through the SSM 130 financial institutions,
which represent 85% of the Eurozone financial system assets. In this way, the bank sector’s safety and
robustness gap is covered, while financial solvency and banking integration at European level are also
promoted (Magnus, Backman, Power, 2015).
Furthermore, the European Parliament voted for and established the Single Resolution
Mechanism (SRM) in April 2014, which will be put in force on 01.01.2016, after the EU bank
recovery and resolution directive (BRRD)22 has been adopted by all member states. The SRM’s
operation will be supported by the Single Resolution Fund (SRF). The SRF should reach at least 1% of
the amount of covered deposits of all credit institutions authorised in all the banking union member
states –which is estimated to be around 55 billion euros– and it is going to be built up over a period of
eight years. In fact, the bank resolution financial burden shifts from national resources to a
supranational fund (Lekkos and Leventakis, 2014). Through the banking union, the bond between the
financial institutions bailout and the public debt –that is the substantial reason for the European debt
crisis– is broken, while the first step for minimizing the borrowing cost difference, which hindered to
date competition and growth, is also taken. The banking union will enhance the trust to the banking
industry, shrink the fragmentation in the financial sector and reduce dramatically a bank-run risk.
Finally, as far as the banking union is concerned, there was an agreement in April 2014 on the
reform of the directive which provides the harmonisation of the national deposit guarantee schemes23.
The banking union in association with the rescue mechanism establishment opens the
discussion about the official, namely the institutional, transformation of the ECB into a lender of last
resort (Xafa, 2015). Goodhart and Schoenmaker (2014) have argued for the need of the ECB financing
states, although, as was mentioned above, it is formally not allowed to do so by its statute. Actually,
however, this has been the case several times during the crisis.
5. The fiscal governance and the democratic legitimacy

During the crisis, the Eurozone spread the panic of the financial markets to the political
governance through strict austerity and fiscal consolidation packages, while the countries that
implemented these packages were little benefited. Moreover, economic governance reforms took place
in the Eurozone due to the economic crisis and under the massive pressure of the international markets
19
Council Regulation (EU) No 1024/2013 conferring specific tasks on the European Central Bank concerning
policies relating to the prudential supervision of credit institutions – Text with SSM relevance
20
Regulation (EU) No 806/2014 of the European Parliament and of the Council establishing uniform rules and a
uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a
Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010 –
Text with SRM relevance
21
The national central banks were charged until recently with the supervision of the national banking
institutions.
22
Directive 2014/59/EU of the European Parliament and of the Council establishing a framework for the
recovery and resolution of credit institutions – Text with EEA relevance
23
Directive 2014/49/EU of the European Parliament and of the Council on deposit guarantee schemes – Text
with EEA relevance
34
and the government financial needs. Since 2010’s revision of the Stability and Growth Pact (SGP) a
number of measures have been taken, with the so-called “Two Pack”24 –which is an evolution of a
series of proposals known as the “Six Pack”25 – being their flagship. The “Six Pack” provides the
strengthening of surveillance and assessment for the states in receipt of financial assistance, for those
that are subject to an excessive deficit procedure and for those that are experiencing serious financial
difficulties. Furthermore, both the preventive and the corrective arm of the SGP were revised towards
a stricter direction by introducing the adoption of national fiscal rules, the prevention and the
correction of macroeconomic imbalances and the intensification of deviation sanctions. The change in
the government budget approval process is a typical example. More specifically, each member state
will have to submit its draft budget for the following year by 15 October annually, namely before
submitting it to the national parliament. If the EC has any objection about the draft budget then the
government will have to revise it, while it is also provided that the states experiencing severe financial
disturbance will come under enhanced surveillance and will also be compulsorily subject to a
macroeconomic adjustment programme.
Several economists criticised these reforms (Blanchard and Leigh, 2013), since the produced
outcomes are inevitably associated with austerity programmes, while there is also a political problem
concerning the infringement of the democratic principle “no taxation without representation”26.
Additionally, they pointed out the essential difference between legal force and political legitimacy.
Actually, they argue about the ability provided to the EC to enforce the adoption of new taxes or
expenditure cuts from national governments, because in this way the fundamental principles of
democratic legitimacy are undermined. According to De Grauwe & Yuemei Li (2013), as well as
depicted in Chart 11, the higher the spreads the more intense the austerity measures were, something
that seems quite as a punishment or penalty. Moreover, in the same study it can be figured out that the
larger the austerity packages the higher the recession was, as it is also depicted in Chart 12.
At the EU level, the member states co-signed on 01.03.2012 the intergovernmental Treaty on Stability,
Coordination and Governance in the Economic and Monetary Union (TSCG), while on 01.01.2013 the
Fiscal Compact –the TSCG fiscal component– entered into force.
Since the beginning of the crisis as well as more recently –due to the strict austerity
measures that accompanied bailout programmes– many economists (Wyplosz, 2015) have accused the
EU of imposing infeasible requirements to countries that have no other choice to follow, which,
according to them, is something fundamentally irrational and antidemocratic. In fact, the view that a
country could be forced by another to take steps that it does not want to take is a violation of the EU
democratic principle that all countries are equal.
6. Reflections
The taboos of the European politicians about particular choices create serious problems to the
economic integration and political deepening process. One typical example is the Eurogroup that
although it takes the most important decisions, it does not have any legal or institutional status.
Actually, it is an informal body with no minutes taken at its meetings, while its decisions define at
least the future of the euro and the Eurozone.
Likewise, the ECB Governing Council’s arbitrary way of setting the inflation target under 2%
not only it does not secure the stable and sustainable growth, but rather confirms the imposition of
personal obsessions at the expense of a really progressive economic policy.
24
The decision 6866/13 refers to a package of measures known as “Two Pack”, which includes: a) a regulation
on enhanced surveillance of Euroarea member states that are experiencing or threatened with serious financial
stability difficulties, b) a regulation on enhanced monitoring and assessment of draft budgetary plans of Euroarea
member states, with closer monitoring for those in an excessive deficit procedure.
25
The EC issued six legislative proposals on 29.09.2010 relating to the reform and enforcement of the budgetary
surveillance framework, the establishment and enforcement of a new surveillance framework to identify and
correct emerging macroeconomic imbalances, and the harmonisation and strengthening of national budgetary
frameworks.
26
Those who decide to impose a tax should bear the political cost of this decision, which is to publicly account
for it.
35
Furthermore, the amounts allocated by the European budget do not help essentially in the
economic integration and political deepening of the EU member states and even more of the Eurozone
member states. The fiscal union, through a strong EU budget, is far from the present reality. The
structural funds, the Cohesion Fund, the European Investment Bank and other institutions help
countries that undergo asymmetric shocks deal with them, but the amounts directed to these countries
are too small27. The amount of 33 billion euros granted by the structural funds and that of 27 billion
euros granted by the European Investment Bank cannot be seriously considered as an effective
instrument for combating an asymmetric economic shock. Typically, the USA government federal
budget equals 25% of the national GDP, while the EU budget equals less than 1.5% of the European
GDP.
7. Conclusions
The monetary union is something much more than a single exchange rate and a central bank.
The loss of the sovereign monetary policy making is only one of the consequences for a country
entering the common currency. The investors reacted faster than the cumbersome European
governments and the absent European mechanisms, thus leading many countries to economic
suffocation. The resolution of the “moral hazard” problem was not enough to prevent the debt crisis
from spreading to several Eurozone member states. Both the EU and the ECB reacted in a multilevel
way to address the crisis, through the creation of rescue mechanisms and emergency support
programmes. A monetary union can work successfully as long as there is a single support and
supervision mechanism at fiscal and banking level. Such mechanisms are provided by the political
union, which is deeper than the economic union. These mechanisms were absent in the EU and due to
the crisis they became gradually piece of the “euro-confederalisation” puzzle. However, their size,
response speed and overall function continue to raise doubts about whether they can guarantee the
Eurozone’s and the EU’s survival (De Grauwe and Li, 2015).
27
In order to be more easily understood the asymmetric shock cost and the need for smoothing out business
cycles in the Eurozone member states, a typical finding from a recent study is given, (Antonakakis,
Chatziantoniou, Filis, 2015) which prove that 80% of the business cycle shock in the EU member states are
caused by the “spillover effect”, that is the shock dispersion from the rest EU member states.
36
8. Appendix: Charts - Tables
Chart 1: GDP at current prices
Chart 2: Growth rate
Chart 3: Unemployment rate
37
Chart 4: Interest rate spreads for Eurozone member states
Chart 5: EFSF loans
Chart 6: ESM loans
38
Chart 7: EFSM loans
Chart 8: The change in spread from June 2012 until February 2013
Chart 9: Interest rates of Spain and UK government bonds
39
Chart 10: Spain and UK government debts
Chart 11: Austerity measures and spread levels
40
Chart 12: Austerity measures and growth rate
41
Table 1: GDP at current prices
GDP $ USA Euroarea EU China Russia

2006 13,855,888,000,000 11,171,913,753,944 15,277,153,474,532 2,729,784,031,906 989,930,542,279
2007 14,477,635,000,000 12,865,170,227,278 17,666,078,553,517 3,523,094,314,821 1,299,705,764,824
2008 14,718,582,000,000 14,104,469,320,998 19,012,781,861,265 4,558,431,073,438 1,660,846,387,625
2009 14,418,739,000,000 12,898,241,885,261 17,005,366,281,318 5,059,419,738,267 1,222,644,282,202
2010 14,964,372,000,000 12,635,364,066,139 16,937,824,892,179 6,039,658,508,486 1,524,917,468,442
2011 15,517,926,000,000 13,621,651,189,769 18,310,001,820,621 7,492,432,097,810 1,904,793,932,483
2012 16,163,158,000,000 12,642,794,345,501 17,232,152,914,473 8,461,623,162,714 2,016,112,133,645
2013 16,768,053,000,000 13,186,281,579,559 17,950,130,244,943 9,490,602,600,148 2,079,024,782,973
2014 17,419,000,000,000 13,402,747,137,991 18,460,645,625,272 10,360,105,247,908 1,860,597,922,763
Source: World Bank
Table 2: Growth rate
Growth China Euroarea EU Russia USA

2006 12.68823 3.258509 3.422497 8.153432 2.666626
2007 14.19496 3.060461 3.075478 8.53508 1.77857
2008 9.623377 0.494562 0.479147 5.247954 -0.29162
2009 9.233551 -4.54355 -4.41129 -7.82089 -2.77553
2010 10.63171 2.053446 2.124739 4.503726 2.53192
2011 9.484506 1.66137 1.761179 4.264177 1.601454
2012 7.750298 -0.82858 -0.49113 3.405547 2.321085
2013 7.68381 -0.36473 0.117218 1.340798 2.219308
2014 7.351 0.851212 1.294461 0.640486 2.388227
Source: World Bank
Table 3: Unemployment rate
Un.Rate USA Euroarea E.U Russia China

2006 4.7 8.324359 8.221834 7.1 4
2007 4.7 7.43085 7.175679 6 3.8
2008 5.9 7.498431 6.972234 6.2 4.4
2009 9.4 9.551122 8.956025 8.3 4.4
2010 9.7 10.18412 9.6352 7.3 4.2
2011 9 10.17533 9.611461 6.5 4.3
2012 8.2 11.40159 10.51036 5.5 4.5
2013 7.4 12.0867 10.93022 5.6 4.6
Source: World Bank
42
Table 4: amounts that each mechanism lent
Mechanism/
Country Greece Cyprus Ireland Portugal Spain
EFSF 130.9 0 17.7 26 0
ESM 86 9 0 0 41.3
EFSM 7.16 0 22.5 26 0
Total 224.06 9 40.2 52 41.3
Source: www.europa.com
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44
Sectors attracting venture capital in Poland and other European countries
Elżbieta Grzegorczyk
University of Lodz, Faculty of Economic and Sociology, Institute of Finance
elzbieta.grzegorczyk@uni.lodz.pl
Introduction
For both: the potential entrepreneurs and from the perspective of economic development, the
distribution of industries in which capital providers are willing to invest their capital is extremely
important. The PE/VC is perceived as the one invested in the areas widely named “innovative” such
as: know-how, high-tech, etc. Relation with product, process or market innovation is understandable,
as per the fact that they usually indicate the potential for outstanding growth, which by definition, is
associated with expectations of high return of capital invested.
The main objective of the following study is to analyse the spread of the private equity/
venture capital among sectors/ industries within the Polish economy and other European countries.
Moreover, the aim of the study is an indication of sectors that draw the greatest attention of VC
investors in Europe. In the analysis, special emphasis are placed on identifying sectors that might be
treated as popular or specific within venture financing and identifying industry trends in recent years.
What is more, interesting are also similarities and differences between chosen countries, in terms of
industries that are attracting VC.
Most of the PE/VC market reports published describe individual countries separately or
combine them into subgroups usually as per their geographic location (e.g. CEE countries, Baltic
countries, etc.). I strongly believe that the most appropriate grouping should depend on the level of
development of the market, thus below analysis of PE/VC market, concern countries grouped in
clusters distinguished based on their convergent traits and sector characteristics by taxonomic
analysis. It gives the opportunity for reasonable comparison, which confront venture capital sectors
interests in Poland with other countries from the same cluster to avoid comparing apples to oranges.
In the study there were used statistics published by the EVCA28 (for years 2007-2014) for
Poland and other selected countries. In addition, there were used statistical data provided by
Eurostat29 and GUS30. Due to the nature of the sources, analysed data treat the PE/VC market
generally, with no division into different types of private equity capital.
Sectors attracting PE/VC in Poland

Analysing the investment preferences of VC funds in Poland for last 8 years (Table 1), it can
be noticed, that although the distribution of capital between sectors occurs, it is not as significant as
in the case of western Europe. In the analysed period, investors withdrew money from some sectors
and at the same time they develop investment in areas that initially were considered as of little
interest. Between 2009-2012, large sums of capital were invested in life sciences, which currently
attract only around 4% of the total PE capital. According to data published in the report "Social
Diagnosis 2013"31 in 2011 nearly 55,5% of working Poles used private healthcare, when in 2013 the
percentage grew by 2,4 percent points to 57,9% [Czapiński, Panek, 2014, p. 127]. Reports indicate
that the potential for private healthcare industry has been recognized by the financial markets.
Investors in Poland decide to invest in companies within this profile [Jaka jest przyszłosć…].
Therefore, such a decline in investments in this area is highly surprising.
Table 1. The amount of PE/VC investments depending on the industry in Poland, in 2007-2014 [amount
in euro k]
POLAND ( in € k) 2007 2008 2009 2010 2011 2012 2013 2014
28
EVCA - European Private Equity & Venture Capital Association
29
Eurostat - European Statistical Office
30
Central Statistical Office of Poland (pl. GUS – Główny Urząd Statystyczny)
31
Polish report: „Diagnoza Społeczna 2013”
45
Agriculture 0 0 82 320 0 0 0 0
Business & industrial

104 029 66 974 33 319 43 049 12 193 43 843 16 091 42 321
products

1 256 26 049 22 485 63 659 18 770 3 564 58 820 2 605
services
Chemicals & materials 199 857 627 0 0 7 708 0 185
Communications 67 504 58 664 147 496 77 263 253 217 9 764 11 395 96 350
Computer & consumer

23 632 20 759 6 269 12 597 15 072 29 767 22 410 12 219
electronics
Construction 1 863 31 175 0 1 034 9 953 1 202 26 400 0
Consumer goods & retail 28 502 187 100 77 933 153 211 168 548 130 861 91 138 34 227
Consumer services 65 053 7 675 2 241 13 349 4 508 40 133 17 246 103 608
Energy & environment 0 64 294 1 100 0 11 501 32 056 29 728 20 260
Financial services 92 379 49 278 0 71 749 69 288 92 083 10 229 12 974
Life sciences 13 608 40 452 146 332 39 014 84 847 143 970 14 042 12 280
Real estate 3 420 510 44 300 1 073 0 0 0 0
Transportation 33 778 173 370 0 28 114 44 261 5 636 54 022 0
Unclassified 0 176 0 0 0 0 0 0
Total investment 435 224 727 334 482 183 504 432 692 157 540 588 351 520 337 029
Legend for colours (% of total PE/VC):
>30% >20% >10%
Source: Own based on EVCA Yearbook 2015.
The similar situation we can observe in the case of financial services, which in 2010-2012
were able to get 10%-17% of private equity and currently not more than 4%. Furthermore, the total
value of the PE/VC in Poland is declining since 2012, thus total capital in 2014 represents only 62%
of the amount reached in 201232. Therefore the decline of sector influence on gathering funds is even
more forcible. The financial crisis had a strong impact on the reduction of interest in all: the
financial services, consumer services and business & industrial services, especially in 2008-2009.
However, currently PE investors' attention was directed towards consumer services, which in 2014
received more than 30% of the total private equity (around 103 million). It is surprising, however,
that while in 2013 there was a significant increase in investment in business services, currently only
1% of equity goes to this sector, despite the optimistic forecasts on the significant development of
this area. Poland is an increasingly frequently chosen country for location of modern business service
centres. As indicated in the report "The potential development of services for business" 33 [Polska
południowa, 2014, p.3], this industry is currently one of the pillars of the Polish economy and the
number of workplaces in the industry grow almost linearly. It is forecasted that the annual increase in
new vacancies will reach the level of several thousand [10 lat sektora, 2014, p.74].
Industries, which continuously retain attractive for the PE/VC investors are communications
32
2012 – € 540.588k; 2013 – €351.520k; 2014 – € 337.029k.
33
Polish report: „Potencjał rozwoju usług dla biznesu”
46
and consumer goods & retail. When it comes to the former area, currently around 96 million euro
(almost 30% of the total investment) finances telecommunications. The extremely rapid growth of
mobile communication of the early XXI century has lost its strength, however, in this sector it is still
believed to be relatively developing. The communications area is not only the mobile phone industry,
but also widely understood media and IT. Consumer market is stable since 2008, as it continuously
maintained the attention of venture investors, capturing from 34 million up to 187 million euro. So
stable position may result from the fact that the majority of the entrepreneurs seeking financing from
the PE/VC funds, have ideas for innovative products, whose main aim is to make peoples’ life easier
or more enjoyable. The more products meet the needs of the society, the greater probability that the
idea will gain a substantial audience and thus the company, in a relatively short period of time,
achieve an increase in sales.
It is worth mentioning that in the computers & customer electronics area, there is a decrease
of capital. By definition, the electronics industry should be perceived as a perfect choice for PE
investors as it gives the opportunity to achieve high profits, therefore it should easily gain funding.
However, neither in Poland nor in Europe (generally), investments in this sector do not gather ample
interest of PE/VC investors. Poland lacks in sufficiently innovative projects in the field of
electronics, which could tempt potential venture funds.
Industries which are perceived by investors as unprofitable, which they are rather reluctant to
become involved in, are construction, agriculture, chemicals & materials. In the case of the first
sector it is among other, due to the fact that projects in this area usually require relatively large
amounts of money and the return on investment is highly dependent on the future status of the real
estate market. It is difficult, therefore, to achieve above-average capital returns. Agriculture is
assumed not to be attractive due to the lack of innovation in this field.
Venture capital is not only about the sphere of highly advanced technologies (high-tech), but
from the investors point of view, it constitute as an important source of innovative ideas that are
worth investing in. The alarming fact is that investments in high-technologies in Poland are
extremely small (table 2).
Table 2. The amount of PE/VC investment in high-tech sector in Poland, in 2007-2014 [amount in euro
million].
POLAND ( in € m.) 2007 2008 2009 2010 2011 2012 2013 2014
Total PE/VC investment 781 727 480 504 689 541 352 337
high-tech investment 1 15 4 0,3 22 21 2 3
Source: own based on EVCA Yearbook 2015.
In 2014 the value of investments in highly developed technologies has not reached even 1%
of the total PE/VC investments, such as in the previous year. Most countries in Central and Eastern
Europe, invested no more than a few percent in the high-tech sector. In comparison, the average
European share of high-tech in 2014 was 10.1% [EVCA 2015]. This may be the result of aversion of
Polish investors to take excessive risks associated with the high technology area or from insufficient
number of ideas in this area that investors would be willing to support financially. On the other hand,
positive is the fact that the number of patents submitted by Poland at the European Patent Office is
increasing (in 2004 - 124 patent applications, in 2012 - 469) [Eurostat, 2012], as well as the number
of applications concerning strictly high-tech industry, which since 2004 has been doubled (41
applications in 2012). In Western Europe, however, the amounts are much higher - the average for
European countries in 2012 is approximately 1900 total patent applications and 140 applications
relating to high-tech [Eurostat 2012b]. Often for cheaper and safer way is to buy licenses and patents
for technological solutions already proven. These, however, do not influence directly on the Polish
market innovativeness. Poland has a huge area for improvement.
Sectors attracting PE/VC in selected congruous countries

The analysis of sectors attracting venture capital in Poland and other countries should start
with the countries cluster specifics. Clusters differentiation was made based on the taxonomic
47
analysis. The creator of multidimensional comparative analysis was Professor Z. Hellwig [Hellwig,
1968]. Proposed method is an estimation of the level of differentiation of objects described by a set
of statistical characteristics. This lead consequently to identification of homogeneous groups -
clusters of counties with similarities in their development [Kopczewska, 2009]. The taxonomic
analysis of clusters for the five year period 2009-2013 brought the results to the four groups
distinguished [Grzegorczyk, 2015, p.247], presented on the map 1 below. Clusters of countries are as
follows:
 First cluster: Germany, United Kingdom, France
 Second cluster: the Belgium, Netherlands, Luxembourg, Denmark, Sweden, Finland, Norway,
Switzerland, Austria and Spain
 Third cluster: Italy, Greece, Portugal, Ireland, Baltic countries (Latvia, Lithuania, Estonia),
Poland, Czech Republic, other CEE34
 Fourth cluster: Romania, Bulgaria, Hungary, Ukraine
When it comes to the discovered similarities within third cluster – where Poland is a
member, this group contains a part of the Central and Eastern European countries and other ones of
the eastern Mediterranean basin. In these cases the level of development of the PE/VC sector could
be assessed as satisfactory.
Map 1. Map of Europe with analysed clusters indicated in 2014

Source: Grzegorczyk E., Private Equity/Venture Capital sector specifics in certain groups of countries within
Europe [in:] 14th EBES Conference – Barcelona Proceeding Volume 3, EBES Barcelona 2014, p. 1944.
Countries indicated within third cluster are characterized by a low participation of PE/VC
investments in total GDP value (around 1–2 %), while a low percentage in GDP is inadvisable
because it reduces the possibility of a more rapid development of the economy [EVCA 2014c]. In
this group from 28% to 50% of all sources employed are qualified employees hired in technology or
science. Not significant difference comparing to the previous cluster (40%-58%). On average, the
countries of this group report about 700 patents to the Patent Offices, which is not a significant
number35. Venture capital in this cluster comes mainly from government agencies (from 31% to
58%), both indirectly and directly, in the form of quasi-funds, recapitalization of seed funds or
34
CEE – Central Eastern Europe (Ex-Yougoslavia and Slovakia)
35
Average no pf patents: Cluster 1 –11700; Cluster 2 – 1510; Cluster 4 – 72)
48
throughout funds of funds. When the distribution of resources between different industries is being
concerned, in this group there is no longer visible such diversification as in the previous two clusters.
All countries are focused mainly on 2–3 branches in a given year drawing from 60% up to 90% of
the total PE/VC investment value. For each county, however, other sectors such are the area of
interest. When it comes to investing in high technology, around 1%–13% of total investment finances
high-tech. As per the level of company development, approximately 66% of capital is invested in
buyout phase. However, such as in second group, the early phase of development gain in importance,
as the companies in these stages, have the greatest difficulty in obtaining funding for the
development. At the same time, these particular enterprises (SMEs) are the driving wheel of
economies that want to catch up with more developed countries36.
As Poland is combined in the third cluster, it seems most reasonable to confront PE/VC
investor’s interests in Poland with other countries from the same cluster, where the level of
development of the PE/VC sector is assessed as “satisfactory”. Third group consist of the countries
from the Central and Eastern part of Europe (Poland, Czech Republic, Latvia, Lithuania, Estonia and
Slovakia, Slovenia) and the countries of the eastern Mediterranean basin (Greece, Italy, Croatia), as
well as Portugal and Ireland.
It is visible, that in this cluster PE/VC investors are focused on particular sectors (table 3).
Table 3. The amount of PE/VC investments depending on the industry in indicated countries from
Europe, in 2007 [amount in euro k]
Czech Baltic
Sector focus Poland CEE Greece Italy Portugal
Republic countries
Agriculture 0 0 0 1 492 24 000 0 12 785

104 029 49 233 3 000 0 0 722 260 15 668
products

1 256 2 000 0 0 8 750 155 521 13 019
services
Chemicals & materials 199 8 091 0 0 0 61 860 24 885
Communications 67 504 1 038 7 431 3 023 41 508 174 075 5 245
Computer & consumer

23 632 0 2 976 0 0 70 538 3 761
electronics
Construction 1 863 0 20 525 0 0 15 500 10 178
Consumer goods & retail 28 502 8 091 21 518 27 000 238 1 156 695 8 079
Consumer services 65 053 1 063 1 582 2 100 0 80 229 29 436
Energy & environment 0 0 8 837 620 0 49 926 14 778
Financial services 92 379 0 0 0 0 84 734 11 020
Life sciences 13 608 0 5 600 9 000 15 125 47 978 6 300
Real estate 3 420 0 0 0 0 0 0
36
More information and details about the methodology of analysis and the characteristics of diversified
clusters can be found in: Grzegorczyk E., 2015. Private Equity/Venture Capital sector specifics in
certain groups of countries within Europe [in:] Mehmet H., Business Challenges in the Changing
Economic Landscape – Vol. 1. Proceedings for the 14th Eurasia business and Economics Society
Conference, Springer, pp.239-260.
49
Transportation 33 778 0 0 620 0 219 250 0
Unclassified 0 0 0 0 0 0 50 970
Total investment 435 224 69 516 71 469 43 855 89 621 2 838 565 206 124
Subtotal High-Tech 1 102 0 3 731 0 14 780 134 716 43 399
Legend of colours:
>30% >20% >10%
Source: own base on EVCA Yearbook 2015.
In all countries capital was concentrated mainly on 2-3 industries, which in 2007 consumed
from 51% (Portugal) up to 94% (Czech) of the total value of PE/VC investments. In some of these
countries other segments are almost completely omitted e.g. Czech, CEE, Baltic countries and
Greece. It looks slightly different in case of Portugal, Italy and Poland, as there, although a few areas
attract most of the venture capital; almost each sector grabs some of it. Those that gathers the biggest
portion of PE/VC are however industrial products and customer goods. It might be related to the
need of constant push facilitate life and make it more enjoyable in this part of Europe. Thus investors
are seeking for entrepreneurs whose products meet these needs.
What is worth mentioning, in 2007, in Portugal (21%) and Greece (17%) PE/VC invested a
lot in high-tech. In Baltic countries and Italy investors financed technologies at amount around 5%
or all PE/VC capital, but in the rest of the countries there was allocated not even 1%. The average
within the cluster is around 5%. This situation may have a bad impact on the overall economy
development.
In 2014, the total capital amount in almost all countries from the third cluster fell
significantly (except Portugal and CEE). These are echoes of the latest financial crisis, which
touched, in a greater or lesser extent, almost all European countries, and resulted in more
conservative approach when it goes to risky investments. The same as in 2007, (table 4) capital was
mainly concentrated on 2-3 branches, gathering in 2014 from 51% (Portugal) up to 100% (Greece).
Table 4. The amount of PE/VC investments depending on the industry in indicated countries from
Europe, in 2014 [amount in euro k]
Czech Baltic
Sector focus Poland CEE Greece Italy Portugal
Republic countries
Agriculture 0 0 219 19 200 0 0 135

42 321 0 2 203 3 800 0 234 597 24 042
products

2 605 3 200 2 070 6 052 0 41 976 5 314
services
Chemicals & materials 185 0 196 0 0 101 933 1 165
Communications 96 350 6 267 3 934 250 198 18 898 8 959
Computer & consumer

12 219 1 819 1 864 4 903 0 4 999 11 727
electronics
Construction 0 0 0 0 0 3 000 35 512
Consumer goods & retail 34 227 2 600 2 811 1 000 0 191 337 34 694
Consumer services 103 608 0 1 998 9 436 0 52 687 19 769
Energy & environment 20 260 0 7 122 13 200 0 23 800 7 521
50
Financial services 12 974 100 100 0 0 0 2 913
Life sciences 12 280 0 1 177 4 800 0 43 782 22 130
Real estate 0 0 0 0 0 0 53 625
Transportation 0 0 0 0 0 3 200 300
Unclassified 0 0 0 0 0 0 14 055
Total investment 337 029 13 986 23 694 62 641 198 720 209 241 861
Subtotal High-Tech 2 736 2 107 3 903 5 053 0 30 183 14 426
Legend of colours:
>30% >20% >10%
Source: own base on EVCA Yearbook 2015.
It is worth to notice, that in Poland investors withdraw their money from some sectors (such
as: real estate, transportation or construction) compared to 2007. The structure seems to be more
similar to other countries from the group, where there are only a few sectors which are financed by
PE/VC, but the rest is in the minority or even omitted. It may be a result of the fact, that the PE/VC
market is not highly develop yet and venture investors, to manage the risk, prefer to keep in
portfolios mainly the sectors, they perceive as profitable and rather predictable such as
communications. In Portugal, however, the diversification of capital is visible, where each sector
had the financial support from VC invertors.
In 2014, the biggest amount of capital within the cluster went to business & industrial
products (about € 306m), consumer goods & retail (about € 267m) and Consumer services (about €
187m). In turn, the least funded sectors were transportation, agriculture and financial services.
When it comes to high-tech investments, the average for the cluster is 4% (Italy the most, Greece not
at all).
Sectors in current PE/VC funds’ portfolios in Poland, Czech and Italy

Each fund has its own investment policy and specific preferences as per the industry.
Analysing the PE/VC investor’s interest in various sectors, therefore, it is worth to pay attention to
the diversification of fund portfolios operating in different countries. Table 5 presents an analysis of
the portfolios of more than 100 funds operating in Poland, Czech Republic and Italy, grouped by
national PE/VC associations37. Some of the funds, due to the lack of publication of the current or
sufficient data to verify whether the investment can be taken into account, had to be omitted38.
37
Poland – PSIK (Polskie Stowarzyszenie Inwestorów Kapitałowych); Czech – CVCA (Czech Private
Equity and Venture Capital Assotiation); Itally – AIFI (Associazione Italiana del Private Equity e
Venture Capital).
38
In the study there were taken into account the investments indicated by funds as the current
(ongoing) projects and/or portfolio investments not older than 5 years. Projects considered are those
that concern the particular country or the European markets.
51
Table 5. Number of projects financed and number of funds investing the particular sectors in Poland,
Czech Republic and Italy based on PE/VC funds’ portfolio analysis.
Number of PE/VC funds that invested Number of projects financed by
in sectors PE/VC funds
Czech Czech
Poland Italy TOTAL Poland Italy TOTAL
Republic Republic
Agriculture 0 1 1 2 0 1 1 2
Business & industrial products 18 10 31 59 21 35 117 173
Business & industrial services 16 9 23 48 24 30 63 117
Chemicals & materials 8 4 11 23 10 10 26 46
Communications 20 11 28 59 56 73 96 225
Computer & consumer

11 7 12 30 12 19 18 49
electronics
Construction 6 2 2 10 8 1 2 11
Consumer goods & retail 14 10 33 57 23 36 103 162
Consumer services 19 4 18 41 27 13 37 77
Energy & environment 10 6 15 31 15 11 27 53
Financial services 9 8 8 25 17 17 14 48
Life sciences 20 9 19 48 26 43 69 138
Real estate 3 2 2 7 3 3 4 10
Transportation 6 6 2 14 6 10 3 19
Unclassified 5 0 0 5 5 0 0 5
Total no. of funds / projects 48 13 42 103 253 302 580 1135
Source: Own based on data from particular funds webpages (funds lists available on: PSIK
http://www.psik.org.pl/fundusze.html; CVCA39; AIFI http://www.aifi.it)
The analysis, are in line with and confirms previous statistical one’s. However, in some
sectors, it shows slightly different situation than earlier research. There should be highlighted a few
important factors affecting the discrepancy results. In the following analysis of portfolios, the data
relate to the amount of projects in the industry, not the amount of capital allocated for this purpose.
In addition, many projects do not apply strictly to one sector, but is on the borderline of industries,
making it difficult to qualify it. Moreover, survey-based projects are currently in the portfolio of
PE/VC funds (funded no earlier than 2010). There are also projects funded by more than one fund,
therefore may be included in the analysis twice or more. This does not affect negatively the
interpretation, since the main question posed in the survey is about the industries that attract capital.
Thus, if the project is able to attract more than one investor or if investors are willing to conduct the
investment together, the better situation for the sector it shows.
Analysing currently implemented capital projects financed by PE/VC, in the three indicated
39
Ondrej Ptacek, Equity Gap on the Venture Capital Market in the Czech Republic [in:] International
Journal of Business and Management Vol. II (1), 2014, pp.67-68.
52
countries, definitely on the first place, there is the sector broadly understood as communication (i.e.
the media and IT solutions). It is visible on the graph 1 below, that although statistics presented
previously show a significant reduction in the total amount of capital in the communications sector
between years 2007 and 2014, now almost one-fifth of all projects included in the PE/VC funds’
portfolios, are initiatives in modern media (e.g. mobile networks, portals, specialized software, etc.).
More than half of the funds in Poland, the Czech Republic and Italy are interested in investing in this
sector. Such disparities may arise from the fact that these projects do not need a lot of capital, so
some might be unnoticed in the overall amount statistics.
Similarly, in the sector business & industrial products there are many investors interested.
In the countries taken into account, over 15% of all projects implemented with the help of PE/VC
capital, support the ideas in this sector. However, when it comes to the total amount of venture
capital, this sector gathers the biggest portion of funds. In this case it seems that the projects held in
industry (such as: automotive, specialized machines, etc.) are absorbing a large sums of capital. The
situation is similar in the consumer goods & retail sector. Interesting is the state in life sciences
sector. Although from the overall statistical point of view, the attractiveness of this sector has been
declining since 2007, it is considered by 46% of PE/VC funds as interesting – 138 projects are
currently financed in the PE/VC fund portfolios.
Graph 1. Comparison of total investment amount and portfolio analysis results (for Poland, Czech and
Italy combined as one).
0 50.000 100.000 150.000 200.000 250.000 300.000
Agriculture
Business & industrial products
Business & industrial services
Chemicals & materials
Communications
Computer & consumer electronics
Construction
Consumer goods & retail
Consumer services
Energy & environment
Financial services
Life sciences
Real estate
Transportation
Unclassified
0 50 100 150 200 250

Total no. of projects financed by PE/VC funds Total no. of PE/VC funds invested in sectors
Source: Own, based on data from particular funds webpages (funds lists available on: PSIK
http://www.psik.org.pl/fundusze.html; CVCA40; AIFI http://www.aifi.it)
Summary
The European countries from the third cluster, including Poland, are characterized by low
participation of PE/VC investments in Gross Domestic Product value (around 1%). There is still a
large gap in the comparison with other European countries, where the percentage is from 3% to 5%.
Although differences even within the cluster could be noticed, they have a lot in common.
In Poland the most stable and continuously attractive for the PE/VC investors is sector of
customer good and retail. What is important, almost 30% of the total investment finances
telecommunications. As well private healthcare industry has been recognized by the financial
markets. However, the financial crisis had a strong impact on the reduction of interest in all modern
services, especially financial ones. Currently PE investors' attention was directed towards consumer
services receiving more than 30%. Business services, gathers only 1%, despite the optimistic
forecasts on the significant development of this area.
It can be stated that Poland and other countries indicated in the cluster three, since 2007 are
40
Ondrej Ptacek, Equity Gap on the Venture Capital Market in the Czech Republic [in:] International
Journal of Business and Management Vol. II (1), 2014, pp.67-68.
53
focused mainly on 2-3 main branches investing from about 51% up to 100% of the their total value
of PE/VC investments. For each country, however, potential interesting sectors differs: e.g. in 2014
in Poland the most interesting were: consumer services (31%) and communication (28%); in the
Czech Republic - communications (45%); in Baltic countries - Energy & environment (30%); in CEE
countries – Agriculture (30%), which is unique interest in Europe; in Greece - communication
(100%); in Italy - Business & industrial products (33%) and in Portugal - Real estate (22%) which is
as well quite unusual among this part of Europe.
Analysis only of the value of PE/VC investment is not presenting the whole picture of sector
diversification. Comparing it with the sectors of currently financed projects showed in the PE/VC
portfolios allows to present wider spectrum. Generally this study confirms previous results, however,
in some aspects, it differ from earlier research. In case of communication and life sciences, although
the capital invested is not considerable, a lot of projects attracted the interest from PE/VC funds.
Both sectors are perceived as quickly developing which attract investor’s interest and, moreover, they
tend to be less capital-absorbent, which gives PE/VC funds a greater possibility of capital
movements within their portfolio and thus manage a risk.
Bibliography
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within Europe [in:] Mehmet H. Bilgin, H. Danis, E. Demir, U. Can (editors), Business Challenges in
the Changing Economic Landscape – Vol. 1. Proceedings for the 14th Eurasia business and
Economics Society Conference’ Eurasia Studies in Business and Economics 2/1, Springer, pp.239-
260.
Ptacek O., 2014. Equity Gap on the Venture Capital Market in the Czech Republic [in:] International
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54
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na_2013.pdf> [Accessed 20 September 2015].
List of particular fund portfolios available at webpages published at PSIK Portal
<http://www.psik.org.pl/fundusze.html>:
- http://www.21concordia.com/
- http://3tscapital.com/
- http://www.abris-capital.com/
- http://www.adventinternational.pl/
- http://www.arxequity.com/
- http://www.avallon.pl/
- http://www.blackpearls.pl/
- http://www.bridgepoint.eu/
- http://www.seedfund.pl/
- http://www.c-p.pl/
- http://cee-equity.com/
- http://www.darbyoverseas.com/darby/index.jsp
- http://www.vestor.pl/kim-jestesmy
- http://www.ei.com.pl/pl/
- http://www.eqt.se/
- http://evf.com.pl/
- http://gpventures.pl/
- http://www.highlander-partners.com/
- http://www.ikinvest.com/
- http://www.imperasa.pl/
- http://www.innovacap.com/
- http://www.iqpartners.pl/
- http://www.kfk.org.pl/
- http://www.krokuspe.pl/
- http://mci.pl/
- http://www.mezzmanagement.com/
- http://www.mideuropa.com/
- http://www.montagu.com/
- http://www.oresaventures.com/
- http://www.pentonpartners.com/
- http://www.pinebridge.com/
55
- http://www.rp.com.pl/?id=1
- http://www.resourcepartners.eu/en
- http://www.riversidecompany.com/
- http://www.royalton-partners.com/
- http://www.satus.pl/
- http://www.secus.pl/
- http://www.skyline.com.pl/
- http://http//speedupinnovation.com/
- http://www.syntaxis-capital.com/
- http://value4capital.com/
- http://www.warburgpincus.com/
- http://www.warsawequity.com/
- http://www.waterland.nu/
- http://www.wsicapital.pl/
List of particular fund portfolios available at webpages published at AIFI, <http://www.aifi.it>:
- http://www.035investimenti.it/
- http://www.21investimenti.com/
- http://www.aksiagroup.com/
- http://www.alcedo.it/
- http://groupealpha.com/
- http://www.altopartners.it/
- http://www.ambientasgr.com/
- http://www.antaresinvestimenti.it/it.html
- http://www.ardian-investment.com/
- http://www.argos-soditic.com/
- http://www.apesgr.it/
- http://www.bcpartners.com/
- http://www.cinven.com/
- http://www.cfi.it/public/
- http://www.clessidrasgr.it/
- http://www.cvc.com/
- http://www.cooperarespa.it/
- http://www.consiliumsgr.it/index.php/en/
- http://www.doughtyhanson.com/
- http://dpixel.it/
- http://www.mastcap.com/
- http://www.emisys.it/
- http://www.f2isgr.it/f2isgr/index.html
- http://www.finintprivatequity.it/it/01.php
- http://www.fondoitaliano.it/
- http://www.fondostrategico.it/it/index.html
- http://www.quadriviosgr.com/
- http://www.gradientesgr.it/en
- http://www.higeurope.com/main/
- http://www.h2ispa.com/
- http://www.ipspa.it/
- http://www.mandarincp.com/en/
- http://www.mpventure.it/en/
- http://www.p101.it/portfolio/
- http://www.paipartners.com/
- http://www.sofinnova.fr/
- http://www.starcapital.it/
- http://fondisici.it/it/portafoglio/
- http://www.timventures.tim.it/
56
- http://unitedventures.it/
- http://www.vertis.it/
- http://www.wisesgr.it/it/profilo/WiseSGR/index.html
- http://www.zernikemetaventures.com/SitePages/home.aspx
List of particular fund portfolios available at webpages:
- http://3tscapital.com/
- http://www.amundi.com/int/Welcome-to-Amundi
- http://www.adventinternational.com/
- http://www.arguscapitalgroup.com/pl/
- http://www.arxequity.com/node/18?language=pl
- http://www.credoventures.com/
- http://www.ei.com.pl/pl/
- http://www.genesiscapital.co.uk/
- http://www.gimv.com/en
- http://www.mideuropa.com/polish/o-nas/
- http://www.pinebridge.com/
- http://www.riversidecompany.com/
- http://value4capital.com/portfolio-companies/
57
Terms of trade of EU member countries in the context of changing primary commodity

prices
Witkowska, E. A.
Brandenburg University of Technology Cottbus-Senftenberg
Erich-Weinert-Str.1
03046 Cottbus, Germany
Ewa.Witkowska@b-tu.de
Ewa Anna Witkowska is a Research Assistant at Brandenburg University of Technology Cottbus-Senftenberg

in Germany at the Chair of Business Administration and Corporate Finance. She graduated from Free
University of Berlin in Business Administration with the degree Diplom-Kauffrau, which is equivalent to a
Master’s degree, specializing in Accounting/Auditing and Strategic Management. Prior to finishing her
degree, she studied abroad at San Diego State University with a focus on International Trade and
International Business.
Abstract
In this paper, the terms of trade of EU member countries are presented and the reasons for their movements are
discussed. The assumption is made that the diverging terms of trade development of industrialized countries is
due to their differing specialization in specific export sectors and the corresponding price developments of these
exported goods. The dynamics of primary commodity prices have an effect on the terms of trade of many
European countries, therefore the long-term price developments of selected primary commodities are of interest.
Illustrated in this context are the long-term price developments as well as the primary commodity terms of trade
of the most important primary commodities, together with the underlying reasons for these trends.
Keywords: International Trade, Terms of Trade, Primary Commodity Prices
Introduction
In today’s globalized world, it is of great importance to calculate and analyze the terms of trade
numbers, since they are an important indicator of the gains of trade (see Eiteman et al., 2010, p. 608)
and welfare (see Krugman/Obstfeld, 2009, p. 93), as well as the international competitive advantage of
a given country. They tell us about the domestic exports that are needed to secure the same level of
imports.
The terms of trade of a given nation are defined as the ratio of their average index of export prices
relative to their average index of import prices:
Terms of trade =
(United Nations, 2012, p. 47). In the calculations, representative baskets are used, based on the most
popular exports and imports of a given country. Usually, every country is interested in an
improvement of their terms of trade since an increase means that, for a given quantity of exports, the
country is now able to obtain a bigger quantity of imports.
In tab. 1 are depicted the terms of trade, also referred to as net barter terms of trade (see Sell, 2003, p.
182), from 2000 until 2013, of the “EU-28 countries“, which are the member states of the European
Union by 1. July 2013.
The net barter terms of trade indices in tab. 1 are calculated as the percentage ratio of the export unit
value indices to the import unit value indices, measured relative to the base year 2000. For the
58
calculations, a set of average price indices is constructed, and unit value indices at the country level
are calculated using the current year’s trade values as weights (see World Bank Webpage, 2015).
59
Tab. 1: Net barter terms of trade indices for the EU-28 countries - Base year: 2000
EU-28 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
1. Austria 100.0 98.8 99.0 97.9 96.4 94.6 93.6 94.1 91.6 93.8 90.7 87.8 86.5 86.7
2. Belgium 100.0 99.7 101.3 100.7 98.6 98.9 98.5 99.4 95.9 99.0 96.2 95.0 94.2 94.4
3. Bulgaria 100.0 98.3 100.3 101.2 95.2 96.7 102.7 105.1 105.7 109.0 108.7 107.6 107.6 107.0
4. Cyprus 100.0 102.1 103.0 102.9 103.4 101.5 102.5 101.6 106.1 97.1 97.8 96.3 93.7 92.2
5. Czech Republic 100.0 101.6 103.7 104.3 107.0 106.4 104.4 104.6 102.8 105.5 103.3 102.8 101.5 101.6
6. Croatia 100.0 98.8 97.4 97.2 95.5 95.3 96.6 97.2 96.6 99.6 101.1 98.3 98.1 97.7
7. Denmark 100.0 100.8 100.4 100.3 97.5 99.6 99.3 100.7 101.1 99.5 99.9 99.7 100.1 100.0
8. Estonia 100.0 104.2 99.4 98.0 97.7 96.0 94.2 96.9 94.6 98.6 97.7 96.4 94.3 94.1
9. Finland 100.0 99.1 100.6 97.6 93.3 93.4 91.9 94.4 89.8 92.3 90.5 87.8 86.6 87.9
10. France 100.0 100.5 100.5 99.4 98.8 96.0 95.7 95.6 93.3 95.9 92.2 89.0 88.4 88.3
11. Germany 100.0 100.1 102.0 102.5 100.8 98.8 97.0 97.2 95.8 100.1 98.3 95.3 94.4 96.3
12. Greece 100.0 98.3 99.0 96.6 96.9 93.6 93.0 93.3 91.7 90.3 90.0 90.5 88.4 88.3
13. Hungary 100.0 98.9 98.7 99.5 98.5 96.8 93.3 93.1 91.8 95.2 93.0 93.5 93.0 95.2
14. Ireland 100.0 100.7 99.3 97.9 95.9 98.8 96.5 95.7 94.6 97.5 104.2 97.7 96.4 94.8
15. Italy 100.0 101.9 103.9 105.1 103.9 102.1 98.7 100.7 97.7 102.5 98.0 95.0 95.0 97.7
16. Latvia 100.0 101.4 104.7 104.2 106.7 103.7 102.7 108.8 104.5 104.2 106.5 105.4 102.6 104.2
17. Lithuania 100.0 98.7 99.1 103.3 104.0 100.5 97.7 98.9 96.0 97.4 95.1 94.5 94.3 93.4
18. Luxembourg 100.0 98.9 100.5 94.8 89.7 88.8 85.8 84.9 82.0 83.2 79.9 78.2 75.9 77.7
19. Malta 100.0 102.0 106.9 102.9 101.0 95.9 103.1 106.5 110.5 124.4 131.8 136.5 120.0 124.8
20. Netherlands 100.0 101.2 99.8 99.7 99.4 96.6 94.7 95.9 94.1 95.1 92.7 93.7 91.8 92.7
21. Poland 100.0 102.5 104.3 103.2 105.4 103.2 101.9 102.3 100.5 104.0 101.4 99.0 97.3 97.9
22. Portugal 100.0 99.6 100.3 98.2 97.3 94.1 93.3 93.0 90.4 94.4 92.9 91.5 91.3 92.6
23. Romania 100.0 100.3 102.4 103.6 107.1 107.2 108.7 108.7 107.8 109.2 110.3 111.1 110.4 109.7
24. Slovak Republic 100.0 97.3 98.3 100.5 101.9 102.0 99.3 98.1 94.7 97.7 94.0 93.2 91.6 91.6
25. Slovenia 100.0 101.1 102.8 102.9 101.5 98.3 98.3 97.1 95.3 98.9 95.8 94.5 93.6 94.6
26. Spain 100.0 99.4 99.9 99.5 98.2 96.0 94.9 95.0 91.9 96.9 93.0 89.1 87.9 89.3
27. Sweden 100.0 99.7 99.6 99.2 97.8 95.8 94.5 95.7 93.8 95.2 94.8 92.6 92.3 92.9
28. United Kingdom 100.0 100.7 100.0 101.6 102.0 104.0 103.8 103.8 104.2 102.8 102.7 101.0 100.6 102.2
Source: Own representation, data from World Bank Webpage 2015.
60
A long-term analysis of the terms of trade of the EU member countries shows that the terms of trade
are very diverse, which is an indication of the different trade patterns and economic powers of these
countries. For a better overview and understanding, certain countries were chosen to illustrate the
development graphically (see fig. 1). In fig.1 are selected the terms of trade of European countries with
a relatively stable and strong economy (Belgium, Germany and Netherlands) and of economically
weaker countries which have been strongly affected by the Euro crisis (Finland, Greece, Portugal and
Spain).
Fig. 1: Terms of trade of selected EU member states
105
100
95
90
85
80
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Belgium Finland Germany Greece
Netherlands Portugal Spain
Source: Own representation, based on data from World Bank Webpage 2015.
As can be observed in fig. 1, the terms of trade of the chosen EU countries usually responded to
certain economically relevant events. In consequence of the global financial crisis that began in the
United States in 2007, almost all EU countries faced significant drops in their terms of trade in the
following year.
It is evident that the terms of trade of most EU countries had been falling since the year 2000. Why is
that? A key reason had been the persistent rise in prices for raw materials since the beginning of the
21st century, which accounted for a large proportion of imports for many European countries. An
important feature of this primary commodity boom had been a strong differentiation of price
dynamics. The highest price increase had been denoted for metals and fuels, and the lowest for
agricultural commodities (see IMF, 2008, p. 199). There was also a rise in prices for oilseeds and
vegetable oils. An explanation for this phenomenon could be the use of these products for biofuel
production (see Johnson, 2007, p. 54). The literature also points to the link between uranium prices
and prices of coal and other fuels, as substitutes in the production of electricity (see Helbling et al.,
61
2008, p. 13). The main reason for the price increases of primary commodities in these years had been a
sharp increase in demand for these products. There had certainly been a connection with the
worldwide economic boom and the general growth of income per capita, but especially with the rapid
pace of industrial development and economic expansion in the so-called emerging markets, mainly
China and India (see United Nations, 2005, p. 73). The demand for crude oil had risen particularly
strongly (see Helbling et al., 2008, p. 11), which resulted in a steady rise in crude oil prices since the
beginning of the 21st century. In fig. 2, the worldwide primary energy consumption, and the high share
of consumption by China and India can be seen.
Fig. 2: Energy consumption
Source: World Bank Group 2015, p. 8.
In the described price increase, the low elasticity of supply had been an issue as well. This is not
surprising as can be noticed in the extensive literature about the low supply elasticity of the primary
goods industry, especially in the short term (see for example Canuto, 2014, p. 3; see Hirshleifer et al.,
2007, p. 195-197). The structural basis of the weak supply response had undoubtedly resulted from a
general underinvestment in these sectors in the 90s of the 20th century, when primary commodity
prices were still very low.
As can be seen in fig. 1, the terms of trade of the shown EU member countries are decreasing, but at
different speeds. The terms of trade of the countries Germany, Belgium and Netherlands are falling
more slowly than those of Portugal, Spain, Greece and Finland.
The evolution of the terms of trade of Germany is very interesting. The terms of trade of Germany
show a downward movement, which means there is a deterioration of the terms of trade ratio. Does
this imply that the German economy is getting worse off? So it might appear, if only the terms of trade
development was viewed, but not the global revenue, which for that matter can be a valid little point of
criticism regarding the terms-of-trade concept. If, for instance, certain German companies increase
their productivity because of technological progress, and as a result their costs decrease, they can
charge lower end-prices for certain products. As a consequence, the terms of trade of Germany
deteriorate, but it is possible that there is economic growth in the country. Also, if German companies
can sell a higher number of products in new markets because of good quality, reputation and
marketing, which results in an increase of the total value of exports, then this situation can be in fact
62
quite advantageous for German companies, even if the terms of trade of Germany have a falling
tendency. This has been the case of the German economy in the recent years. The quantity of the
products they sold has been very high. Germany has been very successful in foreign markets and the
surplus in the German trade balance has been relatively high.
On the other hand there were countries that had a worse terms of trade development (see fig. 1 -
Finland, Greece, Portugal, and Spain) due to their weaker exports, partly less competitive products and
less sophisticated exports (for export profiles, see United Nations, 2014, p. 88, 166, 176, 180, 272,
302, 338). The consequence had been debt growth, the recession has deepened and reduced the
wealth.
As the example of Germany shows, a decrease in terms of trade is not necessarily detrimental for a
country if it leads to a significant expansion in export volumes which results in an increase in the value
of exports. The limitations in the informational value of the terms of trade has led to the development
of a number of other concepts. One of them is the income terms of trade, which takes into
consideration the quantities of exports. Income terms of trade are calculated as a multiplication of
terms of trade with the index of the volume of exports (Knall/Wagner, 1986, p. 96). Another important
concept is the factorial terms of trade. This ratio takes into account productivity gains in the domestic
export industry and can be obtained by multiplying terms of trade with an index of factor productivity
of the export industry (Wagner et al., 1983, p. 93 f.).
One possible explanation for the diverse developments of the terms of trade of the EU member
countries (see fig. 1) could be seen in the different sectors of exports and imports of these countries. It
can be assumed that when individualized, knowledge-based products have a dominant position in the
export structure of a country, this country tends to have more benefits from trade in the long run
compared to a country whose exports are largely composed of more standardized products.
For these two groups, standardized (mostly primary commodities) and individualized goods (mainly
manufactured goods), fundamental differences for price elasticities of supply and demand can be
found.
The demand for standardized, i.e. primary products, tends to be very price elastic. When a producer of
a standardized commodity increases the price, it may often be relatively easy for a buyer to find
another supplier or a substitute product (see Mankiw, 2014, p. 91). In addition, the intensity of
competition among suppliers in the case of primary products is often higher than with regard to
individualized products, because primary commodities are in most cases relatively homogenous (see
Porter, 1980, p. 19, where lack of differentiation is considered a structural industry factor that is
fostering rivalry among competitors). In the case of standardized products, price elasticity of demand
is usually greater than price elasticity of supply. The supply is often dependent on long production
cycles. In the agricultural sector for instance, there are seasonal fluctuations (e.g. milk production) or
cyclical fluctuations (e.g. pig cycle) (see Bundesministerium für Ernährung und Landwirtschaft, 2015,
p. 7). Because of that, the price of primary commodities is to a large extend determined by demand.
Suppliers of these products often have low possibilities of price determination.
Individualized goods, on the other hand, are often classified as non-substitutable or not easily
substitutable in the perception of the end user. The demand for this type of goods is therefore
relatively price inelastic. Demand for industrial products hardly decreases when there is a price
increase, as consumers have access to only a few equivalent alternatives. Concerning individualized
goods, there is usually a higher price elasticity of supply than of demand. In this case, supply is highly
relevant for the determination of prices. The suppliers of such products tend to be in a relatively good
position, because in some cases, the buyers of their products are dependent on them.
63
In the long run, world prices are influenced by various factors, such as income changes, structural,
technological and other changes. In a long-term observation, especially income elasticity of demand
plays an important role for world price formations, therefore this aspect will be discussed in the
following. Income elasticity of demand for primary products is generally lower than for manufactured
goods. Primary products (standardized goods) are usually necessity goods, of which demand remains
constant, or possibly growing, but very slowly, when income increases. As a consequence, income
elasticity of demand for primary commodities is relatively low, and the demand for goods of this kind
usually does not keep pace with income. Demand for manufactured products however usually reacts
very elastically with regard to income changes. When income increases, then on one hand, there is an
increase in the demand for high quality products, or technologically advanced products. On the other
hand, completely new needs for new products are created through marketing (Prebisch 1950, p. 18).
As a result, there is a new demand for these products, as income increases.
Prebisch and Singer are implying that primary commodity prices and manufacturers` prices have
diverging evolutions in the long run (Prebisch, 1950; Singer, 1950). The relation of these two product
sectors is reflected in the so called Primary Commodity Terms of Trade (see Ocampo/Parra, 2004,
p.1):
Primary Commodity Terms of Trade (i.e. ”real“ price of a commodity) =
(Ocampo/Parra, 2004, p. 1, 17; World Bank Group, 2015, p. 12). The index “Primary Commodity
Terms of Trade” depicts the primary commodity price index related to the Manufacturers` Unit Value
(MUV). The World Bank uses the term of the “real“ price of a commodity (see World Bank Group,
2015, p. 12 with the example of agricultural commodities). Different categories of commodities can be
chosen in order to analyze the price developments of selected product groups or even individual
products. Usually, primary commodities are divided into the following groups: agricultural, metals and
energy. Fig. 3 shows the terms of trade of those commodities from 1948 to 2013.
Fig. 3: Primary Commodity Terms of Trade
64
Source: Baffes/Etienne 2014, p. 22.
Fig. 3 shows the different long-term developments of the terms of trade of particular groups of primary
commodities. Alongside the long-term trends shown in fig. 3, the primary commodity terms of trade
also had short-term fluctuations, since their development had sometimes been strongly disrupted by
natural disasters (such as drought periods), global economic changes (for example the devaluation of
the dollar in 1971), wars, or harsh OPEC regulations in the case of oil.
From 1948 until the end of the 20th century, a clear downward trend in the agriculture terms of trade is
visible. A brief strong jump of the agricultural commodity terms of trade took place due to the increase
in prices in the postwar years, as well as in 1973-74, i.a. due to the collapsing of the agricultural
production (drought periods) in many areas of the world. During these periods, the growth pace of
prices of agricultural commodities had been higher than the growth rate of prices of manufactured
products.
The falling terms of trade trend of agricultural commodities until the end of the 20th century shows that
prices of manufactured goods had a tendency to be more advantageous than prices of agricultural
commodities for this long period of time. This indicates that the export of agricultural commodities
tended to be less profitable than of manufactured products. Therefore, the long-term development of a
commodity terms of trade index can reveal the export profitability of the specified commodity.
For metals, there was no clear downward or upward trend until the end of the 20th century.
The energy terms of trade had no considerable changes in the time from 1948 until the early seventies.
In the years 73-74 however, there had been major changes due to the oil crisis which was caused by
the war in the Middle East and the subsequent oil embargo by the OPEC. Oil prices increased
drastically and peaked in the beginning of 1974. Thereafter, the situation calmed down (see fig. 3).
During the second oil crisis in 1979/80, oil prices had increased again for a short time period. The fear
of a shortage in supply on the world market pushed the oil price to record levels of partly above 40
USD per barrel (see Mineralölwirtschaftsverband e. V., 2001, p. 15). By the end of the 1980s, the oil
price dropped again (see Baffes et al., 2015, p. 6). Until the end of the 20th century there were no large
changes in the energy terms of trade, only minor fluctuations.
65
At the beginning of the 21st century, substantial changes in the development of most primary terms of
trade had taken place. The prices of most primary commodities began to rise faster than the prices of
manufactured goods. One important reason had been the rising global demand for oil. The rapid
economic growth of countries like China and India had resulted in a rising demand for raw materials
and rising commodity prices. After a significant increase in mid-2008, primary commodity prices
began to fall. That had been the effect of the global economic crisis. This strong decline had been
visible until the first quarter of 2009. After that, prices began to rise again. However, since 2013, a
decline in most primary commodity prices has taken place, which is illustrated in tab. 2.
Tab. 2: Nominal primary commodity price indices (2010 = 100)

Primary Price indices (2010 = 1000) Change %
commodities 2011 2012 2013 2014 2015F1 2014-15
Energy 129 128 127 118 67 - 43,3
Non-Energy2 120 110 102 97 83 - 14,4
Metals 113 96 91 85 68 - 19,2
Agricultural 122 114 106 103 89 - 13,0
Food 123 124 116 107 91 - 15,2
Beverage 116 93 83 102 93 - 8,7
Raw Materials 122 101 95 92 94 - 9,0
1
F denotes forecasts; 2 The Non-Energy price excludes precious metals.
Source: Own representation, based on data from World Bank Group 2015a, p. 4.
The price decline had mainly resulted from an insufficient demand from important emerging
economies, especially China. But also leading primary commodity producers had played a part in
contributing to the falling in commodity prices. In the hope of a lasting boom, managers had invested
heavily in new capacities, only to face a market with insufficient demand (see Focus Webpage, 2015).
Overcapacities had been created. In June 2014, a very strong oil price decrease had started. One reason
for the price decline had been an excess supply on the international oil market, which had been mainly
caused by the mass extraction of oil and gas from unconventional sources in the United States with the
fracking technology. Using the fracking method, the US was able to increase its oil production to 4
million barrels per day (World Bank Group, 2015a, p. 16; Unternehmenspositionen Webpage, 2015).
As a consequence, the US could improve its position on the oil market, while the OPEC lost its
influence. Other major oil producers such as Saudi Arabia did not react with a restriction of their oil
extraction, but, on the contrary, apparently produced even more in order to defend their market shares
(see Unternehmenspositionen Webpage, 2015). Due to the nuclear agreement of the Iran with the US,
and the resulting lifting of Iran’s oil export restrictions, it is very probable that Iran, a huge oil
producer, will enter the world market very soon (see Tirone /Gaouette, 2015).
World market prices for food had shown an increasing trend from the year 2000 onward. In 2007, the
prices rose very strongly (food price crisis 2007-2008). From 2007 on, there has been a very strong
food price volatility (see Bundesministerium für Ernährung und Landwirtschaft, 2015, p. 6), see fig. 4.
Fig. 4: Nominal food price index
66
Source: Bundesministerium für Ernährung und Landwirtschaft, 2015, p.6.
In the middle of 2015, a stock market crash in China had taken place, and the Chinese economy
deteriorated dramatically. This has had worldwide implications, especially for the German economy,
which is very closely connected with China. China is Germany’s third largest trading partner. In 2014,
Germany’s export worth to China had been 74 billion EUR. Especially the automakers are affected.
For the year 2014, 44 % of global Volkswagen sales had been achieved in China, one fifth of BMWs
business activities had been carried out in China, and Audi had sold every third car in China. Now the
car sales in China are expected to decrease (Dometeit et al., 2015, p. 58). Moreover, the economic
crisis in China has had a global impact on primary commodity prices (see World Bank Group 2015, p.
11). All major commodity price indices have fallen (see tab. 2, fig. 5).
Fig. 5 shows the primary commodity terms of trade in the twenty-first century.
Fig. 5: Primary Commodity Terms of Trade since 2000
67
Source: World Bank Group 2015, p.12.
Fig. 5 shows that the terms of trade of agriculture, energy and metals increased from the year 2000
until the year 2008. A temporary strong drop for all mentioned primary commodity terms of trade
(especially strong for metals and energy) occurred in 2008 as a repercussion of the financial crisis,
then the primary commodity prices recuperated. From 2013 onward, the primary commodity prices
started decreasing. Falling world primary commodity prices do not necessarily have to raise economic
concerns for everyone. For primary commodity exporting countries, this situation is admittedly
disadvantageous. However, many consumers are now able to benefit from favorable prices, especially
for energy. The industry can pass on lower prices to customers in order to boost demand. China is the
largest importer of raw materials as well as the greatest beneficiary of the price decrease. Net
importers of energy, such as the European Union, China, Japan, and India can expect purchasing
power gains.
Conclusion
It could be discovered that the terms of trade formations have responded to economic fluctuations, and
that the terms of trade index can, under certain circumstances, give some information about the overall
economic situation as well as the specific economic development of a given country. Furthermore, it
could be shown that the structure of exports of a country and the corresponding price developments
are affecting the gains from trade.
A long-term falling trend of the agriculture commodity terms of trade indicates that the export of
agriculture commodities tends to be less profitable than the export of manufactured goods. Therefore,
the long-term development of a commodity terms of trade index can reveal the export profitability of
the specified commodity.
It can be assumed that the long-run development of the terms of trade ratio of industrialized countries
that export relatively uncomplicated products with a small percentage of value added is worse than the
terms of trade of those highly developed countries that export very specific, high quality goods with
high value added. Countries with an export structure, in which individualized, knowledge-specific
products have a dominant position, and that have a high diversification of their exports, tend to have
more benefits from trade than countries that export less individualized goods. However, these benefits
can only be maintained with continuous product and technology improvements that require high and
consistent research and development activities.
The necessary profitability of trade has a dynamic effect on the domestic economy, since the national
suppliers face competitive pressures and competitive world prices. This leads to an adjustment of
68
production structures (improving productivity and specialization in favor of export goods), and a
creation of incentives for investments in research and development. It can be concluded that the terms
of trade concept is a very helpful and meaningful ratio which is particularly relevant in discussions
about development and industrialization.
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70
Importance of Export Led Growth in Transition Economies: Some Firm Level Evidence
from Serbia
Bozidar Cerovic & Sanja Mitic

Faculty of Economics, University of Belgrade
Abstract
After the global crisis of 2007-08 it is recognised that the applied pattern of growth in a majority of transition
economies has been erroneous for two main reasons: (a) it was based on import led local demand increase
financed by foreign inflows favouring services and thus, producing a biased sectoral structure; (b) such a
growth pattern was not changed during the reform advancement though empirical evidence suggested some
necessary changes in relation to transition progress. Contrary to a simplified proposition that market forces
should allocate resources in the most efficient way, after the crisis that has produced a sharp decline in
economic activity of transition economies, a new idea emerged that export oriented production of tradable goods
should be supported and advanced. The paper analyses this idea from an additional aspect focusing on the
performance of exporting firms and their innovation practices. The analysis was conducted within a set of 71
Serbian firms. The analysis of various aspects of innovation practice (marketing mix innovations, new product
development, process innovation, investment in research and development) of exporters and non-exporters, as
well as of exporters to developed countries vs. exporters to less developed countries reveals important
differences in their performance, that can be explained by international business experience and learning by
exporting. In all aspects of innovation exporters perform better than non-exporters, as well as exporters to
developed countries (EU countries) compared with exporters to less developed ones. It is particularly interesting
that within the set of firms observed R&D activities are better developed among local exporters if compared with
foreign owned firms that are mostly directed towards the local market raising a question on spillover effects that
were expected from FDI in transition economies. These results additionally confirm the necessity of export led
growth pattern during transition.
KEY WORDS: External relations, Innovation, Transition, Growth, Serbia
JEL CLASIFICATION: M31, O24, O32
1. Introduction: Transition and growth

Some 25 years ago the process of economic transition was promoted for non-market economies,
usually based on state owned capital. The process was seen as an appropriate and effectual way to a
market economy model aimed at raising economic efficiency in these countries. Indeed, in the period
of 1990s a huge reforming process was undertaken in ex-socialist, formerly communist led economies.
The reforms were based on the idea of markets liberalisation followed by privatisation and
deregulation intended to direct economies in question toward the most efficient use of resources and to
a sustainable yet long-term economic growth. Since an initial recession was predicted it did not raise
many dilemmas. Although it lasted longer and was deeper than it was expected after a while signs of
growth and recovery appeared and in a decade or so some countries reached their pre-transition
development level while the others restored positive growth rates.
Despite some early warnings (Kolodko and Nuti, 1997; Stiglitz, 1999) it was the global financial crisis
and global recession that took place after 2007 to raise a lively debate on the growth model established
during transition (and particularly given that the post-communist countries in Eastern Europe have
71
been among the most severely affected by its aftermath; see Prica and Uvalic, 2009). The key question
was whether the model of growth pursued in large parts of Eastern Europe, based on neo-liberal
policies of fast trade and financial liberalisation, flexible labour markets, deregulation and reduced role
of governments, was the best policy option.
Shortly, it was recognised that the applied pattern of growth in a majority of transition economies has
been erroneous for two main reasons. First, the model was based predominantly on import led local
demand increase, which was financed by foreign inflows (acquired through privatisation and FDI in
general). Also, foreign inflows were mainly directed to conquer local markets rather than to revive
firms from old (inherited) industries. Therefore, they favoured non-tradable service sectors
(telecommunications, finance, retailing etc.), and biased the sectoral structure of these economies.
Finally, a pretty consensual conclusion was reached that the New Growth Model for transition
economies should be founded on exports and even some new reforms were proposed (although still
within the old framework, see Berglof, 2010). The second mistake was revealed after the analysis of
the reforming process itself. It appeared that within the process some break points related to the reform
progress could be identified. These break points required certain changes in growth patterns applied
(see e.g. Fidrmuc and Tichit, 2007; Falcetti et al., 2006; Cerovic and Nojkovic, 2008, 2009;
Dragutinovic-Mitrovic and Ivancev, 2010). Moreover, the analyses point at tradable goods and
manufacturing industries as key factors of sustainable growth in transition economies in the longer run
(see a detailed analysis in Cerovic et al. 2014). However, the growth pattern that was applied initially
did not change during the first two decades of transition (that is, before the crisis).
Basically, a substantial lack of any industrial policy seems to be the major problem of a relatively slow
and yet non-sustainable recovery and development of transition economies. Such a demise of
industrial policy can explain an unexpectedly sharp fall in manufacturing production and too fast
growth in services that was supported by FDI and resulted in a biased overall economic structure
including a noticeable lack of tradable goods for exports. Nonetheless and parallel with studies
critically examining the growth model applied during transition, there was a renewed interest in
industrial policy within a broader policy framework. This was evidenced in a variety of papers
discussing industrial policy issues, which could be of particular interest for further development of
transition countries. Thus for example, Rodrik (2008) presents a number of theoretical arguments in
favour of industrial policy understood as the means for stimulating certain economic activities
necessary to promote structural changes. Chang (2009) is even more explicit regarding export-
promoting policies. He argues that economic development is impossible without good export
performance while some selectivity and targeting are found in virtually every industrial policy
measure, even those intended for all enterprises: for example, when R&D, innovation, or other
measures are favoured that could strengthen export oriented production.
Being incited by this kind of discussions and particularly interested in local circumstances regarding
competitiveness and exporting capabilities of the Serbian firms, we joined a research project together
with colleagues from the University of Ljubljana (Slovenia) on intangible capital use in the SEE
countries41. The idea was to analyse to what extent firms do recognise intangible capital as a factor of
competitiveness, to what extent it is developed within the firms and does it really add to competitive
advantage of the firms in local and foreign markets. Our results based on a survey conducted in a set
of the Serbian firms have been presented in several phases and in several occasions. The most
comprehensive yet concentrated evidence could be found in our recent paper Cerovic et al. (2015).
41
Similar research projects have been conducted in Slovenia, Albania, Bosnia and Herzegovina and is in
progress in Montenegro.
72
In this paper we shall draw attention to those results of our analyses that are important for the policy
intended to promote export-led growth model just in accordance with the findings from the critical
debate on the growth model applied in transition (that was briefly presented above). For that reason we
shall particularly analyse exporting firms and the link between various kind of innovation, R&D and
similar activities with their exporting results. In doing so we rely on some of our previous findings that
point at the exporters as the firms with the most developed innovative practices, the most progressive
approach to customers and other marketing activities and the most open for acquiring new knowledge.
It will be shown that exports appear to be important for transition economies not only from
macroeconomic perspective but also from the firms’ angle since exports promote innovation and bring
new good practices to a larger extent than it can be done if businesses are oriented predominantly to
local markets.
2. Methodology and rationale for the research

In a broader project aimed at defining the role of intangible capital in Serbian firms we have conducted
a survey within a set of 71 enterprises. Although the sample was formed by the so-called snow-ball
method (that is, the firms were not chosen randomly) the structure of the sample covered the most
remarkable features of the firms in Serbia. There were small, medium and large firms in approximately
equal sub-samples (26, 22, and 23, respectively) allowing for certain comparisons as well as foreign
owned and domestically owned firms in a 1:3 proportion, which reflects ownership structure within
the economy as a whole. Intentionally, the sample was biased in favour of firms producing tradable
goods (46 manufacturing and similar versus 25 firms from services) since these firms could better
represent the use of intangible resources. The survey consisted of seven sections regarding (a) internal
relations (b) human resource management and organisation (c) marketing and external relations (d)
information technology (e) innovations (f) environmental protection (g) finance indicators.
Being taught by broadly accepted expectations that FDI both directly and indirectly that is, by means
of spillovers, should bring the best business practices, new technologies and open new foreign markets
to local producers, we posed a hypothesis that foreign owned firms should be leading in intangible
capital use. Basically, the hypothesis was confirmed in many forms of intangible capital but
nonetheless we met some unexpected yet indicative results. We shall refer to these results in the lines
to follow.
When managers were asked whether they do assess their firms to be more successful than their
competitors, 53% of firms demonstrated a pretty firm trust in their advantages. It is interesting to note
that managers of foreign owned firms were just slightly more confident about the competitiveness of
their products (56%) than the managers of domestically owned enterprises (52%) but this could be
explained by some unrealistic overconfidence of local managers. Expectedly, when asked whether
they consider their firms as leaders within the industry this gap was remarkably widened in favour of
foreign owned firms. Around 63% of foreign firms consider them as leaders in their main markets
compared with only 37% of domestically owned ones, which is a statistically significant difference
(t=-1.856; p=0.068).
On the other hand, a deeper insight in a set of all 30 firms that claim leading position in their principal
markets, we find 20 firms that sell 80-100% of products in the local market, plus 2 that sell 70-75% of
their production also locally. The remaining output of these 22 companies is being sold predominantly
in the neighbouring markets emerged from former Yugoslavia. Such business orientation can raise the
question whether they are real leaders in their industries or rather enjoy some monopolistic power
73
within the local and/or regional boundaries. Indeed, among all the firms that attribute themselves a
leading position there are only five large exporters (four of them earning even more than 50% of
revenues in foreign markets) yet with a large portion of production that goes to developed markets.
Surprisingly, they are all domestically owned firms (four are privatised)42.
After obtaining such a result we recalled some findings on much lesser than expected effects of FDI in
transition economies regarding export orientation and technology and knowledge spillovers (see e.g.:
Gunter, 2005; Gorodnichenkou et al. 2007). We have additionally confirmed such findings when
examined the scope of R&D activities within the firms observed. It came out that exporters appeared
once again as a set of the most advanced firms regarding investments in R&D. Some 22% of all
exporters invest even more than 3% of their revenues in R&D. The role of R&D departments is also
significantly better developed among exporters – their R&D departments are more active in solving
the problems the firm sometimes meets, build information absorption and dissemination capabilities,
puts essential guidelines for technological progress of their firms and acts as real agent of changes.
Finally, in 43.8% of exporting firms there exists a separate and specialised department for R&D
against 10.5 % with non-exporters (statistically significant difference: t=-2.680, p=0.009).
On the other hand 50% of foreign owned firms, which usually lead in management practices, did not
invest in R&D while 36% not even had their local R&D departments. Actually, all of them are parts of
larger international systems that usually organise R&D departments in other places predominantly in
the countries of origin. Among them dominate firms that mainly are sellers of renowned producers’
products (only sometimes with some minor local finalisation). Hence, it is not surprising that all these
firms do not organise local R&D departments nor they invest in R&D locally. However, this is fully in
line with the above mentioned findings that point at relatively poor spillover effects of the FDI in
transition economies: the expected spillovers of knowledge and technology are negligible while the
survey results on R&D suggest that there is a relatively low existing level of technology (as well as a
low prospect for its future development) in locally established foreign owned firms.
Consequently, we found that our hypothesis on the most advantageous position of foreign owned firms
in bringing new practices that could empower local firms to develop their own activities did not hold
in some important aspects. It appeared that domestically owned firms were more active in R&D
investments, particularly (and expectedly) when larger firms were observed. It should be said that
there were also examples of medium sized firms (32%, all manufacturers from various industries) that
developed their own R&D departments particularly if they acted as exporters (though we found that
the influence of R&D departments on companies’ development decisions was still pretty restricted).
All these facts strengthened our intention to additionally analyse data on exporting firms and discover
whether they could be seen as principal innovators and promoters of innovative practices that would
improve competitiveness of a transition economy sometimes even more and on a broader scale than
foreign owned firms could do and what industrial policy is needed to support such developments.
3. Innovation activities of exporting firms in Serbia
The link between exports and innovation is an intriguing research topic in academic literature. On
macro level, there is firm evidence about relationship between export of an economy and its
innovation capacity and knowledge accumulation (Harris and Moffat, 2011, p. 5). Since 1960s
innovation ability has been viewed as a driver of international trade. Today, innovations are basic
42
A complete analysis in Cerovic et al. (2015)
74
prerequisite of economic growth and internationalization. Main results of studies on micro level reveal
two sides of export-innovation relations (a) positive innovation impact on exports, as well as the
reverse (b) positive exports effects regarding innovation. The former type of relations are more
examined and empirically tested. Positive influence of innovations on export is empirically proved in
the developed countries43 but also in emerging markets44.
Similar evidence is found among the firms from South-Eastern Europe. Moreover, a positive impact of
innovations on export level is stronger in SEE firms than in the firms from Central and Eastern Europe
though is a bit lesser if compared with firms from Baltic countries (v. micro-dyn.eu, 2014). An
interesting research has been conducted in Slovenia, a country where 85% of firms are exporting, due
to the small domestic market (Damijan and Kostevc, 2008, pp. 1-23). The research showed positive
impact of innovations on export but also vice versa. Harris and Moffat (2011) reveal strong causal
relations between exports and innovation, so that export activity of manufacturing and service firms
increase probability of investment in research and development. Love and Roper (2013) showed that
innovations without international business activities can not lead to sustained performance.
In our research we analyse innovation activities of Serbian firms from four aspects: (1) innovations in
marketing mix; (2) new product development; (3) business process innovations and (4) investment in
research and development (R&D).45 The first three parts address to main elements of the OECD
definition of innovations.
Results obtained in regard to the first aspect of analysis are listed in the table 1. If compared with the
average frequencies of innovations in marketing mix it appears that exporters innovate more often in
all marketing mix elements. Also, more active (large) exporters have better results than the group of
those with small exporting revenues and non exporters. These differences can be explained by adopted
marketing strategies and marketing mix elements concerning specific characteristics of international
markets that are necessary for any stable positioning in foreign markets.
Table 1 Marketing mix and innovations

Promotion Product/service Distribution Price
All firms 61.4% 67.1% 65.7% 75%
Exporters 64.7% 70.59% 72.55% 77.55%
Non-exporters 52.63% 57.89% 47.37% 68.42%
MAE* 68.18% 68.18% 81.8% 85.71%
LAE** 58.33% 66.7% 58.33% 70.21%
* More active exporters, exporters that earn more than 33% of sales revenues in foreign markets
** Non-exporters and less active exporters (exporters that earn less than 33% of sales revenues in foreign
markets)
43
See Van Beveren and Vandenbussche (2010), pp. 3–24, for Belgium; Wakelin (1998), pp. 829-841, for UK;
Roper and Love (2002), pp. 1087–1102, for Germany; Cassiman and Martinez-Ros (2007), pp. 1-32 and López
Rodríguez and García (2005), pp. 539–557, for Spain etc.)
44
See Anh et al. (2009), pp. 1-12, for Vietnam; Kumar and Siddharthan (1994), pp. 288–309, for India).
45
See Mitić, S. (2015), pp. 53-67
75
The biggest differences between exporters and non-exporters in regard to marketing mix innovations
are in distribution. There is also a difference between those that export to developed countries (EU
countries) and to less developed ones (predominantly Western Balkans countries mostly emerged from
former Yugoslavia). Some 76.2% of exporters to EU innovate distribution techniques, while only
70.8% of exporters to ex-YU and 54.2% of non-exporters undertake similar activities. As a marketing
mix instrument, distribution success in international markets is related to cooperation with foreign
intermediaries and foreign distribution infrastructure. These factors incite firms to adopt such a
marketing instrument in an easier way. Sometimes, markets distribution channels are not easily
accessible, forcing exporters to find new ways to enter such markets and to develop new distribution
techniques. Based on this, Cavusgil and Zou (1994) empirically proved that locally adapted
distribution is the major success factor for exporters, even more important than price competitiveness.
Second part of our analysis deals with the new product development. Firstly, we analyse whether there
is some practice of new product development and what is its success. We continue our analysis by
exploring what types of new products have been developed. Managers were asked to evaluate
performance of their firms in comparison with competitors (table 2). There were three sequences of
question that managers had to answer: 1. whether their company, in the last five years, was as
successful as their main competitors in new products introduction, 2. whether it was more successful
than the main competitors, 3. whether in new products introduction in the last five years company was
a leading competitor in the market. Results show that almost 55% of exporters assess that they were
more successful than competitors. This is a higher percentage than the one for of non-exporters
(47.3%) despite the fact that it is much more difficult to compete in foreign markets. Finally, we did
not find better performances of exporters regarding the last question, which is fairly understandable.
First, it is hard to establish leadership in new product development in international markets, due to a
higher level of competition there. Second, as it has already been explained in section 2, managers
attributed more easily a leadership position to their firms if the firms that acted in local markets only
and if were big enough to enjoy some market power.
Table 2 New product development in comparison with competitors

successful as main more successful than main
competitors competitors
All firms 84.29% 52.86%
Exporters 82.35% 54.9%
Non exporters 89.47% 47.37%
Regarding types of new products, respondents had to assess the importance of different types of new
products for company’s strategy, according to their experience. They had to evaluate five levels of
new product development (repositioning of existing products, improving existing products, extension
of existing product lines, new product lines and new products for global market) by the following
assessments: 3=high importance; 2=medium; 1=low importance; 0=not used (average assessments
presented in table 3). Expectedly, exporting firms systematically attribute higher assessments to all
sorts of innovation regarding their products when compared with non-exporters. Moreover, it appeared
that larger and more active exporters would give even higher marks for innovative activities in all
segments than the group of non-exporters and less active exporters would do. We also found some
statistically significant differences between exporters and non-exporters in regard to extension of
existing product lines (t=−2.226; p=0.003). It seems that such a result appears due to the fact that
76
exporters have to adjust existing domestic products when entering international markets and enlarge
existing product lines in order to be competitive within a different regulatory, economic and cultural
environment.
Table 3 Types of new products (average assessments)

improving extension of new products
repositioning of new product
existing existing product for global
existing products lines
products lines market
All firms 1.95 2.28 2.03 2.08 2.17
Exporters 1,98 2,32 2,16 2,18 2,30
Non-exporters 1,88 2,18 1,63 1,75 1,73
MAE 2.05 2.45 2.09 2.23 2.32
LAE 1.91 2.2 2 2 2.09
Respondents evaluate importance of different types of new products: 0=not used; 1=low importance; 2=medium;
3=high importance
Similar results we met while exploring process innovations. Exporters appeared to be more open and
keen to introduce innovations in process of production, logistics and distribution than non-exporters.
Thus for example, 92% of exporting firms reported introduction of essential changes in process of
production and 86% in processes of logistics and distribution while non-exporters confirmed these
types of innovation in 72% and 83% respectively. However, we find certain level of overconfidence
and overoptimistic self-evaluation in assessing activities in this part of the survey, which is the case
already noticed as a characteristic of local managers, especially among managers and owners in
smaller enterprises (Cerović and Petković, 2003). For that reason we treat these results with reserve,
although they reveal some interesting differences among the firms.
In section 2 we have commented some specific results regarding R&D activities emphasising a
remarkably better performance of exporting firms if compared with either all other firms or just with
foreign ones in some aspects. This primacy relies not only on higher level of investments or better
organisation of R&D but also on the role of R&D departments. When asked whether these
departments take part in: (1) resolving the problems sometimes met by the firm, (2) building
information absorption and dissemination capabilities and (3) introducing essential guidelines for
technological progress of their firms and becoming the real agent of changes, the managers of
exporting firms had much more to present. Once again it was found that exporting firms perform
better in all segments yet with statistically significant differences in regard to building information
absorption and dissemination capabilities (55.6% vs. 20% among non-exporters; t=-2.037, p=0.048).
Apart from this general findings we tested the hypothesis that the export destination also matters.
Thus, we found out that exporters to more developed and demanding markets (EUX, exporting
predominantly to EU countries) invest more in R&D than other groups of enterprises. For example,
77
35% of EUX invest more than 3% of their revenues in R&D compared with only 16.7% of exYUX
(firms exporting to the region of former Yugoslavia) or 13% of non-exporters.
There are also obvious differences among these three groups of firms in regard to establishing specific
R&D departments within the firms. Thus, 55.6% EUX have their own department for R&D, which can
be found in 43.5% exYUX and in only 12% of non-exporters (which is a statistically significant
difference: F=5.560, p=0.006). Similar results were found regarding the role of the R&D departments.
Among the firms that export to EU there are almost two thirds (64.3%) whose R&D departments solve
problems when they appear or build up information absorption and dissemination capabilities while
this is the case in 58.8% among those that export to exYU markets and 21.4% among non-exporters
(F=3.371, p=0.044). As to the most important role of the R&D departments (agent of changes) the
small size of the sample does not allow a statistically significant difference to be identified but still
points at a remarkable difference whatsoever: 57.1% of EUX vs. 41.2% of exYUX (as presented in
table 4)
Table 4 Role of R&D department

EUX exYUX
Solving the problems sometimes met by the firm 64.3% 58.8%
Building information absorption and dissemination capabilities 64.3% 58.8%
introducing essential guidelines for technological progress of

57.1% 41.2%
their firms and becoming the real agent of changes
All these differences in innovation activities could be understood as an outcome of export experience.
Nonetheless, innovation could also be seen as a prerequisite for successful exports, especially towards
developed markets. Although one may point out that we face a mutual relationship, which is
undoubtedly true, it is evident that exports foster knowledge spillovers from foreign markets and help
in creating new knowledge and innovation within local firms. This learning by exporting process
improves innovative capabilities along several lines: (1) interactions with foreign customers, in order
to adapt supplies to their demand and needs, (2) interaction with foreign competitors, in order to
differentiate offering, as well as an opportunity to learn from international best practices, (3) adapting
to international (foreign) quality-technical-ecological standards and (4) sales increase resulting in
economy of scale effect and a higher return on R&D or other innovation investments.
This is particularly noticeable when exporters to more demanding markets come under consideration.
More developed international markets provide a higher potential for learning and urge for strategy
adaptation (especially when firms come from less developed countries), which jointly lead to more
frequent and effective innovations. For that reason, exporters to developed countries (EUX, exporters
to EU countries in our sample) show quite expectedly a larger innovation potential than exporters to
less developed economies. The results obtained from our survey among Serbian firms just confirm the
learning perspective of exporting activities that is highlighted in several models of internationalisation.
78
Thus, for example, Uppsala model, Innovation model, network based models etc. put learning in the
centre of internationalisation process while internationalisation can be defined as a process of
increasing international activities resulting from different sorts of learning. Insufficient knowledge is
the main obstacle for international growth. From our standpoint the Uppsala model that puts
experiential knowledge as the main force of internationalisation (Eriksson et al. 1997) is of specific
interest. The model refers to knowledge of the international market, international buyers, the problems
and the opportunities abroad and can be acquired only by operating in the international market. It is
connected with particular market and it is relatively hard for transferring between firms and business
units, while its accumulation is costly and time consuming. This is type of knowledge can be identified
only among of exporters, and can be viewed as the main differential factor between exporters and non-
exporters. Based on this we may finally conclude that the main drivers of change concerning business
innovation and upgrading business practices in local firms are firmly related to their export
orientation.
4. Conclusions
Economic debates emerged during the crisis known as Great Recession of 2007-09 currently point at
certain deficiencies and errors in establishing growth and development model for transition
economies. In line with some early but then neglected warnings there is almost a consensual statement
that the growth model of transition economies should be re-directed towards exports and based on
production of tangible goods. In our paper we have briefly discussed the issue and tried to reconsider
this advice from the standpoint of firms that were oriented to exports. This approach appeared to be
enlightening and helpful one since macro effects of the proposed so-called New Growth Model for
transition economies were already broadly discussed.
The firm level analysis conducted within a sample of Serbian firms has shown that export oriented
firms perform more innovative activities and show a higher level of capabilities to implement
innovation in their businesses if compared with other firms. Moreover, in certain aspects they come in
front of allegedly more experienced and the most desirable firms in transition economies owned by
foreign investors. It seems that enterprises based on FDI are more frequently oriented to domestic
markets, to service sector and apply a lower technological level that does not need specific
investments in innovation, R&D etc. diminishing in that way usually expected technological and
knowledge spillovers to local incumbent firms.
The findings obtained from our survey in regard to faster and broader innovation within exporting
firms should not be surprising. They are in full accordance to many previous research conclusions on
the relationship between exports and innovation. However, we find that the revealed differences in
performance of exporting firms could open a new path and ease carrying out necessary structural
changes towards the desired model of growth in a transition economy. This could be of particular
importance for a proper design of industrial policy whose lack during transition has resulted in
unfavourable outcomes in sectoral structure and in trade imbalances. Bearing all that in mind we shall
propose three brief policy recommendations that could improve policy efficiency at the least possible
costs under deficient investments after the crisis.
First, governments should not be reluctant to some traditional industrial policy measures that would
favour and support export activities, companies and industries. Second, these measures might be
79
followed and supplemented by specific and indirectly export oriented policies, based on the survey
results, that will favour innovation, investments in R&D and alike. However, the third and the most
important part of these policies concerns government attitude regarding small and medium sized
enterprises (SME). The results of our survey show that the best results in upgrading local businesses
could be expected if firms export to more developed and demanding markets. Such markets are
usually rather big and competitive putting in that way certain difficulties for new entries of SME in
particular. On the other hand, in vast majority of transition economies one shall encounter mostly
SME. Moreover, SME establishing is recommended and usually supported by government policies. In
our view this is an incomplete and non-satisfactory policy: opening of new SME may be important but
these firms cannot be left afterwards to act fully on their own with no support of larger companies
and/or with no further policy measures that will be directed to SME clustering, cooperation and
association particularly when trying to develop exporting activities and to improve their
competitiveness by means of innovation. Since our results suggest that exports are the best channel for
applying innovation and further advancement in competitiveness of local firms it seems that this kind
of policy support could be sometimes even more effective and helpful than simple forms of individual
subsidies and other direct incentives for fostering exports.
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82
Implementation of plastics tax in Ghana: Cost-effectiveness analysis
Kombat A. M.
Chair of Environmental Economics, LG 10, Room 533g
Brandenburg Technical University Cottbus-Senftenberg-Germany
kombatalex@yahoo.com
Abstract
Plastic taxes are increasingly being used in many countries for plastic waste management and for revenue
purposes. Plastics tax was first introduced in Ghana in 2010 to curb environmental degradation caused by
widespread use of plastics under the auspices of Parliament of Ghana. The tax is 10% of the cost, insurance and
freight value of plastics imported into Ghana. However, despite the potential of the tax in plastic waste
management in Ghana, little research has been carried out to determine the extent to which the tax helps abate
plastic waste cost-effectively. Thus, the aim of the paper is, therefore, to analyze the cost-effectiveness of the
plastics tax in terms of abatement costs in achieving its goal.
To achieve the research aim, a qualitative research methodology was adopted where semi-structured
interviews were conducted with officials of relevant institutions who were selected using purposive sampling
technique. Also, existing statistics, institutional reports, newspaper articles, government budget statements and
studies of individuals were used. The interviews were analyzed qualitatively with the use of the transcription
software f4. Additionally, descriptive statistics was used to assess the cost-effectiveness of the tax. The analysis
showed that the implementation of the tax in terms of cost-effectiveness in reducing plastic litter is good.
However, the work suggests further research in this respect in order to make sound statements.
Keywords: Cost-effectiveness, plastics, plastic waste, plastics tax, Ghana
1. Introduction
Plastic taxes are increasingly being used in many countries for plastic waste management and for
revenue purposes (Dikgang et al., 2012; Hogg et al. 2011; Convery et al., 2007). Ghana is among the
few African countries that have implemented plastic taxes. Others countries include South Africa and
Uganda (Kombat, 2015). However, with increase production and consumption of plastics and its
associated waste in Africa, the potential of increase use of plastics tax is very high (Dikgang et al.,
2012).
Generally, plastic taxes are used to shape production and consumption of plastic products, and
associated environmental problems by putting prices on environmentally damaging behaviour so that
every unit of plastic product consumed, produced or discarded becomes a cost to the polluter (see
Stilwell 2012; Endres 2011). It is expected that an increase in the prices of the plastic products through
the taxes would encourage consumers and producers to shift their consumption and production
patterns in a more sustainable manner and induce them to adopt more environmentally friendly
technologies (Field and Field 2013).
The use of a tax for environmental management was first suggested by Pigou (1960).
According to Pigou external cost of pollution could be internalized by imposing a tax on the pollutant
at the level which reduces emissions to the point where the marginal benefits of internalization equal
the marginal costs of abatement. Although Pigouvian tax has been criticized, it should not be
dismissed as irrelevant to environmental policy. Still the idea of how externalities can be internalized
is important as it forms theoretical framework to understand why markets fail to provide
environmental goods and what can be done about it (Hanley et al., 2013). In addition, the Pigouvian
tax has become godfather to a number of policy-relevant variants of taxation of externalities (Convery
et al. 2007). However, its practical use is limited. Modern welfare economists believe a “perfect”
internalization of externalities is not possible in practice because usually the required information is
not available regarding polluters marginal damage and marginal abatement cost functions (Endres,
2011) hence the use of the price standard approach in this respect (Baumol and Oates, 1971, 1988).
83
With respect to waste management across the world, literature on the use of taxes to manage
such waste has centred on producer-generated pollution. Among which are deposit-refund system or
user charges for management of the waste (see e.g. Odoro-Appiah et al. 2013; Obeng-Odoom, 2013;
Numata, 2009). In this work the focus is on an alternative instrument, more similar to that of Dikgang
et al. (2012) and Convery et al. (2007), an upstream tax of 10% on plastics imported into Ghana.
The tax was designed mainly to change consumer behaviour and help raise additional revenue
to manage the plastic litter in Ghana (Government of Ghana Budget, 2011, 2013). However, despite
the potential of the tax in plastic waste management, little research has been carried out to determine
the extent to which the tax is been implemented cost-effectively in terms of abatement costs. Thus, the
aim of the paper is, therefore, to analyze the plastics tax in terms of cost-effectiveness in achieving its
goal regarding plastic waste management.
The rest of the paper is structured as follows: section two sheds light on the plastics tax in
Ghana whilst section three looks at the methodological issues regarding the sources of data, data
collection techniques and analytical procedures. Section four presents the theoretical framework (i.e.
costs-effectiveness criterion of the tax) used as underpin for the analysis. In the fifth section, there is
analysis of the cost-effectiveness of the tax in terms of abatement of plastics, whilst discussion and
conclusions are given in the last section.
2. Plastics tax
This section provides an overview of the Ghanaian plastics tax in terms of mechanisms (i.e. scope,
rate, revenue, assessment and collection) as it is important to understand these mechanisms in order to
analyze the cost-effectiveness.
A law (i.e. Custom Act 809) to impose a 20% excise tax on the cost, insurance and freight
value of plastics imported into Ghana was first enacted on 21st December 2010 by Parliament of
Ghana (see Parliament of Ghana Report, 2010). The law which took effect on 1 st February 2011
however exempted plastics for packaging of water because most households in Ghana used sachets of
water as primary source of drinking water (Stoler et al., 2012) and imposing a tax on it would have
affected prices of the sachet water (Obeng-Odoom, 2013). In 2012, the tax level was reduced from
20% to 15% with exemptions from the pharmaceutical and agricultural sectors under the Customs Act
840 (Government of Ghana Budget, 2012). This was further reduced to 10% in 2013 by Customs Act
863. All exemptions which were granted under Customs Acts 809 and 840 especially plastics for
pharmaceutical and agricultural sectors as well as plastics for water packaging and bottling, PET
(Polyethylene terephthalate) preform bottles, caps, and sleeves were removed and people who
imported such plastics were asked to pay the tax (GRA, 2013). Also, Act 863 proposed an
establishment of plastic waste recycling fund of which 50% of the tax revenue was to be paid into. The
fund was to be used for recycling of plastic waste, production of plastic waste bins and bags and
production and use of biodegradable plastics. The tax is administered by the Customs division of the
Ghana Revenue Authority (GRA).
The tax was meant to deal with plastic litter which had become nuisance to Ghanaians. Obeng-
Odoom (2013) reports that about 250 tonnes of plastic waste were produced daily in Ghana in 2009.
However, only 30% of the plastic waste generated was collected with 2% recycled and the rest littered,
hanged on trees or found in water bodies (IRIN News, 2004).
Since the introduction of the tax to the end of 2013, a total of GHȻ 33.86 million were collected
(GRA, 2014). In the first year of implementation of the tax which was in 2011, the tax revenue
amounted to GHȻ 10.33 million. The following year (2012), the tax revenue increase by GHȻ 3.23
million to GHȻ 13.56 million. It however, decreased to GHȻ 9.97 million in 2013. Part of the revenue
is to be used to support plastic waste management for attainment of zero litter by 2015 as required by
the Millennium Development Goal 7 on environmental sustainability (GSS, 2013) and also for
defraying cost of administration of the tax (Kombat, 2015). The tax revenue is depicted in Figure 1.
84
16
14 13,56
Revenue (million GH₵)
12
10,33
9,97
10
0
2011 2012 2013
Year
US$ 1=GHȻ 3.19, €1= GHȻ 3.96 as of 8th December 2014

Figure 1: Plastics tax revenue in Ghana (2011-2013)
Source: GRA (2014)
3. Methodology
This section of the paper deals with the methodological issues that are employed in this study. It
discusses the sources of data, data collection techniques and analytical procedures employed in the
study.
Data for the analysis was collected from five main sources: interviews, statistics, institutional
statements and reports, newspaper articles and government budget statements. Interviews were carried
out by the author from February-April 2014 in Ghana with an average interview length of 1 hour 26
minutes. In all, 23 senior officials and chief directors from the relevant stakeholder organizations,
namely: Ghana Revenue Authority (GRA); Environmental Protection Agency (EPA); Ministry of
Finance and Economic Planning (MoFEP); Ministry of Environment Science and Technology
(MEST); Zoomlion Ghana Ltd; Accra Plastic Waste Management Project, recycling companies and
Ghana Plastic Manufacturers Association (GPMA) were interviewed.
The purposive sampling method was adopted for the interviews mainly because of limited
empirical studies on the subject matter. Semi-structured in-depth open-ended and closed-ended
interview questions were designed and used as instruments for the interviews. The interview questions
were developed based on the objective of the study and review of literature. The 32 interview
questions were divided into three sections. Section one asked questions pertaining to the respondents
and their institutions. Questions included the status of the respondents in their organizations and their
knowledge on the plastics tax. Section two asked questions on the environmental problems that
emanate from plastic use. Section three asked respondents about the abatement costs regarding the
plastic litter. In the last section, respondents were asked follow-up questions.
The digital voice recording device was used to capture the interviews, and additional notes
taken with field notebook. The Transcription software f4 combined with a foot pedal were used to
transcribe the interviews captured on the digital voice recorder. The transcribed data were then
digitized and analyzed qualitatively. Furthermore, descriptive statistical analysis with the aid of Stata 9
software was used to evaluate cost-effectiveness of the tax.
85
4. Theoretical framework
This section provides background information on the economic criterion (i. e. cost-effectiveness) used
to assess the Ghanaian plastics tax. Here, the analysis focuses on abatement costs.
Usually environmental policy instruments have differing strengths and weaknesses, depending
on the economic criteria used to assess them and the characteristics of the problems they are intended
to solve (US-EPA, 2010; Skjærseth, 2004). In this paper however, cost-effectiveness criterion will be
used to assess the Ghanaian plastics tax. This criterion has been chosen in order to test the extent to
which the plastics tax provides incentives for consumers and firms to determine the cost-effective way
of reducing the plastic litter (see Endres, 2011).
Cost-effectiveness in the context of the study is the ability of the tax to reach its goals at least
costs (Endres, 2011; Balana et al., 2011; Siebert, 2005). It is expected that a tax would produce the
maximum environmental improvement possible for the resources being expended or, equivalently, it
should achieve a given amount of environmental improvement at the least possible cost to society,
private and public authorities (Field and Field, 2013; Endres, 2011; US-EPA; 2010). Usually a tax
provides a strong incentive to select least cost abatement options (Endres, 2011).
Although cost-effectiveness analysis of an environmental policy involves transaction costs46
and abatement costs, the paper focuses on the abatement costs since the tax was meant to abate plastic
litter. Field and Field (2013) define abatement costs as the costs incurred in reducing the quantity of
residuals being emitted into the environment. In general the greater the abatement, the greater the cost
(Tonjes and Mallikarjun, 2013; Field and Field, 2013). Abatement costs differ from one source to
another, depending on a variety of factors (Spiller et al., 2014). Even if the sources produce similar
pollutants, the costs of abatement are likely to be different because of differences in abatement
technology (Hanley et al., 2013; Field and Field, 2013). Abatement costs incurred in reducing
pollutants to achieve environmental tax goals include: (1) changes in production technology by
purchasing, installing, and operating new pollution control equipment (e.g. end-of-pipe treatment
plants and filters), (2) changing a production or consumption process by using different inputs,
different mixture of inputs or cleaner inputs (i.e. input switching), (3) changing production processes
by reducing output, (4) capturing waste or residual products through recycling or reuse and selling
them, (5) treatment, and (6) abandonment of a site (Hanley et al., 2013; Endres, 2011; OECD, 2001).
Although taxes minimize total abatement costs of achieving environmental goals, they are
expensive to the tax paying firms because they will always pay the tax and abatement in the end
(Hanley et al., 2013). But, the more firms abate pollution, the less tax they pay. Abatement costs for
Ghanaian policymakers are the costs the public and private institutions have to pay for the reduction in
plastic litter. Here the polluting firms will always have to compare for each pollution unit whether it is
less costly to abate or pay the tax. With this, the polluters accordingly reduce pollution as long as the
pollution reduction cost for additional unit reduced lies below the tax rate. This shuffling leads to cost-
effeteness level of reducing a pollutant (Endres, 2011). However, the judgment of the Ghanaian
plastics tax against the cost-effectiveness criterion as presented here is the “textbook” analysis and
therefore the assessment of the concrete plastics tax may generate different results.
5. Analysis
Encouraging recycling to create market for plastic waste in Ghana has been the major goal of the
plastics tax. Although the tax bill enhanced the tax focus with respect to other environmental goals,
reduction in plastic litter through recovery and recycling remained an important eligibility criterion
and potential method of reducing the plastic litter. Generally, in order to reduce over dependent on
virgin raw material importation from other countries and resultant plastics tax payments, the large
Ghanaian plastic manufacturing companies (e.g. Blowplast Ghana Ltd, Petroplast, Duraplast and Poly
Products Ghana Ltd) collect and process their plastic byproducts for (re-) use (Field interviews, 2014).
46
See Kombat (2015) and Wätzold and Schwerdtner (2005) for more details of the transaction costs.
86
Therefore, the paper looks at the extent to which the policy goal of reducing plastic litter through
recovery and recycling is achieved cost-effectively.
Generally, the plastic recycling entails costs. Two types of costs are incurred in this respect.
First, the upfront costs which include registration, location and equipment which can be accounted for
as one-time expenses or amortized over the lifetime of the business. Second, is the annual operating
costs which include such items as plastic waste, maintenance, utilities, labour, administrative
expenses, licenses, supplies, insurance, residue disposal and publicity (Field interviews, 2014).
The Ghanaian plastic recyclers continue to devise cost-effective strategies to improve on their
activities and reduce costs. In this respect, special arrangements have been made between the plastic
waste scavengers and recyclers to reduce transportation costs of recyclers regarding the procurement
of plastic waste which invariably reduces recyclers cost of production. The major plastic waste
collectors transport and sell the plastic waste at the recycling units at their own cost. However, this
cost is minimized through the use of tricycles, trollies, bicycles and head portering (An interview with
director of Accra Plastic Waste Management Project, 2014).
Additionally, value placed on plastic waste attracts people to collect and sell the waste to
recyclers. However, since the price of the plastic waste is determined by market forces, recyclers
occasionally reduce their demand for the plastic waste in order to get lower prices. And given that
supply of the plastic waste remains unchanged, the fall in demand for plastic waste leads to a fall in
the equilibrium price and quantity of the plastic waste. Here because market prices are low, there will
be no incentive on the part of the sellers to sell the plastic waste. However, in order to maximize
profits, recyclers take advantage of the low prices to buy more plastic waste. The low prices then cause
the scavengers to process the waste before selling to the recycling units as mechanism to get better
prices (Interview with an official of Zoomlion Ltd, 2014). This however, invariably reduces the
recycling costs of the recycling units in the recycling process. An important measure that leads to cost-
effectiveness of reducing the plastic waste.
Furthermore, accepting a wide range of plastic waste in a single-stream system for recycling
improves recycling and the plastic litter than the disposal charge policies. In line with this, recyclers
prefer buying the plastic waste in large quantities from the major collectors to buying from individual
collector in small quantities (An interview with recycling companies, 2014). The director of Accra
Plastic Waste Management Project proposes that all individual scavengers are obliged to sell their
plastic waste to the major collectors from whom the recycling units can buy from. The director
believes, since the major collectors have already gained some experience in this respect and have been
accepted by many recycling companies, the change to obligatory plastics markets will be smooth and
efficient. The director indicates that exchanges through intermediaries are cost-effective with respect
to plastic waste trading.
The director of Accra Plastic Waste Management Project in an interview further suggest that,
the major and minor plastic waste collectors group into associations and cooperatives to enhance the
plastic waste activities and help reduce transaction costs of the recycling companies. This way, each
recycler can decide which cooperative group or major collector it deals with and that would help
reduce unnecessary expenditure on plastic waste trading. They can simply save up time for hours with
better prices at the market and still recycle. Considering the costs of recycling, the director’s proposal
will help minimize these costs. Here recycling costs would be the responsibility of household
consumers and thus reflect in the price of recycled plastic products compared with collection and
disposal which has no such incentive47.
If transaction costs forms part of the recycling costs, the transaction costs can be considered to
be roughly the same in the recycling processes. Thus, if the definition of cost-effectiveness to
minimize costs for recyclers is considered, then the recycling has the potential to be more cost-
effective than collection and disposal of plastic waste. This is only the case, though, if additional costs
arising from acquisition of plastic waste and any additional recycling costs (e.g. administrative
expenses, overheads costs etc.) are compensated by cost saving measures by the recyclers. According
to the recyclers, using the above stated mechanisms reduce recycling costs of their activities which has
the potential of reducing plastic litter at least cost compared with collection and disposal at dumpsites.
47
See The Ghanaian Times (2014, February 17) and Rockson, (2013) for more information on plastic waste business in
Ghana.
87
An interview with the recyclers indicate that an average monthly recycling cost per tonne of
plastic waste is about GHȻ42.00, while Zoomlion Ghana Ltd (the major waste collection company in
Ghana) puts an average collection and disposal cost per tonne of plastic waste per month at GHȻ
56.00. Comparing the costs of reducing the same volume of plastic waste under recycling and
collection shows that the costs of achieving a given level of reduction in plastic waste are lower with
the former. For a given tonne of plastic waste, cost savings of up GHȻ 14.00 is realized if recycling is
opted.
The cost savings here cannot be taken to mean cost-effectiveness of the plastic waste recycling
activities as more systematic measurement and analysis needs to be carried out to determine this,
because one would have to establish if the cost savings are not overcompensated by additional costs.
However, an interview with directors of the Ministry of Environment Science and Technology,
Environmental Protection Agency and recyclers indicates recycling is cost-effective in reducing plastic
waste compared with collection and disposal at dumpsites and helps to reduce financial resources
spent on importation of plastic raw material. For recycling technologies, efficiency gains seem
plausible, for collection and disposal it seems less likely. Author’s interviews indicate that efficiency
gains by using the recycling can be achieved if (1) operating costs of recycling are reduced, (2) the
transaction costs are reduced by buying plastic wastes from middlemen instead of individual sellers,
and (3) additional costs necessary to maintain the recycling business do not overcompensate any cost
savings.
On the contrary, Zoomlion Ghana Ltd indicates collection and disposal of plastic waste could
be more cost-effective than recycling. To the company, when plastic waste is properly sorted, it
becomes cheaper to collect and dispose them. However, because recycling is a means of obtaining
cheap raw materials (i.e. pellets) for reuse, the company prefers recycling to collection and disposal.
Additionally, the company recommends that scavenging of plastics be encouraged since it contributes
to environmental cleanliness without additional cost to cities authorities. The company opined that
scavenging is the cost-effective way of reducing the Ghanaian plastic litter.
However, in Ghana, cost data are only available on the recycling and collection of plastic
waste from the private recycling and collection companies where detail costs are found. Also, the
amount of information on development of costs in the future of these companies is limited. For these
reasons, it is not possible to determine the cost-effectiveness of the plastic waste recycling and
collection, the two main ways of dealing with the plastic litter. Nor is it possible to derive cost-
effective strategies for recycling and collection. These, and related topics will have to be tackled in
future research where hypothesis maybe tested.
6. Discussion and conclusions
In terms of cost-effectiveness, the traditional economists’ view is that, a tax on a pollutant produces an
incentive to individual or institution minimum costs because the emissions producer will usually
weigh up whether he can abate a unit of pollutant lower than the tax burden resulting from emitting
that unit and would therefore reduce emissions as long as the emission reduction cost for additional
unit reduced lies below the tax rate (see Endres, 2011). It is however difficult to relate this argument to
the Ghanaian plastics tax because of the low incentive effect of the tax to achieve the desire plastic
litter reduction but in general abatement activities embarked on aimed at reducing plastic litter are
relatively cost-effective. This is based on findings on similar policies in other countries (see e.g.
Kombat, 2015; Tonjes and Mallikarjun, 2013; Dikgang et al., 2012; Hogg et al., 2011; Convery et al.,
2007).
However, as conditions are different in other countries regarding implementation of these
taxes, in-depth analysis would be required to confirm the cost-effectiveness of the Ghanaian plastics
tax in reaching its goal. Also, it is difficult to say the alternative abatement policy measures such as
deposit-refund system, plastic litter education and point of sales tax would have achieved the tax goal
at least costs as did in other countries (see Asmuni, et al., 2015; Numata, 2009; APEIS, 2006;
Kulshreshtha and Sarangi, 2001).
Notwithstanding, the study showed the cost-effectiveness of the Ghanaian plastics tax is good
although further research is required to be able to make sound statements. This way, the study aim is
88
achieved but reminds us of the dangers of prejudiced generalizations when assessing policy instrument
and of the need for detail analysis of each policy instruments before drawing conclusions.
Acknowledgement
The author is thankful to Prof. Dr. rer. pol. Frank Wätzold (Head of the Department of Environmental
Economics of the Brandenburg Technical University-BTU, Cottbus-Senftenberg) for providing him
with all the necessary logistics for his PhD study at BTU, Cottbus-Senftenberg. I also like to thank
DAAD (Deutscher Akademischer Austausch Dienst/German Academic Exchange Service), Ghana
Government Scholarship Secretariat and Ghana Revenue Authority for giving me the opportunity and
multiple supports to accomplish my PhD study. Additionally, I wish to thank Graduate Research
School of BTU Cottbus-Senftenberg for their financial support which enable me take part in the 1st
International Conference of Development and Economy in Kalamata-Peloponnese, Greece to do a
presentation on the paper. Finally, I wish to thank Kenneth Bedu-Addo for proofreading the
manuscript.
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91
A (successful) story of Poland’s transformation and European integration. What can be

advised to follow, and what – warned to avoid?
Benon Gaziński
Institute for Political Sciences, Warmia and Mazury University, Poland.
Temporary: A Visiting Professor, Agro-Bio-Tech Gembloux, Universite de Liege, Belgium – a stay
supported by the National Fund for Scientific Research, Brussels.
begaz@uwm.edu.pl
Abstract
In this paper an attempt is undertaken to examine the issue of correlation between the system
transformation and the European integration from the perspective of agriculture and development of
rural areas in Poland. In the first part, the integration as an economic and social phenomenon is
analyzed as well as the transformation of the economic and political system in Poland. In the second
part, the experience of Polish agriculture in a centrally planned economy regime as well as system
transformation is characterized and followed by an outline of the influence of the European integration
on agriculture during the period of an association and the membership as well as some development
trends as observed nowadays.
In final, third part some conclusions point out advantages and shortages of the undergoing
processes of system transformation and European integration.
1. Integration process vs. system transformation

Integration: definition and conditions
The word ‘integration’ is derived from Latin (integratio). It stands for integrating parts into
one functional whole. In order to understand the essence of integration, it is helpful to refer to a notion
of the system. Ancient Greeks expressed the meaning of this concept in a very concise way: a whole is
more than a simple sum of its components. The mentioned ‘more’ embraces a new quality. It
constitutes a benefit, revealed as a result of combining components into a singled whole, so one with
another become correlated (a feedback effect often seen). Taking a car as an example, it is the ability
to move by itself48.
Integration is not always voluntary (although at present this model seems to prevail, at least in
the privileged parts of the world) – it also happens being forced from the outside. In the course of
history, many events of military conquers have taken place, and the defeated could be assimilated by
the winners. But quite opposite course is often recorded – the winners assimilated by the defeated.
Correspondingly, three basic types of integration may be distinguished, depending on the character of
the relations between the states:
Politically unequal integration, while some partners are subordinated to the others
(formerly: the Council for Mutual Economic Assistance (COMECON), colonial
dependency).
 Conventional integration of sovereign states (e.g. EFTA, CEFTA, NAFTA).
 Conventional integration of states with voluntarily limited sovereignty for the sake of
representing them supranational institutions (e.g. the European Union).
Classifying the European Union into the third of the above mentioned categories is well-
founded in the political design elaborated by Jean Monnet and Robert Schuman, regarded as “fathers”
48
B. Gaziński, Procesy integracyjne [in:] Podstawowe kategorie polityki, ed. S. Opara, D. Radziszewska-
Szczepaniak, A. Zukowski, Olsztyn 2005, pp. 198 -200.
92
of united Europe. It also externalizes its unique feature of the institutional order, as compared with this
one of a state, or a typical international organization.
At present, the European Union is at a stage of an advanced economic union. By enforcement of

the solutions incribed in the Single European Act, a single internal market was created, characterized
by four freedoms of transfer: goods (removal of non-tariff barriers), capital, services and people. As an
“spill-over” effect of emerged internal European market, the program of common currency was
launched in the Treaty on the European Union and realized by introducing the euro (in 1999 in a
cashless form, and – in 2002 – replacing the national currencies in 12 Member States)49.
Transformation
The word ‘transformation’ is derived from Latin (transformation). It means a change and is
used is various contexts of significance. In recent 25 years, it is widely spread to use the term the
system transformation. It reflects the turnover, taking place in the countries departing from the
system of real socialism, which have set a reform “package” to restore democratic structures of the
state and to rebuild a market economy.
For political reasons and because of a very nature of the economic system, imposed after the
World War II, Poland – for a half of a century – was not able to participate in processes encompassing
the democratic European nations, like those leading to the establishment of the European
Communities. It is clearly confirmed by the lack of any bilateral agreements between the People’s
Republic of Poland [then official name of the country] and the European Communities (mutual
relations were regulated by international law, as well as the two unilateral directives of the European
Economic Community, on the principles of trade and economic cooperation with the Centrally
Planned Economy states).
The first agreement on trade was signed only in September 1989, already in the early period of
cabinet of Tadeusz Mazowiecki, the first post-war non-communist Prime Minister in the Central-
Eastern Europe. Democratic turn in Poland initiated not only a new era in the relations with the
“Western” Europe but also encouraged a peaceful process of rejecting the whole political and
economic system in other socialist countries.
Let us pay an insight into the system transformation, which was undertaken in Poland in its
contemporary historical context. It is noteworthy that the first transformation of the political system in
the country started in 1918, with re-gaining the independence after 123 year long partition period. It
meant the integration of the lands, which had belonged to the three surrounding countries, into one
organism of the independent Polish state (introduction of uniform currency, law, taxes, educational
system, re-designing of a network of communication, etc.). And the country development was
disrupted by the war, just barely more than 20 years after.
In the years from 1944 to 1949 another transformation was imposed upon Poland, from the outer
decision-making centre, Kremlin. That “revolution from abroad” covered the following areas:
a) Political system:
Parliamentary democracy of the interwar period was replaced by the system of the totalitarian
regime which defined itself as ‘the dictatorship of the proletariat’.
b) Economic system:
 Market economy was replaced by the centrally planned one.
 Private property, which dominates in the market economy, was supplanted by
nationalized, so-called socialized ownership.
49
B. Gaziński, Unia Europejska nie tylko dla początkujących, Olsztyn 2002.
93
The term “advanced socialism” was even invented, in the “new-speech”50 to describe the actual
system performance but the ultimate goal, construction of a communism has been fortunately never
achieved.
Thus, it can be easily noticed that the transformation undertaken in 1989 was directed in quite the
opposite direction as that one of the 1940s:
a) Political system:
The state of that time was submitted to thoroughgoing reconstruction focused on the formation of
the system of parliamentary democracy,
b) Economic system:
 Centrally planned economy was replaced by market economy,
 The dominating nationalized economy made a room for the private property.
From the first September 1939, when the peaceful development of the Polish state was
curtailed by German aggression (and shortly later, 17-th September, by the Soviet one), till September
1989, when the recently established government of Tadeusz Mazowiecki launched the program of
system transformation, more than 50 years and around have passed. For the entire half a century, the
country developed in tight frames of a strange and ineffective social and economic system. It is the
underlying cause of the resultant economic backwardness, as confirmed by the statistical data. It is
estimated that in 1938 the national income in Poland was two-fold higher than in Greece. After 45
years of the real socialism that indicator was reversed in favour of Greece. The relations referring to
other European states were similar.
The strategic choice made by Poland in 1989 to replace the inefficient system of real socialism
by a more effective system of market economy did not mean, though – as many people expected – a
rapid increase of the pace of the economic development. The fall of the GDP per capita, observed in
the first years of transformation, stood for the costs of reconstruction of the political and economic
system.
According to the statistics, in 1990 GDP per capita decreased by c. 8% in comparison with the
year 1989, whereas in the next year – by the following 7%. A considerable part of the population of
the country suffered from a marked deterioration of the standard of living. The burdens of
transformation were more acute for those who were poor and less fortunate. However, the statistics
painted an excessively gloomy picture of the situation, thus contributing to a rapid growth of
disappointment and frustration among the society51. That phenomenon can be explained by several
overlapping causes:
 The so-called ‘grey economy’¸ for example rapidly developing street trade, was not covered
by the statistics. According to the Hungarian estimates of that time, its share in their economy
was comparable with the recorded fall in GDP,
 The new economic system constrained the production of useless trash which increased the
statistics of the national income (e.g. at the time of common pocket calculators massively
imported from abroad, the domestic industry still manufactured mechanic calculating devices,
so-called ‘kręciołki’),
 The scope of wasting was considerably decreased. If in the cooperative blocks of flats
warmth escaped through the draughty windows and not insulated walls, then again owing to
the increased output of mining and heat engineering, the national income increase was
registered,
 Inaccuracy in estimating the fair statistical data since in the previous system: a state-owned
enterprise had strong incentives to show higher results ‘on paper’ than in reality (bonuses for
the management and for the staff for exceeding the planned tasks). Meanwhile, a private
50
A term ”new speech” was introduced by Georg Orwell in his famous ”Year 1984” novel.
51
D. Rosati, Polska droga do rynku, Warszawa 1998, pp. 99 – 134.
94
enterprise could expect one clear prize for excellent results – higher taxes! The state ‘on the
paper’, this time much lower values declared, was not surprising outcome.
It is noteworthy that the costs of transformation were not borne by everyone and that they were
not evenly spread. Thus, not everyone felt the benefits and could participate in the opportunities
created by the emerging new system. Paradoxically, the beneficiaries of the new system were, in
particular, those belonging to the former political establishment who easily got rid of its ideology, the
support for which had frequently only a declarative, on-lip character, and successfully strived for a
position of forerunners of capitalism.
The act of granting property rights to the nomenclature contributed to that considerably (that is
the appropriation by the party and state elites of the national property) even prior to the formal fall of
the real socialism as well as the subsequent so-called ‘thick line' policy (abandoning de-
communization). On the other hand, among the losers of that time were the employees of the big
industrial plants, which used to be the mainstay of ‘Solidarity’, whereas in the new circumstances they
experienced workforce reductions and even bankruptcy of their companies …
The deterioration of mood was enhanced by the effect of demonstration by the growing rich
beneficiaries of the changes, excessive expectations and forgetting the misery of life during the real
socialism. The memory of empty shop shelves of the 1980s tended to be veiled by the short-lived
prosperity of ‘the life on credit’ in the times of Edward Gierek52.
The lack of understanding for the ongoing transformation in the categories of system choice was
clearly visible. People did not often realize the illusory nature of their expectations: that it would be
possible to retain that what was deemed the positive side of the old system – stable job, lack of
unemployment (at least the official one, since it occurred in a hidden form), social benefits, provided
for free or at the level of prices, far away from the market equilibrium (expressed in the colloquial
language: ‘what is being given' at the shop or to ‘receive’ a flat) and at the same time to avoid the
‘bad’ sides of the new system like unemployment, higher risk of doing business or the ‘rapacity’,
characteristics of the “in statu nascendi” capitalism.
Meanwhile, the choice referred to the whole system, covering both the ‘good’ sides of it as well
as the “bad” ones. The “Solidarity” uprising of the 1980s deprived the hitherto authorities of the social
mandate to continue exercising power – the demand for political transformation towards the full
democratization of the state was explicitly expressed. In the economic sphere the postulates were not
so radical – the expectations of that time seem to by expressed by the parole: ‘socialism yes,
distortions no’.
However, those and other deficiencies cannot veil the historical dimension of the changes – the
transformation led to democracy:
 The freedom of assembly and to carry out political activity were granted.
 Free elections were introduced.
 The legal system, including the constitution, was amended.
 New institutions were established, including: the office of the President and Senate, the upper
Chamber of the Seym (Parliamnet), the Constitutional Tribunal, the Tribunal of State and the
Supreme Administrative Court.
 The fundamental human rights and citizen’s rights, which in the socialist system existed only
on the paper, started to be provided.
The transformation of the political system occasioned the introduction of the market economy:
 The ‘handmade' steering of the central plan was replaced by the market regulation.
 The financial system was rebuild (convertibility of złoty, independence of banks).
 The private sector became the dominating one (property relations, participation in creating
GDP and employment).
52
J. Beksiak et.al., Polska gospodarka w XX wieku, Warszawa 1999.
95
 The institutional and legal system was adjusted to the demands of the reformed economy.
In order to illustrate the scale of change, let’s give some examples regarding the last of the
above points. In the period of the socialist economy, there was none regulating law act for starting
business - the interwar Trade Codex turned out to be very helpful in the new circumstances! There
were no statutory provisions regarding the collapse of enterprises – socialism simply did not admit
such an option. There were also no legal bases for establishing foundations (such a law was adopted
under the pressure of the initiators of a church foundation for the sake of Polish agriculture in the
second half of 1980s).
The thorough reconstruction of the state is not the only one result of the system transformation. It
also contributed to the change of the geopolitical localization of Poland on the map of the world:
 Instead of the three, the country has seven states-neighbors.

 Poland met criteria and was accepted to a number of international institutions as: the
International Monetary Fund, OECD or the Council of Europe.
 The membership in the NATO and the European Union is of particular, strategic importance
53
.
Poland chose the way of a ‘shock therapy’ of economic reforms and is deemed a model example
of success. Though there is still one shortcoming not to be overlooked. Poland stands among a few
post-socialist countries where the problem of re-privatization remains to be solved, that is the law
specifying the compensation for the nationalization of the private property, which was carried out
against the law of that time. The transformation of the political system was carried out in a less
fortunate way.
II. Agriculture: European integration and directions of changes
A characteristic feature of the Polish agriculture within decades of the previous system was the
domination of the private sector – out of the post-socialist countries only Poland and Slovenia stood
out in this respect. Comparing the agrarian structure of Poland and Hungary on the eve of the system
transformation, a reversed pyramid of land ownership is obtained. In Poland, approx. 80% of farmland
was privately held, approx. 15% was owned by the state farms, whereas the remaining, less than 5%,
was used by agricultural production cooperatives. By contrast, in Hungary approx. 80% of farmland
was occupied by production cooperatives, approx. 15% - by state farms, whereas the private sector
made up only approx. 5% of land ownership (mainly house adjacent allotments).
Thus, Poland was in a relatively better situation than other countries of the region since the
system changes referred only to a part of the farmland, not for almost all. However, a big
modernization effort was necessary because agriculture did not meet European standards in terms of
technology and efficiency and a lot to be done in food processing. Quite a similar picture presented
agriculture in some other post-COMECON countries.
The beginning of the 1990s was the period of the vast opening in foreign trade. The
liberalization of food trade caused an influx of a wide stream of products from abroad, not seen on the
Polish market before, such as drinks in plastic bottles (for some time even mineral water was imported
from Belgium!), sliced ham and cheeses, or a variety of dairy products. Domestic industry took up the
challenge of the foreign competition. Imported products, their packaging, way of processing and
53
Globalizacja, integracja, transformacja. Główne problemy globalizacji, integracji europejskiej oraz
transformacji politycznej Europy Środkowej i Wschodniej, ed. R. Backer, J. Marszałek-Kawa, J. Modrzyńska,
Toruń 2003.
96
labelling, became the seeds to think of and potentially to follow. Furthermore, they were available for
free and it was not necessary to do any market research to recognize the consumer preferences54.
The modernization of the processing plants and farms was also accelerated by the
requirements of new quality norms. Since the beginning of the 1990s the Government Plenipotentiary
on the European Integration and Foreign Assistance (in 1996 transformed into the Office for the
Committee of European Integration) was, among other duties, obliged to monitor the new law in terms
of its compatibility with the Communities acquis communautaire. The next factor was the influx of
foreign capital. As a result, within around fifteen years, still before Poland formally joined the
European Union, thorough changes were made to the whole branches of food processing, to cite only
the brewing industry, dairy industry or meat industry as the most important examples.
One of the consequences of the fall of socialism was a thorough change of the structure of
Polish foreign trade, which also referred to the turnover of food exportation. The dissolved Council of
Mutual Economic Assistance was replaced by the European Community countries, whereas the main
trade partner became Germany, replacing the USSR – the main trade partner of the Peoples’ Poland. It
is worth mentioning that Germany was Polish main trade partner prior to the World War II, though
one important difference. At that time, due to the aggressive German politics the two countries had
hostile relations, whereas at present the relations are peaceful and friendly. Poland and Germany have
become cooperating neighbors which overcome past resentments.
The Polish trade with the European Communities was regulated by the provisions of the
European Treaty (as the Treaty establishing the Association between the Republic of Poland and the
European Communities is popularly called). Signed (along with Hungary and the former
Czechoslovakia) on 16th December 1991, it was enforced in Spring 1994. The part of the Agreement
focused on the trade, the Interim Agreement, came into effect already in the year 1992. It provided for
establishing a free trade area within the period of 10 years. It did not apply, however, to the
agricultural produce.
An important provision was also the principle of asymmetry of mutual concessions in trade
liberalization – their pace was supposed to be faster for the European Communities than for Poland.
The paradox that – against the expected results of the association treaty – for many consecutive years,
the balance of the food turnover remained negative for Poland, can be explained by series of factors.
The most important one was the protection against import from the third countries on the
Communities borders (charging variable levies, later on the basis of GATT agreement converted into
custom fees, bans on import and import quotas) and applying export subsidies. For instance, the last
ones pushed Poland out of the market of the Kaliningrad region of the Russian Federation, where –
since the beginning of the 1990s – the export of Polish food was dynamically growing.
Thus, no wonder that in those years preceding Poland’s accession to the European Union,
farmers perceived the perspective of a membership with mistrust and fears. Their daily experience
showed that the European Union could be called a ‘bad neighbor’, which practices dumping (the
unfair practices in foreign trade referred to already before the war). The confirmation of this fact is the
quite spectacular example of Hungary during the trade negotiations of the GATT Uruguay Round. In
spite of being granted the official status of a candidate to the European Union, the country joined the
so-called Cairns Group playing a team game against the European Communities.
It was finally Poland’s membership in the European Union which put an end to that clash of
interests since Poland having been the ‘third’ country became the Member of the European Union and
found itself inside the area formed by it. However, the formal acknowledgement of membership was
preceded by a positive balance in food trade because Poland soon became the biggest net exporter of
food exceeding Hungary (Fig. 1).
54
J. Siekierski, Liberalizacja handlu polskimi artykułami rolno-spożywczymi w procesie integracji gospodarczej
[in:] Gospodarka Polski na przełomie wieków, ed. Z .Dach, Kraków 2002, . 263 – 277.
97
Fig. 2. Agri-food and beverages trade balance (million USD).
The European Communities reacted very fast to the fall of real socialism and the initiation of
deep reforms. Already in the year 1989, the decision was taken to set up the aid programme, PHARE
(Poland Hungary Assistance for Restructuring their Economies), soon expanded onto other countries
of the region, altogether including around fifteen countries. Designed to be a temporary assistance
measure, on the final stage of its existence, it became the first pre-accession programme.
Admittedly, the agriculture made use of the PHARE means to a small extend, but in 1999, two
subsequent pre-accession programs were set up, SAPARD and ISPA, out of which the first one
applied exclusively to the agriculture and was supposed to be a form of training preceding the act of
providing the candidate countries with much wider range of programmes and budget means, which
became available from the moment of accession.
In the document ‘Agenda 2000’, announced by the European Commission in July 1997 and
agreed on the ‘summit’ in Berlin in 1999, the standpoint was adopted that the new member states are
not going to have any access to the direct payment scheme till the end of the new budget period
(2013). Such a standpoint was justified by the claim that the essence of the system of direct subsidies
is to compensate for the income lost by the farmers as a result of decreasing the intervention prices
(resultant from the reform of the Common Agricultural Policy). In the candidate states, these prices
were lower than the Community ones. That is why, the farmers from the new member states are going
to benefit from higher prices and there is no reason to provide them with the support of direct
payments55.
Such a standpoint could not have been accepted by Polish negotiators (as well as by their
colleagues from other candidate states). They argued that a lack of direct payments was an open and
evident discrimination as per hectare they would have received much smaller benefits than their
counterparts from the 'old' Union. Moreover, it is the Polish farmer not e.g. the Danish one who had to
and still has to make a considerable modernization effort in order to meet the requirements of the
single European market. Finally, the dispute was finished in a compromise – it was established that the
level of the direct subsidies for Polish farmers was going to rise systematically, reaching the level of
100% in the year 2013, the last year of that budget period.
55
Obszary wiejskie w Polsce a integracja z Unią Europejską, ed. Cz. Sobków, Toruń 2002.
98
The membership in the European Union meant not only obtaining access to the direct
subsidies but also to a range of other agriculture support programmes, such as structural pension (for
farmers in the pre-retirement age group who are going to make over their farms to successors
modernizing their farms), support for young farmers, purchase of machines and modernization of
buildings, land forestation, ecological farming, development of farm tourism as well as employment
outside the farms, etc.
* *
The unprecedented enlargement of the European Union from 15 to 27 and then (following the
accession of Croatia in 2013) to 28 Member States (a numerical growth by 75%) stands for a new
epoch in the EU history, the epoch of overcoming the divisions persisting for the whole post-war half
of the century. The employment in agriculture following the admission of new Member States was
more than doubled. The relation between the number of farmers and the number of consumers in the
EU-15 a compared with the EU-12 amounts to approx. 1 to 4 correspondingly (in order to maintain the
same number of consumers in the ‘new’ Union it is necessary to employ four times as many people in
agriculture).
Joining the Union has become, especially during the first years of membership, a strong
development incentive taking into account the support for the agriculture from the Communities
budget (the level of subsidies in the pre-membership period was at a much lower level than the EU
average).
As it could have been expected, after several years, the ‘accession incentive’ started to run out
and price disparities to even out. What is more, the gradual withdrawal of the Union from the direct
intervention on the market makes the farmers more susceptible to the risk due to price fluctuations.
These prices are more frequently lower than the farmers expect. The positive side is the fact that a
farmer is gradually going to get more and more freedom in making production decisions56.
The changeable farming conditions resulting from the gradual reforms of Common
Agricultural Policy are the circumstances which Polish farmers should be accustomed to since they are
hardened after decades of the politics of the socialist state, reluctant to them, whereas later, as a result
of transformation, they lived in the conditions which were much closer to the principles of a market
economy than the ‘old’ Union farmers.
It is also worth paying attention to some trends which have been observed in first years after the
accession57:
1. the European integration has influenced the structure of household income sources in the way
that in the farming households the incomes from farming stopped to be the most important
position.
2. in the rural areas more than half of the households, do not obtain income from agriculture;
3. the eternal Achilles' heel of the country, the proportion of the farming income has improved
in comparison with the pre-accession period from 65% (2003) to 83% (2006);
4. for the first time a new phenomenon has become apparent – positive balance of migration
between the rural and urban areas;
56
B. Gaziński, Polskie rolnictwo w Unii EuropejskiejiI niektóre doświadczenia pierwszego roku członkostwa,
„Biuletyn Instytutu Hodowli i Aklimatyzacji Roślin”, 242, 2006, pp. 3 – 14.
57
Marta Zielińska, M. Nodzykowski, Rolnictwo i rybołówstwo[in:] 5 lat Polski w Unii Europejskiej, red. M.
Kałużyńska, K. Smyk, J. Wiśniewski, Warszawa 2009, pp. 73 – 103.
99
5. during the period of membership a change of farmer’s attitudes towards Poland’s

membership in the European Union has taken place. Prior to the accession they belonged to
the most skeptical part of the society, whereas now their support is at a higher level than the
whole society average;
6. the urgent issue to be solved is the reform of the insurance system for farmers (the KRUS),
which has been put off by successive governments.
The problems of agriculture and rural development are still going to be solved on the Community
level at least in the years of the budget period of 2014 – 2020 (in the longer perspective it is difficult to
make any forecasts).
III. General conclusions
1. “Bright” points of Polish transformation and European integration
i) Changed political and economic map of (not only) Europe

It is Poland’s democratic turnover of 1989 which has catalised deep democratic processes
within the bloc of then socialist countries. Establishment of the first post-war non-communist cabinet
of T. Mazowiecki set an example to follow: democratic shifts in Hungary and Czechoslovakia. Exodus
of Eastern Germans to Austria while Hungarians had opened the border contributed to the change of
the GDR government and resultant fall of the Berlin Wall. And announcement of Lithuanian
independence in March 1990 undermined the Soviet Union, dissolved in December 1991.
Political and economic map of Europe had undergone profound changes and Poland’s location
aptly illustrates this: former three neighbor states being replaced by the seven new ones: Russia,
Belorussia, Ukraine, Slovakia, the Czechs and (united) Germany.
Similarly deep changes occurred in Mediterranean and Balkan area.
Poland, located on this re-shaped map of Europe, is recognized as a reliable, respectable

country and, as a EU Member State, aspirates to the role of a local leader58.
ii) Thorough reconstruction of the state

Political transformation meant fundamental conversion of the institutional framework of the
state. Some institutions were submitted to be abolished like the censorship office, or the Central
Planning Office and other to be established: the post of the President and the Senate, upper Chamber
of the Seym (Parliament) among the most important ones.
iii) Local self-government reform

The reform was based on the tree foundations: democratic, free elections (including common
election of the Heads of Communes and Presidents of the cities); establishment of a separate category
of the property – communal ownership and strengthening of the commune budget.
iv) “Last not least” metamorphosis of the overall economy

The cornerstones of the reform included: privatization, convertibility of złoty, the national
currency and replacing the Centrally Planned Economy system by the market-oriented one with the
price release. The structure of the ownership has been reversed:
“Socialist” economy ownership: Market economy ownership:
1. “Socialized” sector: 1. Private sector

a) State; 2. Public sector:
58
A. Szczerbiak, Poland within the European Union: New awkward partner or New heart of Europe?(Routledge
anvances in European politics: 76), Routledge, Abington 2012, 251 p.
100
b) Cooperative. a) state
2. Private sector b) communal
In the new system, cooperative ownership “disappeared” as a separate category, being
included into the private sector. In the old system, it is somewhat misleading to speak in term of real
cooperatives, they were a mere semi-state forms – in Hungarian literature they make a good
distinction: cooperatives in the “socialist” economy are referred as “collective” form of the ownership.
v) Stable state, solid economic bases: resistance to financial crisis

During 2009, the first year after the collapse of the US Lehman Brothers Bank, Poland
stands alone among 27 EU Member States, a “green” enclave, exhibiting small, but positive GDP
growth. And still, the national economy performance is well above the EU average, with inflation
recently replaced by slight deflation.
2.”Shadow” points of Polish transformation and European integration
i) Lack of re-privatization59
Poland belongs to one of a few post-socialist countries of the region, where this problem has
not as yet been resolved.
ii) Low level of citizen’s participation in the system of democracy

Polish political scene is stabilized by the two political parties, governing since 2007 Civic
Platform (PO) and Law and Justice (PiS), permanently fighting each other. The system of proportional
elections, practiced in the parliamentary elections and (bigger cities) in local ones led, in Polish
conditions, to a “commander”- style of the party leadership, with no room for a party inner democracy
(grassroot level structures have nothing to say concerning the sequence of candidates names on the
election lists). And a mere citizen feels being alienated from political processes undergoing in home
country. It is manifested by very low participating rate in elections, generally under 50%.
iii) EU citizenship
The performance is not much better as referred to the EU citizenship. Poland stands up well
above the EU average concerning citizen satisfaction of the EU membership. Public polls, results of
75-80% of the acceptance, put Poland on a leading rank among all 28 Member States (and the support
for the EU has been enhanced during a period of the membership). But such a support is very weakly
correlated with self-identification with a EU citizenship as is evidenced by very low participation in
elections to the European Parliament, usually below 45%, one of the lowest among MS. EU is seen
rather as a “sack of money” to make a use than a joint responsibility …
iv) Poland’s performance as an EU Member Country

The most important Polish initiatives are related to Central and Eastern Europe, as the country
pretend to become a regional leader. Activities on general European level are pronounced while they
directly interfere with national interests (the Constitutional Treaty and then Treaty of Lisbon, disputes
on the CO2 emission … ). Otherwise, Poland’s voice at the EU fora is relatively weak one. Indirectly,
it is confirmed by the Polish Presidency of the second half of 2011. It was performed perfectly well
concerning the organization but their six main priorities were edited in a style to avoid a real
controversies, due to a discussion about EU future, coming into a turning point of its history …
v) Some shortcomings of the Poland’s transformation

Polish system transformation – as compared to other post-communist countries – is widely
accepted as a success story. Not putting such a general appraisal into doubt, some important
drawbacks can be pointed out:
 Unemployment, hitting more severely younger generation;

59
Reprivatization: restoring ownership property by a state, or compensation for a property, lost during a period
of socialism, mainly initial years of the system, done with the violation of then binding law regulations.
101
 Correlated migration outflow abroad, entailing those young and better educated
(brain-drainage and escalating constraint to the pension scheme);
 Law instability, undermining business activities (incoherent and complex taxes);
 Absolutely justified fatal reputation of justice, incompetence and irresponsibility
of judges (and prosecutors) …
 “Last not least” weakened social ties, erosion of traditional values, including
religious ones, bonding local societies and the family …
During the first years of transformation, the driving force of economic and social development
was the removal of the bottlenecks of socialism. And, gradually, this source has been dried and
replaced by another accelerating factor – the European integration (not to be reduced to the financial
inflow; improvement of the state and public institutional framework and positive effects of
implementation of the acquis communautarie are of vital but underestimated importance).
Entering into the second decade of the EU (successful) membership, an important lesson from
recent past has to be drawn – a third period has been emerging. This one of the necessary fulfillment
of the remaining, uncompleted or badly introduced reforms – advantages of the European integration
cannot serve as a substitute. And they cannot imitate inner development potentials.
Fig. 2 Cumulative GDP growth in the regions in the period 2004-2013 (2003 = 100)
60%
49% 49%
50%
40% 37% 38%

33% 33% 34%
30% 27% 28%
20% 14%
9% 11%
10%
0%
Source: Poland’s 10 years in the European Union. Report, Ministry of Foreign Affairs, Warszawa
2014, p. 59
102
Fig. 3. Per capita GDP compared to the EU-27 average in 2003 and 2012
90,00% 83,60%
83,50%
80,80%
80,00% 76,40%
75,90%
71,20%71,50%
70,00% 64,10%66,50%66,90%68,20%
62,50%
60,00% 52,90% 54,50%54,40% 55,40%
47,40% 48,80% 49,80%
50,00% 43,80%
2003
40,00% 33,50%
31,50% 2012
30,00%
20,00%
10,00%
0,00%
BG RO LT HU PL EU9 EE LV SK CZ SI
Source: Poland’s 10 years in the European Union. Report, Ministry of Foreign Affairs, Warszawa
2014, p. 64
103
Soil resources and the role in agriculture sector of Greek Economy.
Ch. Paschalidis1, D. Petropoulos1, D. Paschalidis3 I. Chouliaras2, P. Sinioros4 and S.

Sotiropoulos7
1
TEI Peloponnese, School of Agricultural Technology, Kalamata Messinia;
2
Environmental Management, Asset technology consulting, 2 Gioldasi, Neos kosmos Athens;
3
Management Consulting, 17 Mitilinis Anixi Attiki;
4
TEI PIRAEUS Egaleo Attiki;
5
Greek Agricultural Insurance Organization, Tripoli, Greece
E-mail: chpaschal46@yahoo.gr
Abstract
In this paper some basics for Greek agriculture and the contribution of soil resources of the country are given.
The main problems caused by reckless human activities in the territories as well as the measures to be taken for
the protection of soil resources are described. The agricultural sector is one of the main pillars of the Greek
economy. In the last 4 decades the contribution of agriculture section on GDP decrease from 15% to 6%. In
Greece, the cultivated land was 66% of the total area between 2000 and 2006 covering the surface of 8.7 million
hectares. Since soil used in agriculture 3.3 million hectares are grown, while 4.9 million of hectares is grass.
About 500,000 hectares of farmland, left fallow per year. The 56% of farm land is lie in lowlands and the 44%
are mounted and hilly areas. The 82, 7 % of the cultivated land lying in disadvantages areas. (56% of mountain
areas). On the other hand, in 25 E.U countries the cultivating areas are 55.4% and 16.3% there are mounted and
hilly areas.The 33% of the arable land is irrigated. In recent decades irritated areas have approximately tripled.
Keywords: Agriculture economy, sustainability, soil recourses
Introduction
With the increase of population and overcrowding in the coming decades on the planet, land resources
exploitation and reaping of the produced organic mass takes place and is projected to become more
pronounced, resulting in disruption of the biological cycle. About 25% of the growing food needs can
be met by increasing the cultivated area and 15% of the increase in multiple culture. 60% should come
out from increased yields in land already cultivated. Worldwide, the cultivated land per capita will be
reduced gradually from 3 acres, which is currently, at 2.3 acres up to 2020 (Lai R., 1991) and to 1.5
hectares up to 2050. Thus, the greatest challenge humanity has to face in the 21st century will be to
meet the basic needs in food, fiber, fuel and raw materials, from the maximum available per capita
land of 1.5 acres or less. The technologies for sustainable land and water management in the 21st
century should take into consideration such a restriction. Main restrictions on the use of land resources
for agricultural production is drought, nutrient stress, soil shallowness, water excess and continuous
frost (Simonis A. 1993, Simonis A., et al.1994).
Greek Agriculture and Soil Resources

Agricultural sector is considered to be one of the key sectors of Greek economy, however with
significant and many problems. These problems mainly are related to the way policy, the enlargement
of the European Union which strongly influences the viability and competitiveness of our country's
agriculture. Fruits, vegetables, olive oil and cereals are traditional Mediterranean products and make
up a large field of Greek rural economy referred on the level of employment, the cultivated land and
104
value production. During the last four decades the contribution of Greek agricultural sector to the
Gross Domestic Product (GDP) has been reduced from 15% to less than 6%. The contribution of
agricultural production to GDP decreased from 9.9% in 1995 to 7.3% in 2000 and then to 5.2% in
2006 (Kaditi E., Nitsche E., 2010).
In Greece, the agricultural land was 66% of the total land in the period from 2000 to 2006, covering a
surface of 8.7 million hectares. In relation to the soil used for agriculture, 3.3 million hectares are
crops, while 0.49 million hectares are pasture. About 500.000 hectares of arable land are left under
fallow each year. 33% of arable land is irrigated.
Table 1
Soil Allocation of Greece (%)
(Land %)/ Decade 1960- 1969 1970- 1979 1980- 1989 1990- 1999 2000- 2003
Agriculture Land 70 71 71 70 66
Crops 23 23 22 22 21
Forestry .. .. .. 26 28
Source: WDI 2007
Table 2
Categories of Quality of Greek Soil Resources
106 ha %
High quality of Soil 2.49 19
Average quality of Soil 2.33 18
Low quality of Soil 7.57 57
Non uncluded area (urban land, lakes, etc) 0.79 6
Source: CEC 1992
Furthermore, 56% of arable land is in the lowland areas, while the rest are in mountainous or hilly
areas. Finally, 82.7% of used agricultural land is located in disadvantaged areas, 56.4% from which is
located in mountain areas. The corresponding quantities for the EU is 55% and 16.3%.
Regarding the specificity of crops, in 2005 approximately 22% was mixed cultures, whereas 78%
specialized (compared to 84% in 2003). It should be noted that used agricultural land covers only 30%
of the total surface, and the average size of farms is less than 50 hectares, when for the UK is 55.7
hectares, Denmark 53.7 and France 48.7 hectares. (CEC, 1992) The number of farms is estimated at
about 833.000, of which 76% have a size less than 5.0 acres while less than 1% have a size larger than
50 hectares. It should be stressed that, over time, the number of large farms has been increased at the
expense of smaller ones. It is worth noting that the cultivated land in Greece has been decreased
mainly because of the reductions in the production of cotton and tobacco, as well as grains and oilseed
crops. In recent decades farmers were led to overexploitation of the most sensitive soil resources,
leading many of them to suffer severe damage and great destruction from erosion and widespread
degradation of their physical and chemical properties. Also the use of high quality productive land for
industrial, residential, tourist and other non agriculture uses that severely destroy for ever or reduce the
suitability of soils for agricultural use. National land policy (Yiassoglou, 1985) has to be determine
that defines land use zones and key operating rules that ensure its sustainability.
References
CEC (1992) The State of the Environment in the European Community, EEC Com (92) 23 Final- Vol
III, Brussels, Belgium
105
Lai R. (1991). Soil research for agricultural sustainability in the tropics, p. 66-90 In: NRC (ed)
Toward sustainability, Nat. Ac. Press.
Simonis A. (1993). Problem soils of Greece, FAO/ ECE symposium on Agriculture and the
Environment, Geneva, Switzerland.
Simonis A. (1994). Soil Resources - Agriculture, Proceedings of the 5th Greek Soil Conference,
Xanthi.
Kaditi E., Nitsche E. (2010). Report 60. The agricultural sector in Greece. Centre of Planning and
Economic Research, Athens.
Yiassoglou N. (1985). Land use, policy, defining and conditions in Greece. First scientific meeting of
Greek Soil Association. Utilization of land resources Geotechnical 1, pp. 19-36.
FAO (1979). Agriculture towards the year 2000, Rome, FAO.
FAO (1983). Guidelines for the control of soil degradation, Rome, FAO.
Simonis A. (1993). Problem soils of Greece, FAO / ECE Symposium on Agriculture and the
Environment, Geneva, Switzerland.
106
Principal Component Analysis of Wetland Functions and Values: The case of Wetland
Agras-Vritta-Nisi
Apostolidis Georgios
School of Spatial Planning and Development, Faculty of Engineering
Aristotle University of Thessaloniki, 54124, Thessaloniki
gapostolidis@plandevel.auth.gr
Abstract
During the last decades, the rational management of natural resources and the incitement of sustainable
development constitute formulated a goal of policy of both supranational and national institutions. This research
focuses on the evaluation of wetland functions and values. A rural area is selected, Natura 2000 (Wetland
Agras-Vritta-Nisi) the Municipality of Edessa in Pella Regional Unit, where the researcher investigated the
opinion of the residents for the contribution of wetland Functions and Values in local development. The survey
was conducted using a questionnaire in 2013. For the analysis of the data, Factor Analysis in Principal
Components was implemented in order to reduce the large number of variables into a smaller number of
important factors and dimensions. The survey results of the Sampling indicate the important indicators for the
wetland area of research.
Keywords: Functions, Values, Sustainable Development, Factor Analysis, PCA.
1. Introduction
In the European Union Policies, the countryside emerges as an area of preservation, protection and
promotion of the natural habitat, the cultural values and the quality of life (Arabatzis et al., 2006). The
natural and cultural sources are used sustainably, they blunt the regional inequalities, and they promote
the multifunctional role of agriculture and the countryside, as well as contributing to the
transformation of the current system of production (Hoogstra et al., 2004), (Arabatzis and Polyzos,
2008), (Polyzos and Arabatzis, 2008). This policy, applies through specific measures such as
investment in agricultural holdings, agri-environmental measures, establishment of young farmers,
training and sustainable forest management (Bryden, 1994), (Hoogstra et al., 2004), (Perez and
Fernandez, 2006).
The Purpose of this study is to investigate the views of residents of wetland Agras-Vritta-Nisi for the
contribution of wetland functions and values in local and regional development. The Ultimate Aim of
the research was the potential development of ecosystem wetland.
2. Field of Research
The study focused on the prefecture of Pella, which is situated in Central Macedonia. The research
was carried out in the Agras-Vritta-Nisi wetland, rural area of 1.629 residents, according to the Greek
National Census of 2011. The existing legal protection regime of the wider area of the wetland has
been included in the network Natura 2000 with Special Protection Areas-SPA according to the
Elaboration of a Wetland Restoration Plan of Wetland Agras-Vritta-Nisi, Life Project-Nature 2005.
107
3. Sampling and Statistical Methodology
In order to collect the data from the local residents, a questionnaire was used, together with in-person
interviews in two periods. The "population" under study included people of the Agras-Vritta-Nisi
Wetland and the Wider Area. The sampling research method used was Simple Random Sampling
(SRS), due to its simple approach and the minimum knowledge of the population required, compared
to any other method (Damianou, 1999), (Matis, 2001). The sample size was estimated using SRS
Formulae (Arabatzis et al., 2006), (Arabatzis and Kyriazopoulos, 2010), (Arabatzis et al., 2012),
(Tsiantikoudis et al., 2013). Since the variables refer to proportions, the definition of the total sample
size is provided by the following Formula:
n = t2 p(1 - p ) / e2 (1)
where:
p = the proportion estimate,
t = the Student distribution value for a probability (1-α) = 0.95, and n-1 degrees of freedom.
In order to calculate the total sample size, it was necessary to carry out a Presampling with a Sample
Size of 50 people. The variable "sex" presented the largest sample size, at a proportion p =0.54 thus 1-
p = 0.46, and therefore the Total Sample Size calculated:
n = t 2 p (1-p) / e 2 = 1.96 2 x 0.54 x (1-0.54) / 0.05 2 = 381,61
Consequently, the Total Size of the Sample calculated 382 people.
The Reliability of the optimum scores, in the sense of internal consistency, was checked and evaluated
using the Cronbach α Coefficient (Geer, 1993). Reliability indicators are considered to be satisfactory
in general when they are higher or equal to 0.70 (Meulman and Heiser, 2004), (Siardos, 2005). In
some cases, reliability indicators are also considered to be satisfactory or adequate when they are over
or equal to 0.60, particularly when a Tool-Questionnaire-Criterion is applied for the first time on a
population sample (Siardos, 2005).
The conducting of the results and the analysis of the data were realized by using the statistic program
SPSS v.20.
4. Results and Discussion
The results from the questionnaires collected during the sampling period are presented. The following
analysis refers to each variable for which data was gathered through the questionnaires.
108
In this study, the Multivariate Statistical Analysis of Factor Analysis in which the variables were
reduced and analyzed was applied. The method applied is Principal Component (Principal Component
Analysis-PCA).
The KMO and Bartlett's Test shows the sampling adequacy, it is revealed that in this investigation the
analysis is appropriate because the value of Kaiser-Meyer-Olkin Measure of Sampling Adequacy is
0.568 therefore, the analysis is appropriate for the data. Moreover, the significance Sig. is <0.05 which
means that there is a correlation between the variables.
Table 1. KMO and Bartlett's Test
Kaiser-Meyer-Olkin Measure of Sampling Adequacy. 0.568
Approx. Chi-Square 4872.771
Bartlett's Test of Sphericity df 276
Sig. 0
Table 2 shows the extracted components which are representative of the original variables as all the
figures are high. Also, the conclusion is that some variables are more associated with some factor, e.g.
0.847 and others less, e.g. 0.599. Finally, the extraction column shows the percentage of variance of
each variable which is explained by all the factors, the rest being lost.
Table 2. Correlation of Variables with Factors
Variables Initial Extraction
Water Storage 1 0.703
Food Web Support 1 0.662
Ground Water Recharge (Enrichment of Underwater Aquifer) 1 0.794
Sediment Retention 1 0.818
Nutrient Export 1 0.847
Flood Water Retention 1 0.778
Modification of Corrosive Effects 1 0.824
Storage and Release Heat 1 0.767
109
Biological 1 0.663
Potable Water 1 0.784
Irrigation 1 0.733
Fishing 1 0.599
Livestock Farming 1 0.729
Gaming 1 0.769
Logging 1 0.671
Hydroelectric 1 0.694
Sand Collecting 1 0.716
Anti-Flood 1 0.608
Recreation-Entertainment 1 0.786
Cultural 1 0.683
Scientific 1 0.642
Educational 1 0.682
Anti-Corrosion 1 0.817
Climate Change (Climate Improvement) 1 0.696
The eigenvalues of the first eight factors are larger than the unit and explain 72.772% of the Variance,
thus, eight factors are selected at this stage of the analysis.
Table 3 shows the eight factors which were extracted and the corresponding loadings of their
variables. For example, the first variable: Recreation the first factor is selected (0.820). Corresponding
reasonable interpretation follows for the other variables and relevant factors.
110
Table 3. Loadings
Component
Variables
1 2 3 4 5 6 7 8
Recreation-Entertainment 0.820 -0.198 -0.002 -0.122 -0.035 -0.233 0.056 -0.015
Cultural 0.791 -0.016 0.109 -0.202 0.004 -0.022 0.055 0.032
Irrigation 0.760 -0.003 0.047 -0.134 0.254 -0.152 -0.197 -0.095
Livestock Farming 0.697 0.299 -0.020 0.339 -0.092 0.011 0.098 -0.142
Educational 0.680 -0.111 0.255 0.065 0.353 0.040 -0.020 -0.104
Fishing 0.676 0.155 0.209 0.081 -0.246 0.084 -0.004 -0.003
Gaming 0.600 0.165 -0.404 0.463 -0.027 0.040 -0.043 0.017
Hydroelectric 0.593 0.234 0.143 -0.026 -0.090 0.491 0.135 0.009
Scientific 0.577 -0.153 0.252 -0.256 0.238 0.254 0.010 0.189
Anti-Flood -0.005 0.693 0.090 -0.195 -0.089 -0.150 0.009 -0.228
Modification of Corrosive Effects -0.406 0.681 0.242 0.212 -0.026 0.284 0.043 -0.099
Storage and Release Heat 0.021 0.621 0.325 -0.291 0 -0.324 0.291 0.031
Anti-Corrosion -0.396 0.585 0,338 0.034 0.059 0.353 0.248 0.116
Sand Collecting 0.217 0.535 -0.425 0.106 -0.136 0.191 -0.365 0.051
Logging 0.356 0.493 -0.015 0.252 -0.355 -0.261 -0.041 0.205
Climate Change (Climate

0.168 0.450 -0.027 -0.330 -0.047 -0.379 -0.262 0.375
Improvement)
Sediment Retention 0.072 0.421 -0.620 -0.338 0.095 0.322 0.154 0.016
Flood Water Retention 0.020 0.310 0.608 -0.424 -0.211 0.108 -0.249 -0.119
Food Web Support 0.212 0.419 -0.432 -0.035 0.255 0.059 0.137 0.408
Water Storage -0.156 0.130 0.411 0.568 -0.102 -0.255 0.102 0.291
Nutrient Export -0.223 0.451 -0.158 0.002 0.571 -0.348 0.323 -0.129
Ground Water Recharge 0.083 0.008 0.474 0.313 0.565 0.143 -0.245 0.255
Biological 0.518 -0.171 0.064 0.118 -0.122 -0.038 0.527 -0.232
Potable Water 0.010 0.506 -0.049 0.211 0.243 -0.099 -0.360 -0.532
111
Table 4 shows what the components after rotation represent. The first component (factor) is strongly
associated with values: Scientific, Educational, Irrigation, Cultural, Recreation, Hydroelectric,
Fisheries and function of Ground Water Recharge with correlation coefficients 0.779 , 0.752 , 0.721 ,
0.720 , 0.644 , 0.600 , 0.542 , 0.426. Corresponding reasonable interpretation follows for the other
variables and relevant factors.
According to the correlations obtained from Table 4, the eight Factors (Dimensions) are called:
1st Factor: Quality of Human Life in the Wetland
2nd Factor: Land Use of Wetland
3rd Factor: Protection Indicator
4th Factor: Bio-indicator or Eco-indicator of the Wetland
5th Factor: Storage of Sediment and Other Substances
6th Factor: Process Mechanisms of the Wetland
7th Factor: Water Value
8th Factor: Organic Diversity of the Wetland
Table 4. Rotation Matrix
Component
Variables
1 2 3 4 5 6 7 8
Educational 0.779 0.027 -0.110 -0.102 -0.132 0.070 0.156 0.073
Scientific 0.752 -0.086 -0.004 -0.035 0.084 -0.056 -0.220 -0.095
Irrigation 0.721 0.150 -0.356 0.120 0.052 0.042 0.208 -0.039
Cultural 0.720 0.184 -0.225 0.177 0.095 -0.076 -0.098 0.154
Recreation-Entertainment 0.644 0.202 -0.497 0.115 0.011 -0.037 -0.089 0.245
Hydroelectric 0.600 0.311 0.342 -0.007 0.214 -0.189 -0.089 0.175
Fishing 0.542 0.404 0.012 0.150 -0.069 -0.270 -0.017 0.205
Gaming 0.276 0.749 -0.150 -0.222 0.049 0.161 0.124 0.128
Logging 0.053 0.677 0.003 0.409 -0.193 -0.036 -0.009 0.059
112
Sand Collecting -0.021 0.669 0.101 0.076 0.356 -0.045 0.228 -0.268
Livestock Farming 0.470 0.596 0.022 0.049 -0.062 0.024 0.194 0.329
Anti-Corrosion -0.146 -0.056 0.852 0.230 -0.038 0.093 -0.024 -0.057
Modification of Corrosive Effects -0.269 0.118 0.785 0,195 -0.064 0.002 0.277 -0.051
Storage and Release Heat 0.081 -0.040 0.272 0.791 -0.063 0.195 0.032 0.126
Climate Change (Climate Improvement) 0.072 0.247 -0.161 0.655 0.056 0.075 -0.078 -0.400
Anti-Flood -0.046 0.138 0.264 0.611 0.151 0.022 0.342 0.065
Sediment Retention -0.028 0.250 0.173 0.082 0.795 0.290 -0.037 -0.037
Water Storage -0.155 0.197 0.226 0.082 -0.753 0.074 -0.101 0.022
Ground Water Recharge 0.426 -0.098 0.285 -0.210 -0.481 0.173 0.114 -0.450
Nutrient Export -0.130 -0.122 0.144 0.286 0.032 0.783 0.311 0.047
Flood Water Retention 0.219 -0.233 0.302 0.517 -0.007 -0.526 0.138 -0.144
Food Web Support 0.124 0.419 0.108 0.123 0.312 0.515 -0.194 -0.211
Potable Water -0.013 0.187 0.118 0.116 0.030 0.093 0.839 -0.090
Biological 0.385 0.096 -0.108 -0.056 -0.053 0.045 -0.103 0.690
Extraction Method: PCA
Rotation Method: Varimax with Kaiser Normalization
From the stage of Factor Analysis it is shown that only eight out of the 24 original variables met the
statistical criteria therefore, Reliability Analysis was implemented.
1st Factor: Quality of Human Life in the Wetland
Cronbach's Alpha = 0.758
The above scale is considered reliable. The indicator Cronbach Alpha for the first factor regarding the
values and functions of the Wetland is α = 0.758, which is considered high and the reliability of the
scale is concluded to be high since this value indicates satisfactory internal consistency and the
indicator is reliable.
In the next table of hypothetical values of indicator α, for the first factor we present the hypothetical
values of Alpha if the corresponding variable was not included in the analysis. For the function of the
Wetland, enrichment of vault we can see the hypothetical value of α is 0.820, therefore bigger than
113
Cronbach Alpha = 0.758 which means that the particular variable will have to be excluded from the
particular analysis. Also from the column Corrected Item-Total Correlation we can see that 0.187<0.5,
therefore this function has to be excluded from the indicator since the factor α will become much
bigger, equal to 0.820. As far as the Entertainment is concerned, the hypothetical value of α is 0.723,
which is smaller than Cronbach Alpha = 0.758, which means that if the particular variable was not
included in the analysis then Cronbach Alpha would have this value. Thus, the indicator will be
reduced compared to its original value. The same pattern is followed with the rest variables.
Table 5. Hypothetical values Cronbach's Alpha (1st Factor)
Corrected Item-Total Cronbach's Alpha if

Variables
Correlation Item Deleted
Ground Water Recharge (Enrichment of Underwater

0.187 0.820
Aquifer)
Recreation- Entertainment 0.608 0.723
Cultural 0.602 0.703
Scientific 0.558 0.712
Educational 0.657 0.689
Irrigation 0.663 0.714
Fishing 0.479 0.730
Hydroelectric 0.496 0.755
2nd Factor: Land Use of Wetland
The above scale is considered reliable. The indicator Cronbach Alpha for the second factor regarding
the values and functions of the Wetland is α = 0.748, which is considered high and the reliability of the
scale is concluded to be high since this value indicates satisfactory internal consistency and the
indicator is reliable.
In the following table of hypothetical values of indicator α, for the second factor we present the
hypothetical values of Alpha if the corresponding value was not included in the analysis. For the
Logging value, the hypothetical value of α is 0.710, which is smaller than Cronbach Alpha = 0.748.
This means that if the particular value was not included in the analysis, then Cronbach Alpha would
have this value. The same logical explanation is followed for the rest of the variables.
Table 6. Hypothetical values Cronbach's Alpha (2nd Factor)
114
Corrected Item-Total Cronbach's Alpha if Item

Variables
Correlation Deleted
Logging 0.511 0.710
Gaming 0.631 0.641
Livestock Farming 0.574 0.673
Sand Collecting 0.465 0.731
3rd Factor: Protection Indicator
The indicator Cronbach Alpha for the third factor regarding the values and functions of the Wetland is
α = 0.606 which is considered satisfactory and the reliability of the scale is concluded to be
satisfactory since this value indicates sufficient internal consistency.
In the next table of hypothetical values of indicator α, for the third factor we present the hypothetical
values of Alpha if the corresponding variable was not included in the analysis. For the anti-corrosion
value, the hypothetical value of α is 0.355 which is considerably smaller than Cronbach Alpha = 0.606
which means that if the particular variable was not included in the analysis then Cronbach Alpha
would have this value. For the water storage variable it is observed that the hypothetical value of α is
0.848, which is bigger than Cronbach Alpha = 0.606 meaning that the particular variable will have to
be excluded from the analysis. Even from the column Corrected Item-Total Correlation it is observed
that 0.233<0.5 and therefore this function will have to be omitted from the variable and therefore the
indicator α will become much bigger, equal to 0.848.
Table 7. Hypothetical values Cronbach's Alpha (3rd Factor)
Corrected Item-Total Cronbach's Alpha if Item Deleted

Variables
Correlation
Anti-Corrosion 0.552 0.355
Modification of Corrosion Effects 0.551 0.324
Water Storage 0.233 0.848
4th Factor: Bio-indicator or Eco-indicator of the Wetland
115
The indicator Cronbach Alpha for the fourth factor regarding the values and functions of the Wetland
is α = 0.618 which is considered satisfactory and it is concluded that the reliability of the scale is
sufficient and this value indicates satisfactory internal consistency.
In the following table of hypothetical values of the indicator α, concerning the fourth factor we present
the hypothetical values of Alpha if the respective variant was not included in the analysis. Concerning
the storage and release of heat the hypothetical value of α 0.510 being smaller than Cronbach Alpha =
0.618 which means that if the particular variable was not included in the analysis then Cronbach Alpha
would have this value.
Table 8. Hypothetical values Cronbach's Alpha (4th Factor)
Corrected Item-Total Cronbach's Alpha if Item

Variables
Correlation Deleted
Storage and Release Heat 0.531 0.510
Climate Change (Climate Improvement) 0.322 0.617
Anti-Flood 0.478 0.487
Flood Water Retention 0.360 0.585
Finally, the 6th Factor brought out a very Alpha<0.5 which means not a satisfactory internal
consistency and therefore may not be Reliable.
5. Conclusions
The results of the survey showed that the wetland functions and values should always be into account
in the management and development of a region. The analysis of the data shows that there is a great
need for the sustainable management of the environment and the natural resources in order to assess
the goods and services provided by the wetland to humans so as to ensure that such goods will be
lasting and stable in the future. In order for sustainable development of wetland to take place, the
environment must be rationally managed by humans, and there should be consciousness, awareness
and respect for it so as to avoid any negative consequences. A series of European Actions related to
the preservation and management of wetlands aim to strengthen the regional and rural economy.
Wetland of Agras-Vritta-Nisi, has important economic and touristic value for the region of Edessa and
Pella Regional Unit and contribute to the Local and Regional Development (RD). Wetland Functions
and Values can influence the wetland structure and the Natural Resources (Grassland Resources,
Herbs, Game Resources and Water Resources) of wetland and rural areas, and as a result, affect the
role of natural resources in society. A New Tool can be used in this areas in Greece for Sustainable
Environmental Policy and Governance.
116
Given the close relationship between the environment with wetlands areas, the quality of functions and
natural resources, can play a decisive role in wetland of Agras-Vritta-Nisi and an Integrated
Environmental Management Evaluation System with Spatial Indicators (Decision Support System-
DSS) should be implemented, aiming to comply with environmental legislation and other European
Community requirements.
In order for a decision to be made locally and the construction of a spatial plan we always have to keep
in mind the attitude and the opinion of the local residents. Acquiring specific knowledge and
information is vital for the sustainable environmental management and their facilities, which cover a
large number of various issues, and finally aid the full development of the natural resources. At the
same time, results which are the outcome from the experience of socio-economic research can be used
as a guideline for the future formation and implementation of a new policy of a product. Through this
research we looked into the opinions of the local residents of the Wetland Agras-Vritta-Nisi linked to
the Wetland functions and values of the Wetland and their contribution to the quality of life. The
interaction developed in the area between users or consumers and the environment are very important,
which can influence and start new financial growth locally.
6. References
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development of mainland Greek prefectures: a typology". Journal of Environmental Protection
and Ecology, 9(2): 446-464.
Arabatzis, G., Tsantopoulos, G., Tampakis, S., Soutsas. K. (2006), "Integrated rural development and
the multifunctional role of forest: a theoretical and empirical study". Review of Economic
Sciences, 10:19-38.
Arabatzis, G. and Kyriazopoulos, A. (2010), "Contribution of rangelands in quality of life: the case of
Viotia prefecture, Greece". Journal of Environmental Protection and Ecology, 11(2): 733-745.
Arabatzis, G., Kitikidou, K., Tampakis, S., Soutsas, K. (2012), "The fuelwood consumption in a rural
area of Greece". Renewable and Sustainable Energy Reviews, 16:6489-6496.
Bryden, J. (1994), "Prospects for Rural Areas in an Enlarged Europe". Journal of Rural Studies,
10(4):387-394.
Damianou, Ch. (1999), Sampling Methodology: Techniques and Applications, 3rd Edition Aithra,
Athens (in Greek).
Elaboration of a Wetland Restoration Plan of Wetland Agras-Vritta-Nisi, Life Project-Nature 2005,

"Implementation of management measures at the Agras Wetland".
Geer, J.P. (1993), Multivariate Analysis of Categorical Data: Applications. Sage Publications Inc.,
Thousand Oakes, 1993b.
Hoogstra, A.Μ., Schanz, Η., Wiersum, F.Κ. (2004), "The future of European forestry-between
urbanization and rural development". Forest Policy and Economics, 6:441-445.
Meulman, J., Heiser, W. (2004), SPSS Categories 13.0. SPSS Inc., Chicago.
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Matis, K. (2001), Forest Sampling. Assets Exploitation and Management Society of Democritus
University of Trace, Xanthi (in Greek).
NSS Census Prefecture of Pella, 2011.
Perez, S.F.O., Fernandez, A.J.M. (2006), "Forest externalities, demography and rural development in
inland Spain", Forest Policy and Economics, 8:109-122.
Polyzos, S., Arabatzis, G. (2008), "Spatial distribution of natural resources and their contribution to
regional development in Greece". Journal of Environmental Protection and Ecology, 9(1):183-
199.
Siardos, G. (2005), Methodology of Sociological Research. 2nd ed. Ziti Publications. Thessaloniki, (in
Greek).
Tsiantikoudis, S., Soutsas, K., Apostolidis, G. (2013), "Contribution of Game Resources to the Quality
of Life: The case of the Evros prefecture", Journal of Environmental Protection and Ecology,
14(1):240-246.
118
Price and Quality Export Competitiveness in Bulgarian Agri-food Industry
Nikolay Sterev, Dimitar Blagoev, Paskal Zhelev, Diana Kopeva

University of National and World Economy (UNWE), Sofia
1. Introduction
Food industry is one of the key industrial subsectors in Bulgarian economy. The food
production sector accounts60 for about 13.51% of total industrial production in the country,
contributing about 13.71% of total value added in industry. The sector provides employment
to 15% of all employees in manufacturing. In 2014, the Bulgarian food industry was valued at
about €4.8 billion, €4 billion of which was the share of the domestic market with the
remainder exported. The role of the food industry is enlarged due to the close link to
agriculture.
Despite the immense structural changes in agri-food sector in the last 25 years, agri-
food industry preserves and continues to expose certain level of competitiveness on the
international market.
European Union (EU) membership influenced the export competitiveness of the
Bulgarian agri-food industry. It caused some shifts and adjustments in some subsectors,
increasing the comparative advantage there while decreasing or remaining stable in others.
The paper aims to analyze changes in the export competitiveness of the Bulgarian
agri-food industry in the last ten years (2005-2014). Firstly, the applied methodology and data
sources are described. Secondly, a brief summary of the state of the agri-food industry is
presented, covering trade dynamics and structure of the agri-food export. Thirdly, the
comparative advantage in Bulgaria’s foreign trade with agri-food products over the period
2005-2014 is presented. Finally, the last part contains main conclusions.
2. Methodology
Scholars use different indicators in their studies to measure the comparative advantage
and competitiveness of given sectors and products on the international market. The trade
approach has been most intensively used to evaluate competitiveness at a sector level. The
comparative advantage theory traces its roots back to the works of John Stuart Mill, Adam
Smith, and David Ricardo. During the last decade, it was enriched by various researchers and
scholars such as Gehlhar and Pick (2002), Bojnec and Fertö (2007), Juhasz and Wagner
(2013), Beres and Meszaros (2012), Torok and Jambor (2011). Most of the studies are
focused on the competitiveness and comparative advantage in agriculture of new EU member
states.
In this paper, the analysis of export performance is based on evaluation of the
Revealed Comparative Advantage (RCA) index, which was developed by Balassa (1965).
The study covers a period of ten years (2005 – 2014), whereas data are extracted from
UNCTAD Statistics.
60
Source: EUROSTAT
119
The analysis is based on the following trade indicators:
(i) Export growth, which measures the growth of an export over a period of ten years
(2005-2014). Changes in trade balance of agri-food products are traced and compared to the
export of all products.
(ii) Export product structure presents the shares of various product groups within the
agri-food industry
(iii) Market share reveals the top agri-food products in Bulgarian export, according to
their world market position on a year by year basis in percentage (2005-2014). The market
share analysis was done for commodity groups from 01-24 of the Harmonized Commodity
Description and Coding System (HS) and their four-digit codes breakdown:
(a) animals and animal products (HS 01-05),
(b) vegetable products (HS 06-14 ),
(c) animal or vegetable fats, oils and waxes (HS 15),
(d) foodstuffs (HS 16-24).
(iv) Revealed Comparative Advantage (RCA) – the concept of the RCA, initially
formulated by Balassa61 (1965), and later widened and enlarged by various scholars62, is
applied to examine the comparative advantages of two groups of agri-food products defined
under the Harmonized System Codes (HS). The concept is based on conventional trade
theory, where “X” represents the value of exports; “i” is a country (Bulgaria); “j” is a
commodity; “t” is a set of commodities (agri-food products) and “n” is a set of countries
(world trade).
RCA = (Xij/Xtj)/(Xin/Xtn)
The RCA measures a country’s export of a commodity in relation to its total exports
and the export performance of a set of countries. If RCA>1, then a comparative advantage is
revealed.
(v) Another widely used indicator to measure trade performance over time is the
Relative Trade Balance (RTB) index. It compares the trade balance (exports minus imports)
for a group of products to the total trade (exports plus imports) of that group of products.
RTB= (Xi-Mi)/(Xi+Mi),
where Xi and Mi represent the value of exports and imports of industry “i” respectively. The
measure ranges between [-1;1], with a neutral value of zero. If the value of the index is
positive the national production is considered to be competitive in both foreign and domestic
markets.63
(vi) Additionally to the market share, trade balance, and market structure, we use the Gohlhar
and Pick (2002)64 approach to categorize the trade flows in four competition categories:
61
Balassa, B. (1965) ‘Trade Liberalisation and Revealed Comparative Advantage’, Manchester School of
Economic and Social Studies, 33. pp. 99-123; Balassa, B. (1977) “Revealed” Comparative Advantage Revisited:
An Analysis of Relative Export Share s of the Industrial Countries, 1953-1971, Manchester School 4 (1977); pp.
327-344.
62
Danges and Riedel (1977); Kunimoto (1977), Bowen (1983), Vollrath (1987, 1989, 1991)
63
Zhelev, P. (2013) Analysis of the International Competitiveness of the Bulgarian Furniture Industry, Trakia
Journal of Sciences, 11 (1), p.228
64
Gehlhar, M.J. and Pick, D.H. (2002) Food trade balances and unit values: What can they reveal about price
competition? Agribusiness: An International Journal, 18 (1). pp. 61-79
120
(a) Category 1: successful national price competition,

(b) Category 2: unsuccessful national price competition,
(c) Category 3: successful national quality competition,
(d) Category 4: unsuccessful national quality competition.
3. Bulgarian Agri-food Industry: Trade Dynamics, Structure of the Agri-food Export;

World Market Share
The agri-food industry was well-developed during the last decade, according to the
previous analysis. But a question still remains: is the development equally spread among the
agri-food specializations?
The answer would help us to reveal two major findings:
 What movement of the Bulgarian agri-food industry to expect for the next EU-
planning period (2014-2020);
 Which factors facilitate the better position of Bulgarian agri-food industry on the
world market.
Our findings are based on analysis of the agri-food turnover on the non-domestic
market. First, the analysis covers a comparison between the non-domestic trade of Bulgarian
agri-food products and total export (See Figure 1).
25,00
22,23 22,05
20,26 20,77
20,00
15,28 15,56
15,00 13,55
12,02 11,83
10,00
9,43
5,00
4,05 3,71
3,32 3,33
2,62
1,94 2,02
1,01 1,06 1,21
0,00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
All products Agri-food products
Figure 1. Export of Agri-food Products and Total Export (Bulgaria) in Bln. Euro
Source: own calculations based on UNCTAD data
The figure shows that the growth of the export of Bulgarian agri-food products is
greater than the export of other products. The share of food export has augmented from 10.7%
(2005) to 18.2% (2013). This preliminary result offers an insight that the Bulgarian food
industry is more competitive than other Bulgarian production sectors. In addition, the food
industry has experienced growth of its exports during the crisis period (2008-2009).
121
Additional arguments could be found in the analysis of trade balance of the agri-food
industry (See Figure 2).
4,50 180
165
4,00
147 150 160
142 141
138
3,50
140
3,00 117 116

108 120
2,50
91 100
2,00
80
1,50
60
1,00
40
0,50
0,00 20
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
-0,50 0
Export Import Trade balance Export/Import (%) right scale
Figure 2. Trade Balance of Agri-food Products in Bulgaria in Bln. Euro

The agri-food export has been developed for the last 7 years. The figures show that the
export of food products is stable and has rapidly overflown the agri-food import for this
period. Nevertheless, two major trends have to be set:
 The highest growth rate of export had been accounted for between 2009 and 2011,
in comparison with the stable growth rate of agri-food import for the whole period. One
possible reason is the Bulgarian full EU membership that gives a price advantage of the
Bulgarian food products on the EU markets. Another point of view is also connected to a
price advantage in order to minimize the food production costs inside the EU members in
terms of economic crises (2008-2011).
 The agri-food import has started to catch up with the level of export for the last
two years (2013-2014), according to a slow decrease of the positive trade balance of
Bulgarian agri-food sector. This state could be perceived as a first sign that 2007, the year
with a negative agri-food trade balance, is not too far behind.
The change of the agri-food trade on the non-domestic market is a result of structural
changes of the food export (See Table 1).
122
Table 1. Agri-food Export Structure of Bulgaria (%)

2005 2014
Cereals 17,0 25,0
Oil seed, oleagic fruits, grain, seed, fruit, etc, nes 15,3 16,1
Tobacco and manufactured tobacco substitutes 9,5 10,1
Meat and edible meat offal 9,1 4,1
Beverages, spirits and vinegar 8,3 3,0
Cereal, flour, starch, milk preparations and products 6,5 4,9
Vegetable, fruit, nut, etc food preparations 5,3 2,8
Dairy products, eggs, honey, edible animal product nes 5,1 5,0
Edible vegetables and certain roots and tubers 4,4 1,8
Edible fruit, nuts, peel of citrus fruit, melons 3,1 2,3
Animal,vegetable fats and oils, cleavage products, etc 2,3 6,2
Residues, wastes of food industry, animal fodder 3,0 5,6
Others 11,1 13,2
Source: UNCTAD
According to the figures, the overall agri-food export growth could be explained with
the structural changes of non-domestic trade of the Bulgarian food products.
 a very huge enlargement of export with more than 50% for the whole period
(2005-2014) of products such as: cereals; fats and oil; residues of food industry.
 a very huge decrease of export with 50% and more than 50% of food products
such as: meat; beverages; vegetables and fruits.
 a stable export of products such as: tobacco; dairy products and others.
The overall impact of the changing structure of agri-food export is shown on the next
Figure 3.
The figures give an assessment of the real growth potential of agri-food products
divided in three groups:
 Lagging agri-food products: they are falling behind the others. Examples of
these groups are traditional specializations for Bulgarian agriculture and food production as
follows: Sugar and sugar confectionary; oil seeds; live animals, and others;
 Reinforcing agri-food products: they perform better on the market, but their
export potential is gained. The examples of this group are part of traditional specializations
for the Bulgarian agriculture and food production but they show a technological and product
development as follows: Cereals; Tobacco; Edible fruits and edible vegetables, and others;
 Developing agri-food products: they are some of the latest food specializations
that possess enough potential to grow. The examples of this group are not traditional
specializations for the Bulgarian agriculture and food production as follows: animals and
vegetable fat and oils; coffee, tea and spices; residue of food industry; meat fish and seafood
products.
According to the given results, the further development of the agri-food trade on the
non-domestic market should be argued with the change of export competitiveness of the agri-
food products. Thus, the national agri-food policy had to follow the products development
based on the competitive advantage of Bulgarian agri-food industry.
123
800
"Coffee, tea, mate

and spices"
700
"Animal,vegetable fats and
oils, cleavage products"
600
"Cereals"
"Sugars and sugar
confectionery"
500 "Tobacco and manufactured
tobacco substitutes"
"Oil seed, oleagic fruits,
grain, seed, fruit, etc,..."
400
"Residues, wastes of food

industry, animal fodder" "Meat, fish and seafood food
preparations nes"
300
"Live trees, plants, bulbs,
roots, cut flowers etc"
"Vegetable saps and

200 extracts nes..."
"Vegetable plaiting materials,

100
vegetable products nes"
"Live animals"
0
2006 2007 2008 2009 2010 2011 2012 2013 2014
Figure 3. Growth Trends of Non-Domestic Trade of Agri-food Products in Bulgaria

124
4. Comparative Advantage in Bulgaria’s Foreign Trade with Agri-food Products
Over the last ten years, Bulgaria has shown a slight trend of increase in its agri-food
sector competitiveness. This is evident from the dynamics of the two indicators used widely
for competitiveness assessment (Revealed Comparative Advantage: RCA and Relative
Trade Balance: RTB), which basically follow a similar trend (Figure 4).
2,50 0,30
0,25
2,00
0,20
1,50 0,15
0,10
1,00 0,05
0,00
0,50
-0,05
0,00 -0,10
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
RTB (on the right scale)
Figure 4. Dynamics of Revealed Comparative Advantage (RCA) and Relative Trade

Balance (RTB) Indices for Bulgaria’s Foreign Trade with Agri-food Products (2005-
2014)
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
RCA 1.58 1.35 1.31 1.78 2.05 2.18 2.11 2.04 2.25 2.05
RTB 0.17 0.08 -0.05 0.04 0.08 0.16 0.19 0.17 0.25 0.20
Throughout the analyzed period, the RCA index of Bulgaria’s agri-food products has
always possessed values superior to 1 denoting the existence of a comparative advantage of
the country on the world market. After Bulgaria’s EU accession in 2007, the RCA index has
been rising, and since 2009 it has been constantly above 2, signifying a strengthened
international competitive position of the sector. The same conclusions can be drawn by
observing the dynamics of the RTB index. The only year in which Bulgaria was a net
importer of agri-food products was 2007 when it joined the EU and had to fully liberalize its
trade with the EU Member States and to adopt the Common Trade Policy which meant an
increased competitive pressure also from third countries. However, as an EU member state
Bulgaria started benefiting from the Common Agricultural Policy, and the funds had a
positive effect on agri-food producers. Since 2008, Bulgaria has had a constant positive and
(with a few exceptions) increasing trade balance with agri-food products in its trade with the
world. The RTB index has reached its peak value in 2013 when it was 0.25, and for the last
five years it has been permanently surpassing 0.15.
The fact that Bulgaria has a solid specialization in agri-food industry which has an
increasing comparative advantage, and has been registering a positive trade balance makes it
legitimate to target the sector for support by the national industrial policy.
125
Having established that the Bulgarian agri-food industry altogether is competitive on

the world market, it is interesting to see which product groups have the highest comparative
advantage. Such information is provided in Table 2.
Table 2 Bulgarian Agri-food Product Groups with a Comparative Advantage (RCA>1) in 2014
Cod
Product groups / Years 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
e
'24 Tobacco and manufactured 4.2 3.4 4.6 6.0 8.4 7.7 7.4 7.7 7.8 7.5
tobacco substitutes
'10 Cereals 4.3 3.5 1.5 4.5 4.7 6.4 5.3 6.0 8.1 6.7
'12 Oil seed, oleaginous fruits, grain, 5.6 4.8 3.8 5.1 6.3 6.7 8.4 5.3 6.3 5.1
seed, fruit, etc., nes
'11 Milling products, malt, starches, 0.3 0.1 0.9 0.9 2.3 2.8 2.4 3.1 2.8 3.2
inulin, wheat gluten
'19 Cereal, flour, starch, milk 2.4 2.5 2.3 2.6 2.7 2.8 2.3 2.3 2.2 2.3
preparations and products
'23 Residues, wastes of food 1.1 1.0 1.1 1.0 1.5 1.6 1.6 1.8 2.0 2.1
industry, animal fodder
'15 Animal, vegetable fats and oils, 0.8 0.6 0.6 0.9 1.3 1.3 1.3 1.3 1.7 2.0
cleavage products, etc.
'18 Cocoa and cocoa preparations 0.7 0.5 0.6 0.6 0.5 1.4 1.1 1.2 1.5 1.7
'04 Dairy products, eggs, honey, 1.3 1.1 1.3 1.6 1.8 1.6 1.3 1.6 1.6 1.6
edible animal product nes
'20 Vegetable, fruit, nut, etc. food 1.9 1.7 1.7 1.7 2.0 2.1 1.6 1.5 1.4 1.5
preparations
'17 Sugars and sugar confectionery 1.0 0.8 1.4 2.7 2.6 2.9 2.5 1.9 1.6 1.4
'09 Coffee, tea, mate and spices 0.6 0.6 0.7 1.2 1.3 1.1 0.8 1.2 1.1 1.3
According to the values of the RCA index, the most competitive Bulgarian agri-food
product groups in 2014 are '24 “Tobacco and manufactured tobacco substitutes”, '10
“Cereals” and '12“Oil seed, oleaginous fruits, grain, seed, fruit, etc., nes”. Throughout the
analyzed period, on average, they have RCA values exceeding 4, which according to the
Hinloopen and Marrewijk (2001)65 classification means that they possess ‘strong
comparative advantage’. Product groups with a ‘medium comparative advantage’ (i.e. with a
RCA index higher than 2 but lower than 4) are '11“Milling products, malt, starches, inulin,
wheat gluten”, '19 “Cereal, flour, starch, milk preparations and products”, '23 “Residues,
wastes of food industry, animal fodder”.
Several product groups have managed to gain comparative advantage in the years of
full EU membership of Bulgaria, while in 2005 they were at a comparative disadvantage.
These are '09 “Coffee, tea, mate and spices”, '18 “Cocoa and cocoa preparations”, '15
“Animal, vegetable fats and oils, cleavage products, etc.”, and especially impressive has
been the performance of '11 “Milling products, malt, starches, inulin, wheat gluten”, which
managed to progress from comparative disadvantage to ‘medium comparative advantage’.
On the negative side, four 2-digit HS code agri-food product groups have lost their
comparative advantage in the last couple of years. While in 2005, '01 “Live animals”, '02
65
Hinloopen, J. and Van Marrewijk, Ch. (2001) On the empirical distribution of the Balassa index,
Weltwirtschaftliches Archiv, vol. 137, issue 1, p.13
126
”Meat and edible meat offal”, '07“Edible vegetables and certain roots and tubers”, and '22
“Beverages, spirits and vinegar” had a RCA index of 1,04; 1,58; 1,46; and 1,54 respectively,
since 2011 (for product group ’07) and 2013 (for product groups ’01, ’02 and ’22) they have
turned into comparative disadvantage.
The agri-food product groups that perform the best in Bulgaria’s foreign trade in
terms of net exports are '10 “Cereals” and '12 “Oil seed, oleaginous fruits, grain, seed, fruit,
etc., nes”, whose RTB index in 2014 has values of 0,86 and 0,70 respectively. Three product
groups have managed to increase their competitiveness and turn from net importers to net
exporters - '15 “Animal, vegetable fats and oils, cleavage products, etc.”, '11 ”Milling
products, malt, starches, inulin, wheat gluten” and '23 ”Residues, wastes of food industry,
animal fodder”.
Table 3 Bulgarian Agri-food Product Groups with a Positive Trading Balance (RTB>1) in 2014
Cod
Product groups / Years 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
e
'10 Cereals 0.89 0.85 0.21 0.71 0.74 0.82 0.83 0.86 0.90 0.86
'12 Oil seed, oleaginous fruits, 0.77 0.67 0.64 0.69 0.76 0.75 0.85 0.75 0.77 0.70
grain, seed, fruit, etc., nes
'15 Animal, vegetable fats and oils, -0.20 -0.25 -0.33 -0.16 0.01 0.02 0.12 0.07 0.24 0.35
cleavage products, etc
'11 Milling products, malt, starches, -0.58 -0.80 -0.21 -0.18 0.30 0.49 0.48 0.30 0.30 0.35
inulin, wheat gluten
'24 Tobacco and manufactured 0.68 0.58 0.24 0.21 0.31 0.30 0.37 0.34 0.33 0.34
tobacco substitutes
'23 Residues, wastes of food -0.22 -0.28 -0.26 -0.25 -0.05 0.08 0.10 0.18 0.26 0.26
industry, animal fodder
'19 Cereal, flour, starch, milk 0.38 0.34 0.22 0.23 0.29 0.32 0.29 0.23 0.22 0.26
preparations and products
'14 Vegetable plaiting materials, 0.56 0.22 -0.62 -0.87 -0.51 0.34 0.39 0.30 -0.10 0.20
vegetable products nes
'16 Meat, fish and seafood food 0.42 0.41 -0.12 -0.31 -0.17 -0.22 -0.29 -0.27 -0.19 0.00
preparations nes
In order to determine the most competitive Bulgarian agri-food product groups we

have to look at both the RCA and RTB indices. While a certain sector might have a positive
RCA, its specialization might not be enough to guarantee a high competitive performance
and a positive trade balance. According to Porter (1991), a sector is deemed competitive
only if in addition to specialization above the world average, it has a positive trade balance,
unless its RCA index is higher than 2.66 Taking this into consideration, we can determine the
Bulgarian agri-food product groups which are highly competitive on the world markets. In
2014, these are: '24 “Tobacco and manufactured tobacco substitutes”, '10 “Cereals”, '12 “Oil
seed, oleaginous fruits, grain, seed, fruit, etc., nes”, '11 “Milling products, malt, starches,
inulin, wheat gluten”, '19 “Cereal, flour, starch, milk preparations and products”, '23
“Residues, wastes of food industry, animal fodder”, and '15 “Animal, vegetable fats and oils,
cleavage products, etc.”.
66
Porter, M., (1991) Canada at the Crossroads, Business Council on National Issues and Supply and Services
Canada, Ottawa, p. 412
127
Next in our analysis, it is important to find out what are the dominating factors
behind Bulgaria’s agri-food competitiveness. The two basic types of competitive advantage
are lower cost (price) and differentiation. The terms ‘cost competitiveness’ and ‘price
competitiveness’ are used interchangeably given the fact that the capacity to offer or sustain
lower prices depends on the structure of production costs. Differentiation can be achieved by
providing a superior value to the buyer in terms of quality and special features of the
product. Thus, we shall try to delineate to what extent Bulgarian food producers rely on low
price or on higher quality. To do so, we follow Gehlhar and Pick (2002) and use unit value
difference and trade balance to disentangle Bulgaria’s foreign trade with agri-food products
into four categories: successful price competition (trade surplus at lower export than import
unit value), unsuccessful price competition (trade deficit at lower export than import unit
value), successful quality competition (trade surplus at higher export than import unit value),
unsuccessful quality competition (trade deficit at higher export than import unit value)67.
Table 4 Share of Bulgarian Exports of Agri-food Products According to Price/Quality

Competitiveness in 2005-07 and 2012-14 (%)
Category / Period 2005-07 2012-14
1 Successful price competition 62.9 61.4
2 Unsuccessful price competition 5.6 5.3
3 Successful quality competition 25.7 25.8
4 Unsuccessful quality competition 5.8 7.4
The results from using the methodology of Gehlhar and Pick show that the share of
competitive agri-food products (sum of categories 1 and 3) in Bulgaria’s foreign trade
between 2005-2007 and 2012-2014 has slightly decreased - from 88,6 % to 87,2 %.
However a positive feature is that products which are successful in competition either
through lower price or better quality have much higher share (87,2%) than those which are
not successful (12,8%).
Altogether, the largest share in Bulgarian agri-food exports have products which rely
on low prices to compete on the world markets (68,5% in 2005-2007 and 66,7% in 2012-
2014). This reflects a downgrade specialization of the national economy and inferior
strategies of the Bulgarian agri-food firms focused on reduction of costs instead of
differentiation.
The most perspective category 3 (successful in quality competition) has a share of
25,8% in 2012-2014 in Bulgaria’s agri-food exports which is quite stable over time (25,7%,
7 years earlier).
While the highest share of Bulgaria’s exports is concentrated in products successful
in price and quality competition if we look at the number of product groups, we see a
different picture. In 2012-2014, the largest number of 4-code HS product groups (70 out of
181) fell within category 4 (unsuccessful quality competition), followed by category 1
(successful price competition, 42 product groups), then category 2 (unsuccessful price
competition, 40 product groups), and last category 3 (successful quality competition, just 29
67
Gehlhar, M. and Pick, D. (2002) Food trade balances and unit values: What can they reveal about price
competition? Agribusiness: An International Journal 18 (1), pp. 61-79.
128
product groups). Taken together the number of product groups classified as unsuccessful in
price and quality competition (110) is bigger than the ones that are successful (71).
Table 5 provides information about the product groups which are classified as
successful in price and quality competition. Within category 1 fall mostly commodities (such
as various cereals, milling products, oilseeds, vegetable oils, animal fats etc.) as well as other
primary goods (such as live animals, fruits). The same applies for category 3 where we find
various types of unprocessed meat, eggs, honey, frozen vegetables and fruits, tobacco etc.
Among processed food products and food preparations that successfully compete on price,
we find traditional Bulgarian products, such as cheese and curd, and wine of fresh grapes.
The Bulgarian agri-food goods with higher degree of processing and relatively higher value
added that compete successfully based on product differentiation are: breakfast cereals and
cereal bars; bread, biscuits, wafers, cakes and pastries; jams and marmalades; cigarettes.
Table 5. Bulgarian Agri-food Products Successful in Price/Quality Competition on the World

Market in 2012-14
Category 1 - Successful price competition Category 3 - Successful quality
(42 HS 4-code products out of 181) competition
(29 HS 4-code products out of 181)
0101 Live horses, asses, mules and hinnies; 0102 Live bovine 0204 Meat of sheep or goats - fresh, chilled or frozen;
animals; 0105 Live poultry; 0301 Live fish; 0406 Cheese and 0205 Meat of horses, asses or mules - fresh, chilled or
curd; 0604 Foliage, branche etc; 0802 Nuts nes; 0814 Citrus frozen; 0207 Meat and edible offal, of the poultry of
fruit and melon peel; 0909 Seeds of anise, badian, fennel, heading 01.05, fresh, chilled or frozen; 0307 Moluscs;
coriander, etc.; 1001 Wheat and meslin; 1002 Rye; 1003 Barley; 0403 Buttermilk and yogurt; 0407 Birds' eggs in shell;
1004 Oats; 1005 Maize;1006 Rice; 1101 Wheat or meslin flour; 0408 Birds' eggs dried; 0409 Natural honey; 0410
1103 Cereal grouts, meal and pellets; 1104 Cereal grain, worked Edible products of animal origin, nes; 0508 Coral and
post hulling, excluding rice; 1108 Starches; inulin; 1205 Rape or similar materials, e.g. shells; 0707 Cucumbers and
colza seeds, whether or not broken; 1206 Sunflower seeds, gherkins, fresh or chilled; 0710 Frozen vegetables;
whether or not broken; 1208 Flour and meals of oil seeds; 1210 0712 Dried vegetables; 0811 Frozen fruits & nuts; 0812
Hop cones, fresh or dried; 1213 Cereal straws and husks; 1214 Provisionally preserved fruits & nuts (unfit for
Swede, mangold, fodder root, hay, lucerne, clover etc; 1501 immediate consumption); 0813 Dried fruit; 1207 Oil
Lard and other pig & poultry fat; 1506 Animal fats &oils &their seeds; 1211 Medicinal plants; 1212 Locust beans; 1404
fractions; 1512 Safflower, sunflower/cotton-seed oil & fractions; Vegetable products, nes; 1522 Degras and residues;
1514 Rape,colza or mustard oil & their fractions; 1520 Glycerol 1904 Breakfast cereals & cereal bars; 1905 Bread,
(glycerine); 1521 Vegetable waxes, beeswax & other insect biscuits, wafers, cakes and pastries; 2001 Cucumbers,
waxes; 1605 Crustaceans & molluscs, prepared/preserved; 1702 gherkins and onions preserved by vinegar; 2007 Jams,
Sugars, nes, incl chem pure lactose etc; artif. honey; caramel; fruit jellies & marmalades; 2307 Wine lees; argol
2008 Preserved fruits nes; 2105 Ice cream; 2204 Wine of fresh 2309 Animal feed preparations, nes; 2401 Tobacco
grapes; 2205 Vermouth &other grape wine flavoured; 2206 unmanufactured; tobacco refuse; 2402 Cigars, cheroots,
Fermented beverages, nes; 2207 Ethyl alcohol & other spirits; cigarillos & cigarettes
2302 Bran, sharps and other residues; 2303 Beet-pulp, bagasse
and brewing or distilling dregs and waste; 2306 Oil-cake nes
5. Conclusions
Over the last ten years, the international competitiveness of Bulgaria’s agri-food
industry has registered a slight but steady trend of increase. This is evident when one looks
at the level of export growth, the positive trade balance, the rise in the world market share,
and the strengthening of the comparative advantage. The structure of Bulgaria’s agri-food
exports is very low diversified with high dependence on cereals and oil-seeds. In 2012-2014,
the largest share in the exports had products which rely on low prices to compete on the
world markets (66,7%). Most of the exports (87,2%) fall within products successful in
129
competition either based on prices (61,4%) or quality (25,8%). However, the largest
numbers of product groups (110 out of 181) are identified as unsuccessful in quality (70) and
in price (40) competition. The state’s policy should be directed to stimulate a higher-degree
of processing of the Bulgarian agri-food products through creation of local value chains. To
that end, the various existing policy instruments (EU funds, cluster support measures,
innovation and technological policy, export promotion policy, etc.) should be incorporated
in a comprehensive long-term sectoral strategy.
References
Balassa, B. (1965) Trade Liberalisation and Revealed Comparative Advantage”, Manchester

School of Economic and Social Studies, 33. p. 99-123.
Balassa, B. (1977). “Revealed” Comparative Advantage Revisited: An Analysis of Relative
Export Share s of the Industrial Countries, 1953-1971, Manchester School 4 (1977);
pp. 327-344.
Bojnec, S. and Ferto, I. (2007) Hungarian and Slovenian agro-food trade with three main
European Union partners. Ekonomicky Časopis – Journal of Economics, 55, pp. 345-
358.
Donges, J.B. and Riedel, J. (1976) "The expansion of manufactured exports in developing
countries: An empirical assessment of supply and demand issues", Kiel Working
Papers 49, Kiel Institute for the World Economy.
Gehlhar, M.J. and Pick, D.H. (2002). Food trade balances and unit values: What can they
reveal about price competition? Agribusiness: An International Journal, 18 (1). pp.
61-79.
Hinloopen, J., and Ch. Van Marrewijk,(2001) On the Empirical Distribution of the Balassa
Index, Weltwirtschaftliches Archiv, vol. 137, issue 1, pp.1-35
Kunimoto, K. (1977). Typology of Trade Intensity Indices. Hitotsubashi Journal of
Economics, 17(2): pp. 15-32.
Porter, M., (1991) Canada at the Crossroads, Business Council on National Issues and
Supply and Services Canada, Ottawa, p. 412.
Vollrath, T.L. (1991) A Theoretical Evaluation of Alternative Trade Intensity Measures of
Revealed Comparative Advantage. Weltwirschaftliches Archiv, 130, pp. 263-279.
Zhelev, P. (2013) Analysis of the International Competitiveness of the Bulgarian Furniture
Industry, Trakia Journal of Sciences, 11 (1), pp. 227-236
130
Impact of the new Common Agricultural Policy (2015-2020) on the value of direct
payments and on farmers’ income in Wallonia (South of Belgium)
Ph. Burny1,2 and F. TerronesGavira2

1
Centre wallon de Recherches agronomiques, 5030 Gembloux, Belgium
2
Gembloux Agro-Bio Tech (University of Liege), 5030 Gembloux, Belgium
Email: burny@cra.wallonie.be
Abstract
A new Common Agricultural Policy was defined in 2013, with a new structure for direct payment. In Wallonia,
the government implemented the following scheme: 30% for the green payment, 29.9% for the basic payment,
17% for the additional payment for the first 30 ha, 1.8% for young farmers and 21.3% for couple payments.
Due to convergence, the mean support through direct payments will decline from 21,900 € in 2014 to 19,283 €
in 2019. The number of losers will be equivalent to the number of gainers. Regions where cereals and sugar
beet are produced will lose the most, where the region suitable for cattle raising will gain somewhat. There
will be a better distribution of direct payments among farmers: the Gini index will decline from 0.55 to 0.49.
The highest negative impact on income will occur for the specialties “green crops”, “crops and dairy cattle”
and “crops and non-dairy cattle”: the least negative impact will be observed within the specialties “dairy
cattle”, “meat cattle” and “dairy and meat cattle”. The reform will be more profitable for the farms from 30 to
50 ha and will mainly impact the largest farms.
Finally, the CAP reform implemented in Wallonia guarantees a smooth evolution to 2020.
Keywords: Common Agricultural Policy, Wallonia, farm income.
1. Introduction
A new Common Agricultural Policy was defined in 2013 after several years of negotiations between
the EU Commission, the Member States, the EU Parliament and the Council of Ministers (Burny and
Gazinski, 2015). The EU Regulation No. 1307/2013 deals with the new architecture of the direct
payments granted to farmers, giving the Member States or their regions several choices according to
their own conditions and priorities. The Walloon Region (Belgium) finally defined its own policy
which is described below. This policy is supposed to have as less and as slow consequences as
possible in order to avoid too important losses for some farmers. However, it will have impacts on
the value of direct payments and on farmers’ income. These impacts were calculated based on the
available data before making the final choice of the new rules to be implemented in the Walloon
Region, and are presented below.
2. New architecture of the direct payments in the Walloon Region
The new architecture of direct payments in Wallonia is illustrated in Figure 1.
131
Figure 1 New architecture of direct payments in Wallonia (%) (2015-2020)
As it is compulsory for each Member State/Region, the “green payment” represents 30% of the total
envelope for direct payments (Burny, 2014). This payment is submitted to conditions in favour of the
environment (crop rotation, maintenance of permanent pastures, areas with specific environmental
purposes). The specific payment for young farmers has been decided to reach 1.8% of the total
amount of direct payments, according to the expected number of young settlers (Burny and Terrones
Gavira, 2013). The maximum allowed by the EU regulation is 2%.
A characteristic of the Walloon Region is its high level of payments which are still coupled: 21.3%
of direct payments, including 18.8% for suckling cows, 1.2% for dairy cows, 1.1% for double-end
cows and 0.2% for ewes. This share of coupled payments is largely above the figures mentioned in
the EU regulation. However, the Walloon government used the possibility offered to negotiate a
higher share, justified by the economic importance of the bovine meat sector.
Among the options proposed to the Member States/Regions, the Walloon Region also decided to
devote 17% of the available amount for direct payments to grant an additional payment for the first
30 ha of each farm. So doing, the remaining share of the so-called “basic payment” reaches only
29.9%.
3. Evolution of the total envelope for direct payments in Wallonia
As Belgium in one of the Member States where the payments per hectare were among the highest, it
has to contribute to the principle of the convergence among the EU Member States. So, the total
amount for direct payments will decline for Belgium and for its regions (Wallonia, Flanders and
Brussels) between 2013 and 2020 (Table 1).
Table 1 Budget of the 1st pillar of the CAP for Belgium and Wallonia from 2013 to 2020
2013 2014 2015 2016 2017 2018 2019 2020
Budget
568,980 544,047 536,076 528,124 520,170 512,718 505,266 505,266
(000 €)
Belgium Annual
variation - -4.4 % -1.5 % -1.5 % -1.5 % -1.4 % -1.5 % -
(%)
Budget
Wallonia 306,680 291,990 287,712 283,444 279,175 275,176 271,176 271,176
(000 €)
132
Annual
variation - -4.8 % -1.5 % -1.5 % -1.5 % -1.4 % -1.5 % -
(%)
Not taking into account the possible inflation rate, the decline for the Walloon Region will reach
11.6%. If the number of farms remains the same (static model), the mean financial support per farm
would decline from 21,900 € in 2014 to 19,283 € in 2019.
4. Positive and negative Impacts of the new architecture of direct payments on the
support received by farmers from the first pillar of the CAP
According to the available data and if the agricultural area and the number of farms remain equal
through the period 2014-2019, it appears that 42% of the framers will lose a significant amount of
money through direct payments while 44% will be significant gainers. These results are also a
consequence of the principle of convergence within each Member State/region. For 14% of the
farmers, the change, positive of negative, will be smaller than 5% compared to 2014, and so it can be
considered as a status quo (Table 2). Losses are significant (more than 20%) for around 18% of
Walloon farmers, while gains are significant for 31% of farmers.
Looking into more details, it appears that the regions (like the silty agricultural region) where cereals
and sugar beet are produced will lose the most, while the regions suitable for cattle breeding (like
Ardenne) will gain. For the specialties “general crops”, “crops and dairy cattle”, and “crops and non-
dairy cattle”, the negative impact on the farmers’ income will be the highest, contrary to the
specialties “dairy cattle”, “meat cattle” and “double-end cattle”. Concerning the size of the farms, the
new CAP will be more profitable for the middle-sized farms from 30 to 50 ha and will mainly impact
negatively the largest farms.
Table 2 Losers and gainers between 2014 and 2019

% of Walloon farmers
LOSSES
50 % and more 0
From 30 to 50 % 6
From 20 to 30 % 12
From 10 to 20 % 16
From 5 to 10 % 8
TOTAL 42
STATU QUO (from - 5 % to 5
14
%)
GAINS
From 5 to 10 % 5
From 10 to 20 % 8
From 20 to 30 % 5
From 30 to 50 % 6
50 % and more 20
TOTAL 44
133
5. Distribution of financial support among farmers
Though the situation is improved compared to the previous one, it is still obvious that the financial
support to farmers continues to be linked to the size of the farm (Figure 2). Globally, the larger is the
farm, the bigger is the financial support. Nevertheless, it appears that in 2019 (in red), the dispersion
of the points is less important than in 2014 (in blue), showing less disparity among farmers.
Figure 2 Financial support from the first pillar of the CAP according to the area of the farms in
Wallonia (€/farm)
Effectively, in 2019, 50% of the direct payments will be granted to 20% of the farmers, against 18%
in 2014. The Gini index (Worldbank, 2015), as a measure of inequality, can vary between 0, which
reflects complete equality and 1, which indicates complete inequality (if one farmer gets all the direct
payments, all others have none and the index is equal to 1; if each farmer receives the same support,
the index is equal to 0) will decline from 0.55 to 0.49 (Terrones Gavira et al., 2015). The situation is
illustrated in Figure 3.
Figure 3 Distribution of direct payments among farms (Gini index)
6. Conclusions
The implementation of the new Common Agricultural Policy (CAP) is a complex process. In the
Walloon Region, it was sought since the beginning to get the smoothest evolution as possible, mainly
134
avoiding too big and brutal losses for some farmers, who could be forced to give up farming. Though
the Walloon Region will get less financial support from the CAP budget, notably for direct
payments, it seems that the results of the new CAP are finally politically acceptable. Smaller and
younger farmers will get more support while the losses for largest farmers will be limited.
References
Burny, P., 2014. Greening of the Common Agricultural Policy: implementation in Wallonia (South
of Belgium), Proceedings of the conference Ecological performance in a competitive economy,
Academy of Economic Sciences of Bucharest. Supplement of the journal “Quality – access to
success”, 103-105, Bucharest, Rumania.
Burny, P., Gazinski, B., 2015. The Common Agricultural Policy in a changing world. Reforming and
adjustment, In: Unia Europejska wobec wyzwan przyszlosci, Aspekty spoleczne, gospodarcze, i
srodowiskowe. ISBN 978-83-7417-859-4. 270-281, Warsaw, Poland.
Burny, P., Terrones Gavira, F., 2013. Possible implementation of the payment to young farmers
within the first pillar of the Common Agricultural Policy. Proceedings of the sixth international
scientific conference Rural Development 2013: Innovations and Sustainability. Aleksandras
Stulginskis University, Kaunas, Lituanie, 54 – 56.
Terrones Gavira, F., Burny, P., Lebailly, P., 2015. Service public de Wallonie, 2015. Impact et appui
à la mise en oeuvre de la nouvelle réforme de la PAC au niveau wallon. Annexe 1. Impact de la
réforme du premier pilier pour l’agriculture wallonne. 35p.
Worldbank, 2015, GINI index (World Bank estimate),
http://data.worldbank.org/indicator/SI.POV.GINI, 11 November 2015.
135
Entrepreneurship and the state of SMEs in Poland. An example of central Poland
Małgorzata Jabłońska
University of Lodz, Poland, Faculty of Economics and Sociology
Department of Finance and Accounting of SMS
malgorzata.jablonska@uni.lodz.pl
In the literature it meets statement that refers to the enterprise as a fourth factor of production
functioning within the rationalization and the use of innovative solutions conducive to economic
development. On various attempts to define the concept of entrepreneurship the most prominence is
its economic dimension. Entrepreneurship treats itself as one of the factors allowing for more
efficient operation of the human individual or enterprise.
The concept of entrepreneurship is characterized by multi-dimensionality and heterogeneity.

Depending on the purpose of the research concept that is narrowed or generalized. This is mainly due
to the different perspectives on the problem of entrepreneurship on the part of sociologists,
psychologists and economists. Each of the science formulates, therefore the definition of
entrepreneurship, which directly corresponds to the position through it and touches the priority areas
from the point of view of the individual sciences.
The level of entrepreneurship in Poland is relatively high. According to the data

presented by the Polish Agency for Enterprise Development, the rate of entrepreneurship -
defined as the share of adults who have set up their own business or take action in this
direction - amounts to Polish 25%, while the EU average is 23%. In addition, the Polish
economy is the sixth in the EU in terms of number of enterprises. According to Eurostat
data, in Poland there are 1.52 million enterprises and their number is steadily growing. In the
past ten years the number of newly established enterprises was higher than liquidated.
The purpose of this article is to draw attention to the essence of the factors of finance
in the development of entrepreneurship and regions. Financial capital constitutes the entire
free cash that can be spent on new investment magnifying physical capital region and the
funds allocated by the locals for consumption increasing domestic demand. Financial capital
as a factor of regional development and at the same regional entrepreneurship is examined
taking as the criterion the following aspects:
- The financial situation of local governments and enterprises,
- EU funding,
- Incomes of the population,
- The level of investment.
The article analyzed centrally located region of Polish - Lodz province. Lodz province is
centrally located region of the country, confronted with the consequences of the restructuring of
traditional industries in the main cities of the region and with low potential of endogenous
development in rural areas dominated by low-productivity agriculture. The preferred central location
makes the region more attractive foreign investment.
KEYWORDS Entrepreneurship, polish region, finance,
JEL CLASSIFICATION CODES: R11
136
Introduction
The concept of entrepreneurship is characterized by multidimensionality and heterogeneity.

Depending on the purpose of the research this concept is either narrowed or generalized. This is
mainly due to the different views on the problem of entrepreneurship presented by sociologists,
psychologists and economists. Each scientific discipline formulates the definition of
entrepreneurship, which directly corresponds to the its position and touches the priority areas of the
individual disciplines. Economists approach to the issue of of entrepreneurship found its expression
in regional termsbecause it is one of the most important factors of regional development is just a
component of the social capital of the region. In the context of this study entrepreneurship is
understood as the ability to undertake self-employment and to take risks. Entrepreneurship requires
adequate stimulation by creating an environment conducive to the emergence of willingness to take
business experience as then tending to its start and run.
The literature often emphasizes the key role of the SME sector in the economy of the
country, mainly in terms of created GDP. SMEs in Poland account for nearly 99% of all active
enterprises, while their share in the GDP creation is about 50%. It is therefore crucial to promote the
idea of self-employment, but not only because of the large share of SME sector in GDP.
Entrepreneurship of small and medium-sized enterprises has undoubtedly a significant impact on the
development of regions and eventually of the entire economy. The measurable results of the launch
of new enterprises a. o. are: starting new activities, creating new jobs, increased income of the
population, expanding sales markets, use of local resources, growth of the investment attractiveness.
The goal of this paper is to draw attention to the importance of financial factors for the
development of entrepreneurship in the regions. Financial capital is the entire free cash that can be
spent on new investments increasing physical capital of the region, and the funds allocated by the
inhabitants to consumption that increases domestic demand.
Role of SMEs in Polish Economy
Poland has a great potential of entrepreneurship: 590 thousand commercial law companies
and civil law partnerships, and 2.8 million individuals who have registered economic activity. Every
year, more than 300 thousand people begin their adventure with business. 166 firms hourly are
registered in Poland. After three years of operation the half of them still develop successfully. In
2010, the firm achieved an average revenue of 1.9 million PLN (from 0.4 million PLN in micro- to
454.5 million PLN in large enterprises)68. Initiating entrepreneurial behavior is one of the greatest
challenges of modern economies.
The literature often emphasizes the key role of the SME sector in the economy of the
country, mainly in terms of the creation of GDP. SMEs in Poland account for nearly 99% of all
active companies, while their share in GDP is about 50%. It is therefore crucial to promote the idea
of self-employment, but not only because of the large share of SME sector in GDP. Entrepreneurship
of small and medium-sized enterprises has undoubtedly a significant impact on the development of
68
Przedsiębiorcy w Polsce. Raport na temat wkładu przedsiębiorców w rozwój polski, PKPP
Lewiatan, Warszawa 2014 r., p. 9
137
regions and eventually of the whole economy. The measurable results of the launch of new
enterprises a. o. are: the emergence of new types of activity, creation of new jobs, growth of income
of the population, expanding sales markets, the use of local resources, increase of investment
attractiveness69. etc. The most important is the role of small and medium-sized enterprises in
activating local and regional development, which mainly results from their relations with the local
environment and creation of networking relationships. Entrepreneurial climate in the region is also
important as it is the main factor encouraging the population to start new ventures. New ventures
(which mainly SMEs) contribute to the improvement of living conditions of the local community.
Financial Factors as a Key Element for Regional Development
The factors of regional development and entrepreneurship in the region are those elements of
the structure of the territory, which allow operating in the sphere of production, distribution,
circulation and consumption70. The main of them are the internal qualities of entrepreneurs, which
facilitate the decision-making (e.g. experience, age, creativity) but also the economic (financial
infrastructure, market situation, market structure), financial (access to external sources of finance,
social assistance), legal (legal conditions of running business) and social factors (e.g. social
expectations regarding the role of man as the owner of the firm).
Classification of factors proposed by P. Churski refers to the current realities of socio-

economic life in Poland. This taxonomy is derived from the theory of regional development. It can
therefore be assumed that treating them as the determinants of regional entrepreneurship is justified.
These factors include:
Human capital – is the most important type of capital for the contemporary development
process and is created by the part of human resources actively or potentially involved in social and
economic activities in consequence of the possessed knowledge, qualifications and skills. The
aspects of human capital include:
- population situation,
- level of education and access to educational services,
- situation on the labor market.
Physical capital - essentially includes physical goods, mainly in the form of fixed assets
serving as the basis of business activity. Aspects typical for physical capital include in particular:
- natural resources and natural environment.
- technical infrastructure,
- Social infrastructure,
69
Chądzyński M, Przedsiębiorczość, jako czynnik rozwoju sektora MSP w regionach, Wydawnictwo
SGGW, Stowarzyszenie Ekonomistów Rolnictwa i Agrobiznesu, Roczniki Naukowe, tom XI, zeszyt 1,
Warszawa 2009, p. 56.
70
Strzelecki Z., Polityka regionalna, [w;] Gospodarka regionalna i lokalna, red. Strzelecki Z.,
Wydawnictwo PWN, Warszawa 2008, p. 80.
138
- fixed assets of enterprises.
Financial capital is the entire free cash that can be spent on new investments increasing
physical capital of the region and the funds allocated by the locals for consumption that increases
domestic demand. Financial capital as a factor of regional development and regional
entrepreneurship can be analyzed taking as a criterion the following aspects:
- financial situation of local governments and enterprises,
- EU funds,
- income of the population,
- level of investment.
Social capital - is a new category of capital affecting regional development. It consists of

norms, values, social activities and relationships between social groups and thus affects the
development of entrepreneurship and competitiveness of the region. The specificity of this type of
capital makes it difficult to quantify. Social capital should be considered taking into account the
following aspects:
- social activity,
- activities of non-governmental organizations,
- entrepreneurship.
Technological and organizational innovations are considered to be the main factor of

regional development in all models of development. This includes all forms of innovations in the
economy: technical and technological solutions, new organizational, institutional and management
forms. Innovation analysis must take into account a set of aspects:
- innovativeness,
- business environment,
- development of the institutional sphere of market economy,
- structure of the economy.
External flows of people, capital and goods are now considered to be a complementary
factor of the regional development. It builds exogenous activity in the region and promotes the
development of its of endogenous activities. The analysis of this factor is carried out based on the
determining aspects:
- migrations,
- foreign investment,
139
- foreign trade71.
Deserving special attention among these factors are those having a financial nature,
governing the formation of new businesses in terms of their access to capital or stimulating their
development through better access to knowledge, innovation, etc. Financial factors are rarely found
in the literature as a separate group of factors that determines the phenomenon of regional
entrepreneurship. In large part, they are classified as economic factors and were analyzed as such in
previous research on regional entrepreneurship.
Economic state of the Lodz region
The Łódź Voivodship is a region located centrally in the country, confronted with the
consequences of the restructuring of traditional industries in the main cities of the region and the low
potential of endogenous development in rural areas dominated by low-productivity agriculture. The
favorable central location makes the region an increasingly attractive place for foreign investment.
The region, as well as the nearby Mazowieckie, has a dual character: a great city surrounded by
underdeveloped and low-urbanized areas72. Łódź Voivodship generates 6.2% of the Polish GDP,
which places it on a stable 6th position, right after the Voivodships: Mazowieckie (22%), Śląskie
(13%), Wielkopolskie (9%),Dolnośląskie (8%), and Małopolskie (7%)73.
The Łódź Voivodship takes the 9th place in the country in terms of the area and 6th in terms
of population. More than 64% of the population live in cities. The largest and dominant in the region
is the city of Łódź. Nowadays, the largest number of inhabitants in the Łódź region was recorded in
Łódź - approx. 725 thousand, which represented more than 28% of the population living in the
Voivodship.
The city hosts approx. 50% of industrial enterprises, more than 30% of entities of high and
medium-high technology and more than 50% of business environment entities. Compared to other
regions, the Łódź Voivodship is economically relatively well developed. It is also characterized by a
high employment activity rate.
Traditional industries, such as: energy, textile, industry ceramic and construction, furniture
manufacturing, agro-industry, creative industries, medical and pharmaceutical industry; as well as
modern services such as logistics, warehousing and outsourcing, are developing in the region.
Preferential conditions for doing business in the region have been created, a. o. in two Special
Economic Zones: Łódź Special Economic Zone, and Starachowice Special Economic Zone. The
advantage of the Voivodship is its location at the intersection of two of the four pan-European
transport corridors and the planned creation of the Central Traffic Junction.
71
Churski P., Czynniki rozwoju regionalnego i polityka regionalna w Polsce w okresie integracji z
Unią Europejską, Wydawnictwo Naukowe UAM, Poznań 2008, p. 67-72
72
Gorzelak G., i inni, Propozycje możliwych kierunków działań rządu w poszczególnych regionach, w
tym określenie potencjałów rozwojowych województw, Ministerstwo Rozwoju Regionalnego,
Warszawa 2010, p. 111.
73
Analiza sytuacji społeczno-gospodarczej województwa Łódzkiego, Departament Polityki
Regionalnej Urząd Marszałkowski Województwa Łódzkiego, Łódź 2010, p. 32.
140
The Economic Potential and Entrepreneurship of the Lodz Region
The Łódź Voivodship is associated mainly with the dynamically developing textile industry,
which was flourishing in the first half of the nineteenth century. The dominant role of the industry
determined the development of the region, its industrial specialization and at the same time caused its
economic monoculture. The changes of the political system unlocked entrepreneurial attitudes
among inhabitants, which has been reflected in an increase in the number of small and medium-sized
enterprises since the early 90s of the 20th century. They were often developing based on the bankrupt
large textile enterprises74. The consequence of unfavorable conditions for the development of the
region is weakening the dynamics of its development, resulting in an outflow of people to other
major cities, especially to the nearby Warsaw. This phenomenon is unfavorable for the region mainly
because it concentrates highly skilled workers and professionals educated in universities located in
Łódź. The advantage of the region lies in considerable lignite resources, so that the region has a
surplus of cheap electricity - very large reserves of thermal waters, which can be the basis for the
development of renewable energy and for the development of spa functions of the region.
The potential of the region lies in its central position, both in Poland and among the regions
of Central and Eastern Europe. Opportunities for the region can result from foreign direct
investment, which give an opportunity to locate modern services and new industries in the Łódź
Voivodship. Large enterprises deciding to make investments in the Łódź region can choose between
two basic scenarios. They can make investments in the technology park and they can also invest in
the special economic zone.
Table: The dynamics of GDP per capita in the Łódź region, 2010-2012
Voivodship GDP per capita
2010 2011 2012
Poland 101,7
103,6 104,7 101,7
Łódź 104,4 105,0 102,3
Source: Own calculations based on Local Data Bank.
Łódź Voivodship is not as rich as Mazowieckie and Warsaw, but the distance between the
Voivodship and Europe is steadily decreasing. The Łódź region is characterized by a medium level
of economic development. This is evidenced by the level of GDP, which is growing faster than the
national average. Three-quarters of GDP in the region is created in the business sector and one-third
in the public sector. The industry of the Voivodship is characterized by still relatively low level of
competitiveness, productivity and innovativeness, resulting from the significant share of textile and
clothing industry and other sectors generating low added value and from the dominance of low
innovation level micro, small and medium-sized enterprises. An important role in the economy of the
74
Sokołowicz M., E., Region wobec procesów globalizacji – terytorializacja przedsiębiorstw
międzynarodowych (na przykładzie regionu łódzkiego), Wydawnictwo Uniwersytetu Łódzkiego, Łódź
2008, p. 72.
141
region is played by traditional industries such as textile industry, food industry based on agricultural
resources of the region as well as ceramics and building materials growing on the basis of the
resource base existing in the region75. The economy of the region is dominated by industries with
low added value, so even though the people employed here account for more than 8% of the total
industrial employment in Poland, they produce only 5 to 7% of industrial production of the country.
Table: Output per 1,000 inhabitants in 2010-2012
Voivodship Output per 1000 inhabitants
2010 2011 2012
Poland 76,4 84,6 86,5
Łódź 66,4 73,9 76,2
Source: Own calculations based on BDL.
According to the CSO data there still have been development gaps between the Polish
Voivodships for the last five years, Most of new companies have been registered in the Mazowieckie
Voivodship. This is due to the fact that many firms see an opportunity to market their products and
services in the capital city, a. o. because of its high population density. The data on the very City of
Warsaw, however, distort the image of the entire Voivodship and it has therefore the highest
development rates and the lowest unemployment rates in the country. The lowest level of
entrepreneurship is observed in the Opolskie Voivodship and the regions located on the eastern
border.
An important segment of the region's economy is the agricultural sector. In 2012 the Łódź
region produced 8.2% of Polish gross agricultural output and 8.3% of production of commodities.
The region is an important producer of fruit and vegetables and livestock. The production of grain in
2012 was 32.6% higher than in the previous year, while the production of animals for slaughter
remained at the level of 2011. Potato crops in the Łódź region in 2012 accounted for 12.6% of the
national production, which gave the region the first place in the country. The Łódź Voivodship has a
small share in Polish export (3.1%) - compared to 6.2% share in the Polish GDP and 6.6% share in
the population of our country. Therefore, the economic crisis in the European Union, which is the
main market for export of Polish goods was not so harmful for the Łódź region. So we can conclude
that the branch structure of industry, with a predominance of traditional industries and a relatively
small share of the Łódź region in foreign trade saved the economy of the region from the effects of
the crisis in Europe and the economic slowdown in Poland. The industry in the voivodship was
strongly restructured in the recent years (visible a. o. in the increase of the share of: printing industry,
production of building materials, environmental protection devices, household appliances and
packaging, insulation, soft drinks, ceramic tiles, food processing and furniture industry). The textile
75
Research on potential and specialization of Polish regions – synthesis. Łódź Voivodship. Report
co-financed by the European Union within the European Social Fund. Research within the project:
„Wdrożenie systemu monitorowania polityk publicznych w województwie łódzkim” (POKL.05.02.01-
00-011/13), Nowakowska A. et al., Łódź 2013, p . 9.
142
industry, which for a long time the region was famous for, lost some of its importance, although it
still plays an important role in shaping the labor market. The situation of this industry is linked to
international competition, mainly from the Far East markets. Traditional industries still play the most
important role in the region - hence a great importance of implementation of innovative techniques
and technologies in the economy. The level of innovation in the Łódź region is low. The region is
among the weakest in Europe in this respect76. Less than 15% of companies operating in the region
conduct innovative activities (14.2% of production firms, 10.7% of service firms). The largest share
among the most innovative firms is represented by large enterprises (56%), the share of medium-
sized ones is approx. 28%, small firms - 7%. Low level of innovative activity of enterprises applies
to any type of innovation, i.e. product, process, organizational and marketing innovations.
Companies primarily implement innovations aiming at modernization of the existing production
processes and at increasing productivity77.
The positive effects of entrepreneurship in the region include:
 high level of public sector investment, along with high growth rate in the years 2004
- 2011 (by 88.6%),
 high level of entrepreneurship in Łódź and in the central counties,
 high attractiveness for investors of the Łódź Special Economic Zone, which has
become in recent years one of the most dynamically developing economic areas in Poland
and in the world.
Conclusion
There are the sources in the literature that refer to the entrepreneurship as the fourth factor of
production functioning within rationalization and the use of innovative solutions conducive to
economic development. The various attempts to define the concept of entrepreneurship most often
highlight its economic dimension. Entrepreneurship is therefore treated as one of the factors allowing
for more efficient operation by individuals or enterprises.
The level of entrepreneurship in Poland is relatively high. According to the data presented
by the Polish Agency for Enterprise Development (PARP), the rate of entrepreneurship - defined as
the share of adults who have set up their own business or take actions in this direction - amounts to
25% in Poland, while the EU average is 23%. Moreover, Poland's economy takes the sixth place in
the EU in terms of the number of enterprises. According to Eurostat there are 1.52 million enterprises
in Poland and their number is steadily growing. In the past ten years, the number of newly
established enterprises was higher than the number of closed businesses. Financial capital as a factor
of regional development and of regional entrepreneurship is analyzed taking as a criterion the
following aspects:
- financial situation of local governments and enterprises,
76
Świerkocki J., Fundusze strukturalne jako czynnik rozwoju gospodarczego w województwie
łódzkim [w:] red. Świerkocki J., Rola funduszy strukturalnych Unii Europejskiej w rozwoju kapitału
ludzkiego i społecznego w regionie łódzkim, Wydawnictwo Uniwersytetu Łódzkiego, Łódź 2012, p.
366.
77
Regionalna Strategia Innowacji dla województwa Łódzkiego – LORIS 2030, Deloitte Business
Consulting S.A., ŁARR, Łódź, p. 15.
143
- EU funds,
- incomes of the population,
- level of investment.
The paper analyzed the Łódź Voivodship - a region located centrally in the country,
confronted with the consequences of the restructuring of traditional industries in the main cities of
the region and the low potential of endogenous development in rural areas dominated by low-
productivity agriculture. The favorable central location makes the region an increasingly attractive
place for foreign investment. The region, as well as the nearby Mazowieckie, has a dual character: a
great city surrounded by underdeveloped and low-urbanized areas. Łódź Voivodship produces 6.2%
of the Polish GDP, which places it on a stable 6th position right after the Voivodships: Mazowieckie
(22%), Śląskie (13%), Wielkopolskie (9%), Dolnośląskie (8%) and Małopolskie (7%).
References
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Urząd Marszałkowski Województwa Łódzkiego, Łódź 2010.
Bank Danych Lokalnych
Chądzyński M, Przedsiębiorczość, jako czynnik rozwoju sektora MSP w regionach, Wydawnictwo
SGGW, Stowarzyszenie Ekonomistów Rolnictwa i Agrobiznesu, Roczniki Naukowe, tom XI, zeszyt
1, Warszawa 2009.
Churski P., Czynniki rozwoju regionalnego i polityka regionalna w Polsce w okresie integracji z
Unią Europejską, Wydawnictwo Naukowe UAM, Poznań 2008.
Gorzelak G. et al, Propozycje możliwych kierunków działań rządu w poszczególnych regionach, w

tym określenie potencjałów rozwojowych województw, Ministerstwo Rozwoju Regionalnego,
Warszawa 2010.
OECD Review of SME and Entrepreneurship Issues and Policies at National and Local Levels in
Poland, Report on the Local Dimension, OECD.
Przedsiębiorcy w Polsce. Raport na temat wkładu przedsiębiorców w rozwój polski, PKPP Lewiatan,
Warszawa 2014.
Regionalna Strategia Innowacji dla województwa Łódzkiego – LORIS 2030, Deloitte Business
Consulting S.A., ŁARR, Łódź.
Sokołowicz M., E., Region wobec procesów globalizacji – terytorializacja przedsiębiorstw

międzynarodowych (na przykładzie regionu łódzkiego), Wydawnictwo Uniwersytetu Łódzkiego,
Łódź 2008.
Strzelecki Z., Polityka regionalna, [w;] Gospodarka regionalna i lokalna, red. Strzelecki Z.,
Wydawnictwo PWN, Warszawa 2008.
Świerkocki J., Fundusze strukturalne jako czynnik rozwoju gospodarczego w województwie łódzkim
[w:] red. Świerkocki J., Rola funduszy strukturalnych Unii Europejskiej w rozwoju kapitału
ludzkiego i społecznego w regionie łódzkim, Wydawnictwo Uniwersytetu Łódzkiego, Łódź 2012.
144
Fourth Anti-Money Laundering Directive – New Requirements and Challenges for

Bulgarian Accountants and Auditors
A.Filipova-Slancheva
Sofia, Bulgaria
E-mail: nasiafilipova@gmail.com
Abstract
This study assessed anti-money laundering requirements and the expected impact of the new EU Directive
- Fourth Anti-Money Laundering Directive for Bulgarian accountants and auditors. The Directive
was approved by European Parliament on 20/05/2015, and tightens the rules for EU Member States
in respect of anti-money laundering and aligned them with international framework. With the new
framework, money laundering and terrorist financing countering is reaching new heights. Hence
involvement and role of certain professional groups – accountants, auditors expands and challenges their
routine activities and professional practice.
Due to the role of their professional activity, accountants and auditors play crucial role in the fight
against illegal activities, including also money laundering and terrorist financing.
In order to investigate the current status of the applied anti-money laundering practices, 10 members of the
Institute of Public Accountants (randomly selected) plus 10 members of Association of the Professional
Accounting Companies (randomly selected) are examined. The purpose of the research was to enclose their
internal procedures, alignment with the requirements of LMML and LMMF and expected challenges
stemming from the new Anti-Money Laundering Directive.
General conclusion was that the activity of accountants and auditors in Bulgaria is strictly regulated by
Accountancy Law, Independent Financial Audit Law, as with respect of money-laundering and financing of
terrorism Law on the Measures against Money Laundering (LMML) and Law on Measures against Financing
of Terrorism (LMMF) are introduced and applied. In terms of legal framework, Bulgaria has transposed most
of the EU-wide regulatory requirements in its national legal framework. Respective Associations has also
issued certain ethic codes, where illegal activities are carefully treated - The Code of Ethics for Professional
Accountants, applicable to all members of Institute of Public Accountants.
The analysis let to the insights that auditors are applying provisions from the respective Laws, internal
procedures are in place. Here the Institute of Public Accountants contributes with guidelines, policies for
risk mitigation, just to mention the few. In respect of accountants, the research shows that processes are not
streamlined, involvement of the Association needs improvement. New legislative requirements (risk
management, prediction of offences, due diligence beneficial ownership) will impose serious challenges for
the sector, as dedicated involvement of all parties is needed.
KEYWORDS: New anti-money laundering Directive, accountants, auditors, challanges
JEL CLASSIFICATION CODES: M4 Accounting and Auditing
145
I. INTRODUCTION – MONEY LAUNDERING
Money laundering may be defined as an approach to hide the criminal origin of the money by
entering the money into the financial system, hence legitimating them and tearing the connection with
illegal actions (Reuter and Truman, 2004). Schneider (2004) argues that there are three primary aims
of money laundering, which summarized could be defined as spending illegally obtained money
in the official, legitimate economy, while hiding all traces of illegal activities.
The process of money laundering is accepted to be split into three steps (Reuter and Truman, 2004;
Masciandro et al., 2007; Schneider, 2004). First step is defined as “placement”, i.e grey money
enter the financial system, usually moved into bank accounts (Schneider, 2004). The second
step in the process is “layering” - erasing the illegal origin of laundered money. The third step in
the process is “integration”, which means that the money will be integrated back into the legal
financial system.
The Financial Action Task Force (FATF), which is an inter-governmental standard-setting body in
the fight against money laundering, argues that “successful money laundering damages the
integrity of the entire society and undermines democracy and the rule of the law” (FATF,
2014). Money laundering is feeding the continuance of criminal activities (FATF, 2014; FI,
2013b).
In Bulgaria, as is believed to be valid for most countries around the world, money laundering
is more than extensive. It is worth mentioning that the magnitude is difficult, if not impossible, to be
determined (FATF, 2014).
There are very few studies on money laundering and the expected prevention role of the auditor,
especially in Bulgarian contexts.The lack of contemporary relevant studies might perhaps be
explained by the fact that the auditor's role in this context not always has been obvious, or that it is
not distinguished in relation to other occupational groups with reporting obligations.
Having said that and the fact that money launders are becoming ever more “innovative” and
sophisticated, new legislative approach is required. As summarized by Ringh and Sultani (2014),
recruitment of a third party, with capacity and opportunity to detect and report crime and act as a
preventive force, is an option. The auditor of a company may be that third party. Auditing means
verification and giving credibility to the financial information provided by the company (Abel and
Gerson, 2001; Audit Quality Forum, 2005; Grumet, 2006). Respectively, having in mind
auditor`s insight into company business, their role in combating economic crime as stated by the
Economic Crime Bureau, is of a paramount importance. This is valid both in terms of prevention and
the notification thereof (EBM, 2004).
On the other hand, as summarized by various authors expectation gap for auditors exist and
certainty for tracing activities, inventively hidden or not impacting the audited financial statements
(Clarke, 1990; Melnik 2003). In this respect, He (2012) proposes auditor to report to self-regulatory
body as a solution for the dilemma of losing client in case reporting suspicions of money laundering
to the authorities.
II. EU ANTI-MONEY LAUNDERING LEGAL FRAMEWORK
EU legal framework in respect of money laundering and terrorist financing is to a large extent based
on international standards adopted by the Financial Action Task Force (FATF) (http://www.fatf-
146
gafi.org/about/ ). The Financial Action Task Force (FATF) is an inter-governmental body established
in 1989. FATF set standards and promote effective implementation of legal, regulatory and
operational measures for combating money laundering, terrorist financing.
EU has developed its framework throughout the last decades, as rules and scope have evolved
and expanded, targeting, all possible loopholes. The first elements put in place through the adoption
of Council Directive 91/308/EEC of 10 June 1991. The Second Anti Money Laundering Directive
(2001/97/EC) additionally extend the scope.
Currently, Directive 2005/60/EC on the prevention of the use of the financial system for the
purpose of money laundering and terrorist financing (Third AMLD) is applied. The Directive
aims at protecting the soundness, integrity and stability of the financial system, against the risks
of money laundering (ML) and terrorist financing (TF).
On 5 June 2015, the Fourth European Union Anti-Money Laundering Directive (Directive EU
2015/849) was published in the Official Journal of the EU. The new Directive extends and replace
the applicable currently Third Anti-Money Laundering Directive (2005/60/EC). All member states
are obliged to transpose it into national law by 26 June 2017. Drivers for the development of the
new Directive are revision of FATF Recommendations in 2012, EC report on Third Anti-Money
Laundering Directive also published in 2012.
In order to strengthen member states abilities to counter money laundering and terrorist financing
and improve consistency, the new Directive introduces several important changes:
Introduction of an Ultimate Beneficial Owner (UBO) register – accurate, relevant
information on beneficial ownership of all entities falling under the respective
national jurisdiction. Purpose – enhanced transparency;
Risk-Based Approach – mechanism to identify and minimize the risks

associated with money laundering and terrorist financing;
Customer Due Diligence Scope – the scope of CDD is enlarged compared to Third
Directive in respect of circumstances which enforce CDD;
Politically Exposed Persons (PEPs) – clarified definition and enhanced list of
categories of individuals, who could be treated as PEPs. Members of governing bodies
of political parties, directors, deputy directors, board members of international
organizations are included in the list
Third Party Reliance – all obliged entities are allowed to leverage on third party
compliance capabilities for CDD requirements
Enforcement – detailed provisions on forms of sanctions and minimum
measures
III. BULGARIAN LEGAL FRAMEWORK, PARTICIPANTS AND ROLES
Bulgarian regime on prevention of money laundering is based on EU legislation and the money
laundering directives adopted within the EU. EU directives on money laundering sets a framework
by which the member states jointly can take action against money laundering, since money
laundering is stated to often be carried out on an international level, meaning that the measures
taken on a national level will have limited effects (EBM, 2004).
147
Law on the Measures against Money Laundering (LMML), which has been amended several
times since 1998, comprises the legal framework insofar. LMML is supplemented by Rules on
Implementation Law on the Measures against Money Laundering (RILMML).
General customers due diligence (CDD) obligations are also applicable to designated non-financial
businesses and professions, besides financial institutions.
Article 16 of LMML and Article 17 of RILMML require obliged entities to adopt internal rules for
control and prevention on money laundering.
On 5th of February 2003, National Assembly adopted the Law on Measures against Financing of
Terrorism (LMMF). Aim of the Law is prevention and disclosure of the actions of natural persons,
legal entities, groups and organizations aimed at financing of terrorism.
LMML covers various designated non-financial businesses and professions (DNFBP)
(privatizations bodies; public notaries; political parties; sports organizations; dealers in arms, petrol
and petroleum products; leasing enterprises; collective investment undertakings, investment
intermediaries and management companies; pension insurance companies; trade unions and
professional organizations; non-profit legal entities;private bailiffs, among others) chartered auditors.
Obligations for DNFBP are equal to financial institutions in respect of customer identification,
beneficial owner, keep records, notify State Agency for National Security for any suspicious
activities; develop internal procedures and responsible units for AML/CFT. LMML and RILMML
provide extensive coverage and legal framework, which incorporates FATF requirements and even
exceed them.
State Agency for National Security (http://www.dans.bg/en/msip-091209-menu-en) plays a
crucial role in the process of anti-money laundering. There is a specialized administrative
directorate for financial intelligence within its structure. The Financial Intelligence Directorate
(FID) collects, stores, investigates, analyzes and discloses financial intelligence under the terms
andprocedures of the LMML and LMFT. FID collaborates with FATF (Financial Action Task Force)
and MONEYVAL (Committee of Experts on the Evaluation of Anti-Money Laundering Measures and
the Financing of Terrorism). MONEYVAL
(http://www.coe.int/t/dghl/monitoring/moneyval/About/MONEYVAL_in_brief_en.asp) was
established in 1997, as an organization developing measures within member states of the Council of
Europe against money laundering and financing of terrorism; evaluating and recommending in order
achieving effective systems.
Legal basis for the audit activity in Bulgaria is carried out under state and professional
regulation. In force are the following laws:
Accountancy Act
Independent Financial Auditing Act
Since 2008, Independent Financial Audit Act has been harmonized with the EU Directive
2006/43/EC of the European Parliament and the Council on statutory audits of annual accounts and
consolidated accounts. Only statuary auditors have the right to perform statutory audits of financial
statements.
Professional standards include:
International Accounting Standards - IFRS and ISA
National Accounting Standards for the Financial Statements of Small and Medium-
sized Enterprises
148
International Auditing Standards

Code of Ethics of the Professional Accountants
Art 3 of Independent Financial Auditing Act stipulates that “the independent financial audit is
performed by statutory auditors, members of the Institute of Certified Public Accountants.
In terms of accounting in Bulgaria, governing is done by the Accountancy Act, which is developed
on the basis of the Fourth Directive of the Council of the EU. Hence, harmonizing the country’s
statutory accounting legislation with the European Union one. Apart from auditing, accounting
profession remains fragmented, which leads to low institutional capacity, as summarized by
World Banks in its report on the Observance of Standards and Codes. There are four accounting
associations: - two for individuals Institute of Professional Accountants in Bulgaria with, estimated to
have 100 members; Union of Accountants with appr. 500 members and two for accounting firms -
Association of Professional Accounting Companies with 65 members (http://www.apac-
bg.org/index.php?page=10); Association of Accounting Offices, estimated to have more than
20 members. None of the associations operates a certification program or performs other
functions ordinarily
IV. RESEARCH
In order to investigate the current status of anti-money laundering and auditors` and accountants`
role, a survey was conducted in August and September 2015. An approach defined by Saunders et al.
(2009) for simple random sampling was followed. Sample size is based on the number of registered
auditors/auditing enterprises and accountants as sample size is determined at 10 members for
accounting association, and 10 auditors plus 10 auditing enterprises, twenty altogether for auditing
activity. Lists are obtained from web sites of the Association – IPAC and APAC. In the next stage,
selected members are approached and structured questionnaire was sent, with 5 simple
questions - internal procedures; alignment with the requirements of LMML and LMMF; expected
challenges stemming from the new Anti-Money Laundering Directive; support by Association in
terms of guidelines, drafts, etc. Yes/no questions – The respondent answers with a “yes” or a “no”.
V. FINDINGS FROM THE SURVEY
The Institute of Certified Public Accountants (ICPA)

(http://ides.bg/en/Institution/InstitutionItem.aspx?NewsItem=66e02721-e485-4100-bc9e-
322c296aae0d&pg=1) is a single professional organization for all Certified Public Accountants in
Bulgaria. ICPA is an independent, professional organization, headquartered in Sofia, with 12 regional
organizations (4 based in Sofia and 8 countrywide). Currently, as of Sep. 15, members of ICPA are
791 registered auditors and 158 members registered specialized auditing enterprises. Independent
Financial Audit Act regulates the activity of the Institute. All certified public accountants are licensed
post exam pass, with register held in ICPA. It is worth mentioning that among other
149
activities, the Institute develops audit methodology and techniques for support and regulation of
the profession.
ICPA is a full member of Federation of European Certified Public Accountants (FEE) since 2006
and member of International Federation of Accountants (IFAC) since 1995. ICPA, as a member
of IFAC, has accepted Code of Ethics as developed by the International Ethics Standards Board for
Accountants (IESBA). IEASBA (http://www.ethicsboard.org/about-iesba ) is an independent
standard-setting organization, which develops high-quality ethical standards for professional
accountants worldwide.
Association of the Professional Accounting Companies (APAC) is established in 2003. Association

is based in Sofia and is a voluntary non-governmental sectoral organization. Members
include specialized accounting and auditing companies, companies offering financial, tax and
accounting consultations. Association provides some form of guidelines, imitate legal and
regulatory amendments, organize seminars.
VI. CONCLUSION AND RECOMMENDATION
The aim of this research is to investigate the current status of the applied anti- money
laundering practices in Bulgaria. Investigation was conducted from three perspectives, which are as
follows:
Legal perspective;
Major participants with their role;

Auditors and accountants responsibilities and requirements.
Bulgaria has transposed most of the EU-wide regulatory requirements in its national legal
framework. In respect of money laundering and terrorist financing two laws are in place - Law
on the Measures against Money Laundering (LMML) and Law on Measures against Financing of
Terrorism (LMMF). It can be concluded that both laws are stricter than FATF standards.
Accountants and auditors` activity in Bulgaria is strictly regulated by

Accountancy Law, Independent Financial Audit Law. Auditors are applying provisions from the
respective Laws, internal procedures are in place. Professional associations play crucial role in the
process of legal compliance. Respective Association has also issued certain ethic codes, where
illegal activities are carefully treated - The Code of Ethics for Professional Accountants, applicable
to all members of Institute of Public Accountants. The Institute of Public Accountants contributes
with guidelines, policies for risk mitigation, just to mention the few. For the professional activities
of accountants, various associations exist, which fragment it and leads to low institutional
capacity. In the report, Association of the Professional Accounting Companies is selected, as one of
the most involved and representative one. It can be concluded that APAC has taken some initial steps
150
in respect of legal compliance, guidelines for anti-money laundering and terrorist financing, but more
active role, with involvement of all other associations is needed.
General conclusion is that new legislative requirements (risk management, prediction of

offences, due diligence beneficial ownership) will impose serious challenges for accountants and
auditors. Expectations are Association to play even bigger role, provide comprehensive and holistic
guidelines. It is worth mentioning also, that careful and precise addressing of expectation gap is
needed, because these professions are under conflict of interest situation and might lose clients.
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Laundering. Washington DC: Institute for International Economics
Saunders, M., Lewis, P. and Thornhill, A. (2009) Research Methods for Business Students.
5th Ed. Edinburgh: Pearson Education Limited
Schneider, S. (2004) Organized Crime, Money Laundering and the Real Estate Market in
Canada. Journal of Property Research. 21(2), pp. 99-118
The Audit Quality Forum (2005) Agency Theory and the Role of Audit. London: Institute of
Chartered Accountants
152
APPENDICES
Appendix 1: Interview Questions

Introduce question: Can you, please, present you/your organization, your position?
Question Yes/No Answer

1. Have you established internal procedures in respect of
anti-money laundering and terrorist financing countering?
2. How do you or your organization align with the
requirements of LMML and LMMF?

3. Have you reviewed the new Anti-Money Laundering
Directive?
4. Do you expect challenges stemming from the new
Anti-Money Laundering Directive?

5. Do you/your organization, as a member of
professional association, receive support by the association
in terms of AML guidelines, procedure
drafts, etc?
153
The relationship between the declared income and gross domestic product: A key factor
in identifying tax evasion in the Greek economy.
Lazos Grigorios, Maroudas Theodoros

Greek Ministry of Finance, Dioikitirio, 54 123 Thessaloniki Greece
glazos1@yahoo.gr
Abstract
It is a fact that the tax compliance is a crucial factor for achieving the goals of the state budget. Especially in a
national economy like that of Greece, with acute financial problems nowadays, the above mentioned fact makes
particularly urgent the adequate fight of tax evasion. Under this point of view, the tax administrations of
economically developed countries – and the Greek tax authorities in recent years - have implemented risk
analysis methods to enhance detection of divergent tax behavior. The present study attempts to contribute
towards this direction by exploring Greek economic reality and the relation, by administrative region, between:
the declared taxable income and the relevant tax income, as they are depicted in the submitted income tax
returns of individuals taxpayers in the available tax statistics of the Greek Ministry of Finance, and the gross
domestic product based on the data of the Greek statistical authority of the respective period. The analysis of
these elements results in useful conclusions which can be integrated into a general plan of targeted tax audits,
after completion of the risk analysis, in order to reduce tax evasion.
Keywords: Tax evasion, Income, Gross domestic product.
JEL Classification Codes: Η24, Η26
1. Introduction
Limited tax compliance undoubtedly constitutes a perpetual and particularly important problem for
national economies. The consequences of the width of tax noncompliance on the public finances
fundamentals are numerous and particularly determinant for the overall development of economy. Tax
noncompliance results in the deficiency of Public Revenues, which in its turn, leads to the restriction
of social benefits destined for the citizens, while it sets off the effort to attain the objectives of
implementing the state budget. In parallel, this phenomenon distorts the exercise of economic policy
as well as the implementation of its set objectives. Furthermore, tax noncompliance has direct
consequences in the distribution of tax burden between consistent and honest taxpayers and those who
evade taxes, thus causing additional tax burden on the former. The loss of tax income due to tax
evasion may result in the imposition of supplementary taxes on declared income in order to
compensate for these losses (Andreoni et al., 1998). Particularly, in an economy such as the Greek
economy, which is characterized by long lasting pathogenies, the restriction of extended tax evasion
apparently becomes an imperative need within the aim of affronting the chronic budgetary deficits, as
well as of liberating all those healthy productive powers from unfair competition in order to render
them helpful in the resurrection of National economy.
2. Theoretical framework
The strategy of dealing with tax noncompliance comprises different strategies, the most prevalent of
which focus on the increase of the number of the tax audits conducted, the expansion of the width of
the tax audit process, the establishment of stricter administrative and penal sanctions for the
commitment of tax violations etc. (Alm and McKee, 2006).
154
Sanctions and penalties for tax deviations in Greece are strict, unjustifiably strict in certain cases and
by principle they initially impede tax evasion. Nevertheless, the greater problem posed is that the
possibility of revealing tax evasion and then imposing the respective penalty is close to none, due to
the inadequacy of the competent authorities, the conduct of few and inefficient tax audits, but also due
to the complicated nature of the tax legislature, which consists the operative event for opaque
practices. Therefore, this possibility, of detecting tax evasion and then imposing the respective
penalty, should be increased with every possible means (Bank of Greece, 2010).
Tax compliance, as it is demonstrated by the review of the international bibliography is directly

dependent on available income, the level of economic development, the level of social ethics, diverse
demographic factors, the educational level, the legal framework etc. Granted that the specific
determining factors vary per geographical region, it is consequently concluded that geographical
region constitutes yet another indicator for the volume of tax compliance.
By implementing the specific premise on state level, (Friedland et al. 1978) have supported that tax
evasion in Mediterranean countries is more acceptable than in Anglo-Saxon ones. Likewise, the
countries of the European South present the lowest indicators of tax compliance in Europe, even
though they have made significant efforts to reinforce the latter via the increased imposition of the tax
system (Jackson and Milliron, 1986). It is manifest from the specific observations that Greece
constitutes part of a wider geographical region, where tax noncompliance remains at high levels.
In the study of Matsaganis and Flevotomou (2010), which is unique in examining the parameter of
geographical region and its correlation to the tax compliance of individual taxpayers in Greece, it has
been observed that the submission of dishonest tax declarations is mainly located in southern Greece,
where a percentage of 16% of the submitted tax declarations are dishonest. Furthermore, the respective
percentage for the city of Athens is less than 6%. This event has been justified by the former
researchers and attributed to the concentration of public services and public employees in Athens, as
well as to the dissemination of incomes deriving from activities pertaining to the sector of
constructions and tourism to the other regions. Moreover, according to Artavanis et al. (2012) tax
evasion in Greece spreads without discrimination over all geographical regions of the country. The
particularly high volume of tax evasion in a big city of central Greece, which has even been reported
in a publication of the prominent economic journal Financial Times in 2011, makes a strong
impression, following the aforementioned research findings. The specific city has been reported in the
FT publication as the city with the greatest number of luxurious big-engine cars of a certain brand and
type in Europe, while, in parallel, this city was flowingly accepting grants and transfers from the
European Commission.
Tax administration authorities in defining their plan of action and in recently using the principles of
risk management and analysis (Freedman et al., 2009) try to locate and evaluate those criteria which
could be included in the process of selection of the tax cases under audit. According to the Ministry of
Finance of India (2008), within the aim of defining and assessing the risk of tax noncompliance, a
wide array of economic information should be compiled, on the basis of a relational data basis. The
Greek tax administration has recently, in 2010, adopted the use of risk assessment methods, in order to
organize the selection of tax cases to be audited.
On the grounds of the aforementioned it is concluded that the detection of the deviation between the
declared income of taxpayers and the gross domestic product per geographical region in Greece could
guide in a substantial manner the endeavors of the Greek tax administration for the limitation of
excessive tax evasion. The specific parameter could be assessed either per se or included in the context
of general assessment of risk factors on the basis of risk management and risk analysis.
3. Research methodology
The present research has been focused on income taxation of individual taxpayers. The research
question posed pertains to the possibility of a remarkable existing deviation, per geographical region
in Greece, between declared income of individual taxpayers and gross domestic product. Thus
according to the hypothesis set in the research, if a sufficient correlation between the two
155
aforementioned volumes is not present in any of the administrative regions, then tax administration
authorities should set tax audit as a priority in the specific regions.
Within the aim of attaining the research objectives, tax data have been drawn from the annual sheets of
tax data, as published from 2001 to 2010 by the Greek Ministry of Finance. It is to be noted that since
2011 and on, no further data sheets have been published by the Ministry of Finance. Specifically,
declared incomes, as submitted by the taxpayers in their tax declarations for the respective years, have
been drawn from the years 2001 to 2010 per geographical region. It is to be noted that the present
study has not taken into account tax exempted incomes or incomes that have been independently taxed
(e.g. as the interests on deposits).
Furthermore, data pertaining to the gross domestic product per geographical region and for the same
period of time (2001-2010) have been drawn from the Hellenic Statistical Authority (EL.STAT). As it
is known the Gross Domestic Product (GDP) constitutes the sum of all the final goods and services
that an economy annually produces, as expressed in terms of money. The GDP is calculated by the
Hellenic Statistical Authority by three alternative methods that lead to the same result: a. by the
income method, b. by the production method and c. by the expenditure method. The Gross Domestic
Product is expressed as follows:
GDP = C + I + G + NX, where:
(C) Consumption,
(Ι) Investment,
(G) Public expenditure for buying goods and services,
(ΝΧ) Net exports (exports minus imports)
It is equally to be noted that all the aforementioned volumes (declared incomes and GDP) have been
deflated by their reduction to fixed values on the basis of the GDP of the year under study.
Additionally, within the aim of clarifying the relevance between the two variables (declared incomes
and GDP) the correlation coefficient Pearson r has been used. The correlation coefficient r gives a
measure of the volume of correlation between the two variables. The correlation coefficient r between
X and Y is given by the measure:

 (x i  x )( y i  y )
r( X ,Y )  r  i 1
 
 ( xi  x ) 2 
i 1
(y
i 1
i  y) 2
It acquires values in the closed space between -1 to 1. Especially if 0 < r < 1 then variables X and Y
are positively linearly correlated. If -1 < r < 0 then variables X and Y are negatively linearly
correlated. In case that r = 1 then the two variables present a perfect positive linear correlation, while if
r = -1 then there is a perfect negative linear correlation. If, finally r = 0 then there is no linear
correlation between the variables X and U (linearly uncorrelated).
4. Research Findings
By analyzing the correlation between the declared incomes and the GDP a significant degree of
differentiation per administrative region emerges. Specifically, the correlation coefficient Pearson r in
the 13 administrative regions ranged to a great width, with values from 0,17 to 0,98. More
156
analytically, the correlation coefficient in decreasing classification, per administrative region, along
with the assessment of the correlation between the variables on the basis of the coefficient’s value is
presented in the table given below:
Table 1: Correlation coefficient per administrative region between declared incomes and GDP
Assessment of the Correlation

Administrative Region Correlation coefficient r
coefficient r
1 0.98 Very strong correlation
4 0.77 Strong correlation
7 0.55 Moderate correlation
10 0.39 Weak correlation
13 0.17 No correlation
By analyzing the data presented in the aforementioned table it is demonstrated that:
a. In those regions where the correlation coefficient r is higher than the value 0.60 (strong-very
strong correlation) there are initially no indications of increased tax evasion.
b. In those regions where the correlation coefficient r is ranges from null to the value 0.60 (no,
weak or moderate correlation) there are indications of increased tax invasion and thus the tax
administrations should indicatively (by sampling) focus on tax audit in relation to other
criteria of risk analysis.
It is even more worth mentioning that there is a very strong correlation, of the value of 0.98, in the
region of Attica, fact which demonstrates that there are initially no indications of tax avoidance and
evasion of taxed incomes from the taxpayers involved in the given region. The specific finding is close
to the observation made by Matsaganis and Flevotomou (2010), as the latter, in the context of their
respective research, depicted a relatively low percentage of tax evasion in the city of Athens.
This event is most probably due to the comparatively greater number of wage earner in the city of
Athens, in comparison to other regions of Greece, due to the concentration observed (great number of
public authorities, big companies etc.) and the low margins of tax evasion permissible for this category
of taxpayers as compared to other categories of the latter. Moreover, according to Kamdar (1995) the
American tax service IRS holds the belief that tax noncompliance is more characteristic of taxpayers
with incomes deriving from enterprises, agricultural activities, as well as of self-employed taxpayers
157
who have the possibility to avoid taxes and hide incomes by declaring artificially overstated
expenditure thus decreasing their declared incomes.
5. Conclusions - Proposals
By conducting the present research, it is shown that the correlation between the amount of declared
incomes of individual taxpayers and the GDP per administrative region in Greece may constitute a
powerful factor of prediction of the degree of tax noncompliance, so that the tax administration efforts
to trace tax evasion focus, to a greater degree, on the specific administrative regions. The latter may be
achieved either by the use of the research findings as they are or by their inclusion in a more general
plan of tax evasion detection, which is to co-evaluate other risk factors too (e.g. the background of
noncompliance etc.) and which is to be governed by the principles of risk analysis.
Further research is needed, which would focus –on a next level and on the grounds of the findings
already yielded-, on locating income sources which display a greater amount of tax evasion per
administrative region of the country in conjunction with research into the constituent composition of
the GDP in those regions. Moreover, the impact of current tax legislature and applicable tax
coefficients on the observed tax evasion could also be over time investigated for the period of the
proposed research.
References
Alm, J. and McKee, M. (2006), “Audit certainty, audit productivity and taxpayer compliance”,
National Tax Journal, vol. 59 (4), pp. 801-816.
Andreoni, J., Erard, B., and Feinstein, J. (1998), “Tax compliance.” Journal of Economic Literature,
vol. 36 (2), pp. 818-860.
Artavanis, Ν., Morse, A., and Tsoutsoura, M. (2012), “Tax evasion αcross industries: soft credit
evidence from Greece”. Fama-Miller Center for Research in Finance. The University of Chicago,
Booth School of Business. Chicago Booth Paper No. 12-25
Bank of Greece (2010), "Monetary policy. Interim report 2010 ", Bank of Greece, Economic Research
Department, Athens.
Freedman, J., Loomer, G. and Vella, J. (2009), “Corporate tax risk and tax avoidance: New
approaches”, British Tax Review, 1, pp. 74-116.
Friedland, N., Maital, S. and Rutenberg, A. (1978), “A simulation study of income tax evasion”,
Journal of Public Economics, vol. 10 (1), pp. 107-16.
Jackson, B. and Milliron, V. (1986), “Tax compliance research: Findings, problems and prospects”,
Journal of Accounting Literature”, 5, pp. 125-165.
Kamdar, N. (1995), “Information reporting and tax compliance: An investigation using individual
TCMP data”, Atlantic Economic Journal, vol. 23 (4), pp. 278-292.
Matsaganis, M. and Flevotomou, M. (2010), “Distributional implications of tax evasion in Greece”,

London School of Economics and Political Science, The Hellenic Observatory, The European
Institute, Hellenic Observatory Papers on Greece and Southeast Europe, GreeSE Paper, no 31.
Ministry of Finance India (2008), “Risk management manual 2008, principles for tax administration at
the CBEC”, Central Board of Excise and Customs, Ministry of Finance, Goverment of India.
158
Is audit quality Implied by Accruals Quality associated with Audit fees and Auditor
Tenure? Evidence from China
Kikhia Hassan & Albitar Khaldoon & Jin Ping Zhang

School of Accounting and Finance, Zhongnan University of Economics and Law, Wuhan, China
E-mail: hassankh.2011@hotmail.com
Abstract
The Enron and Arthur Andersen scandal has raised concerns internationally about auditor independence and
audit quality. Furthermore, the debate continues about the relationship between audit fees, auditor tenure and
audit quality in spite of extensive empirical evidence examining audit failures and earnings management.
Therefore, the purpose of current research is to determine the effect of audit fee and audit tenure both partially
and simultaneously on the audit quality. Using a sample of Chinese firms, an environment where we believe it
provides us with an opportunity to test whether the development of market and legal institutions affects the
impact of audit fees and auditor tenure on audit quality. We employ the standard deviation of residuals from
regressions relating current accruals to cash flows as proxy for audit quality. The paper documents statistically
significant negative association between audit fees and audit quality. These findings are consistent with
economic bonding being a determinant of auditor behavior rather than auditor reputational concerns. Further,
the current paper shows a positive association between auditor tenure and audit quality in the earlier years of
audit tenure. These results support the proposition that when the Learning Effect dominates the Bonding Effect
in the earlier years of tenure, then audit quality is likely to be higher. Taken audit fees and audit tenure together,
the results suggest that there is positive association between audit fees and audit quality in the earlier years of
auditor tenure. Interestingly, the findings of our study have important implications for policymakers, auditors,
multinational firms, and users of financial reports. As the rapid growth of China's economy gains global
recognition, the Chinese stock market is capturing the attention of international investors. To a lesser extent, our
paper also differs from the prior studies in methodology and findings in the investigation of audit quality.
Keywords: Audit quality, accruals quality, audit fees, auditor tenure.
1. Introduction
Due to corporate scandals as Enron and WorldCom in the United States, there has been an increasing
focus on auditor independence (Chen, Lin & Lin, 2008). Last decade, the performance of auditors is
criticized and auditors are often perceived to lack independence. This lack of auditor independence
decreases the quality of the audit. However, when the audit gives reasonably assurance there is always
room for mistakes and errors that can decrease the audit quality and mislead a third party in his/her
decision. This raises the question of what is a high quality audit. The most used definition of audit
quality is DeAngelo’s (1981) which expresses the quality in terms of the auditor’s competence and
independence. The quality is then dependent on the probability that the auditor will both discover a
breach and report that breach (DeAngelo, 1981). In other word, to increase the auditors’ ability to
detect questionable accounting practices it is important that the auditors and/or the audit firm are
knowledgeable about the company and the industry. Furthermore, the auditors and/or audit firm ability
to report these misstatements depend upon their independence from the client (Knechel, 2001).
However, during the years after DeAngelo's definition of audit quality a number of studies regarding
the audit quality has been performed with focus on a number of variables. Most of these studies have
focused on the quality of the audit to see if they perform a low- or high quality audit. Jackson,
Moldrich & Roebuck (2008) have studied audit quality from the perspective of mandatory audit firm
rotation, Vanstraelen (2000) examines if a long-term audit mandate have an impact on audit quality.
Yet other studies examines if auditor fees have an impact on audit quality (Hoitash, et.al., 2007).
We add to this literature by determining the effect of audit fee and audit tenure both partially and
simultaneously on the audit quality in the Chinese capital market setting. China's unique institutional
features provide us with an opportunity to test whether the development of market and legal
institutions affects the impact of audit fees and audit tenure on audit quality. The reasons for choosing
159
the auditing area and more specifically if the audit fees and audit tenure have effects on audit quality
are that it is an incompletely studied area. The above mentioned studies and also other studies that
focus on audit quality provide ambiguous and inconclusive results.
Firstly, Fees paid to auditors can affect audit quality in two ways: large fees paid to auditors may
increase the effort exerted by auditors, hence, increasing audit quality (Yuniarti, 2011). Alternatively,
large fees paid to auditors, particularly those that are related to non-audit services, make auditors more
economically dependent on their clients. Such financial reliance may induce a relationship whereby
the auditor becomes reluctant to make appropriate inquiries during the audit for fear of losing highly
profitable fees. Conversely, the potential for audit failure imposes significant economic costs on the
auditor (DeAngelo, 1981; Simunic, 1984). Though a number of recent studies have examined the
relationship between audit and non-audit fees and independence, they are ambiguous as to the
relationship between audit fees and auditor behavior (Larcker and Richardson, 2004). They also differ
on how fee composition and client importance affect auditor independence.
Secondly, the question of whether audit quality is affected by the length of time that an auditor serves
a client has received extensive attention from researchers. According to Chen et al. (2008) “Regulators
are concerned that as audit firm / partner tenure (the length of the auditor–client relationship) gets
longer, auditors are more likely to compromise on their client’s accounting and reporting choices
because they are “too familiar” with the management and because they want to retain the client’s
business”. In accounting literature, this is known as the ‘familiarity threat’. Hence, there is argued that
longer auditor tenure reduces the auditor's independence, and as a result the audit quality diminishes.
On the contrary, it can be argued that as the auditor becomes more familiar with the client, he is better
able to do an audit due to increased knowledge of the firm. The first years of auditing a new client
involves start-up costs as a result of gaining sufficient understanding, as argued by DeAngelo (1991).
The effects of this argument are opposed to the first, at least in the first years.
Furthermore, for audit quality proxy, Dechow and Dichev (2002) suggest a method of distinguishing
informative accruals from no informative ones. They argue that when managers use discretionary
accruals opportunistically, the current period accruals are less likely to be realized as future cash
flows. In other words, the accrual quality measure, estimated as the association between current
accruals and realized cash flows in the current as well as succeeding and previous years, deteriorates if
the accruals are driven by opportunism, but not when they are motivated by the need to convey private
information. Furthermore, the accrual quality measure is not subject to the criticism regarding the
separation of discretionary and nondiscretionary accruals. On the basis of these considerations, we
proxy audit quality by accrual quality. To sum up, ongoing interest in the issue suggests that this
question has not been completely answered by extant research. In this paper, we provide additional
insight into the debate by examining the impact of audit tenure, and audit fee both partially and
simultaneously on the audit quality.
2. Literature Review and Hypotheses Development

2.1. Audit fees and audit quality
The link between audit fees and audit quality is suggested by the signalling or reputation hypothesis
(Lindberg, 2001). Models of reputation capital suggest that sellers expend resources in order to build a
reputation because buyers are unable to determine product quality before purchasing (Klein and
Leffler, 1981). Several studies suggest that higher audit fees are associated with higher audit quality in
order to compensate for the high-price of reputation (see Simunic, 1980; Ferguson and Stokes, 2002).
Evidence suggests that audit clients are willing to pay a fee premium on these auditors‟ reputations in
order to get a better quality of service (Simunic, 1980). In other study, Elitzur and Falk (1996) suggest
that audit fees have a positive relationship with planned audit quality. They examine planned audit
quality and audit fees in a multiperiod model. Ordinarily, higher audit fees might inspire auditors to
increase the audit quality. Hoitash et al. (2007) also agree that higher audit fees will increase the
auditor's effort and result in a higher audit quality. Conversely, Ashbaugh et al. (2003) find no
association between firms’ total fees and discretionary current accruals, nor any association between
income increasing-accruals and client fees. Similarly, Chung and Kallapur (2003) find no association
160
between several audit-fee metrics and their estimate of discretionary accruals. In recent studies related
to corporate governance, evidence suggests that lower audit fees could also be associated with a
perceived higher audit quality. This is because the auditor might take into consideration that firms
bound by a strong internal control environment will probably have a lower audit risk thus reducing the
audit effort and audit fees by means of an effective internal corporate governance mechanism (Griffin
et al., 2008; Krishnan and Visvanathan, 2009).
Furthermore, in their discussion of Kinney and Libby (2002) suggested that the threat to auditor
independence could be as strong when the audit fee is large. Several studies that have empirically
examined the relationship between audit quality and audit fee assume that audit services are quality-
differentiated and that in a competitive market, quality differences are reflected in fees (Francis &
Simon, 1987). Extending their sample to include all firms in China’s stock market and employing
several different measures of abnormal audit fees, Fang and Hong (2008) find a positive relationship
between audit fees and audit opinion improvement. Chen, Su, and Wu (2005) also show that there is a
positive correlation between a higher abnormal audit fee and an improvement in audit opinion. In
their research, Frankel et al. (2002), report a significant negative association between audit fees and
the probability of meeting their earnings benchmarks such as a small positive earnings surprise (0 to 1
cents) over the last available consensus median analyst forecast and a small increase in earnings (0 to
1 cents) over the last year’s earnings. They also report a significant reduction in discretionary accruals
when audit fee rank is high (see Frankel et al., 2002). However, it seems reasonable to suggest that
increasing audit effort and therefore audit fees enable the auditors to get information and make
judgments on the accrual estimation errors. Consequently, the auditor will require management to
correct its estimates and modify its accounting methods to improve accrual quality and hence the audit
quality. To sum up, the following hypothesis is suggested
H1: There is a significant and positive relationship between audit fee and accruals quality and hence
audit quality.
2.2. Audit tenure and audit quality.

After the accounting scandals of the last decade, the relationship between the auditor and the client is
often scrutinized, resulting in questions about auditor independence. Mandatory audit firm rotation is
recommended as a solution to improve the quality of financial reporting. This view is consistent with
the argument that audit quality impairs when auditor tenure increases. A reduction in audit quality
might occur, because auditors are more likely to agree with managers on important decisions as the
length of the relationship between the auditor and the client increases (Chi and Huang 2005; Boone et
al. 2008; Davis et al. 2009). This view is in line with the Bonding Effect explanation which related to
auditor independence. However, the long-tenure association between the audit personnel/firm and the
client may give rise to concerns about familiarity and self-interest threats to auditor independence. On
other hand, earlier studies stress the negative impact of short tenure on audit quality in initial years of
the auditor-client relationship (Geiger and Raghunandan 2002). However, the majority of the literature
emphasizes the positive impact of long tenure on audit quality (Mansi et al. 2004; Ghosh and Moon
2005). This is consistent with the Learning Effect explanation that audit quality is low in the initial
years as it takes time for the auditor to acquire the client-specific knowledge and audit quality
increases as the auditor gets familiar with the client's business and information system. Furthermore,
Solomon et al. (1999) document that as the length of the relationship between the auditor and the
client increases, the auditor has more client-specific knowledge. As a consequence, it is less likely
that the auditor relies on managerial estimates and becomes thus more independent of firms’
management. Myers and Omer (2003) investigate the extent to which auditor tenure is associated with
the distribution of both income-increasing and income decreasing accruals. They document that both
income-increasing and income-decreasing accruals are lower when auditor tenure increases,
suggesting that audit quality increases with auditor tenure.
A more recent paper and by using Chinese data, Firth, et. al., (2012) find that firms with mandatory
audit partner rotations are associated with a significantly higher likelihood of a modified audit opinion
than are no-rotation firms. Moreover, they find similar evidence for voluntary audit firm rotation,
although the significance level is much weaker than for mandatory partner rotation. However, they do
not find robust evidence that mandatory audit firm rotation is more effective than other forms of
161
auditor rotation in enhancing audit quality. Based on the description of the studies above, the empirical
analyses provide conflicting results. However, the current study argues that when an auditor starts a
new audit engagement, he would spend more time to learn about the entity's business and its
environment (including its internal controls). At the same time, it would take some time for the auditor
to develop a close relationship with the client. Hence, the Learning Effect is likely to dominate the
Bonding Effect in the earlier years of the auditor-client relationship. In contrast, as the Learning
Effect weakens over time, the Bonding Effect strengthens over time as the auditor and the client gets
close to each other. The Bonding Effect would dominate the Learning Effect either when the Learning
Effect reduces to zero or when the negative force from the Bonding Effect dominates the positive
force from the Learning Effect. Therefore, the current study predicts that the Learning Effect is likely
to dominate in the earlier years and the Bonding Effect is likely to dominate in the later years of
auditor tenure. Therefore, we set the following hypothesis:
H2: Audit quality is likely to increase in the earlier years of auditor tenure due to a Learning Effect
and is likely to decrease in the later years of auditor tenure due to a Bonding Effect.
2.3. Audit fees, Auditor Tenure and Audit quality

Research indicates that in addition to the high set up costs, auditors face a steep learning curve in the
initial years of an engagement. Caramanis and Lennox (2008) provide direct evidence that auditors
expend more effort (i.e., audit hours) in the first years of an audit. However, as tenure lengthens,
auditors acquire a more complete understanding of their client’s operations. It follows that, all else
constant, audit effort should decrease as tenure increases. Interestingly, however, audit fees generally
increase with auditor tenure. Some recent studies examine the interaction between auditor tenure and
either fees or auditor specialization. However, seemingly opposite conclusions are reached. One set of
studies examines the interaction between auditor tenure and audit fees. Gul et al. (2007) find that
nonaudit fees (but not audit fees) are associated with poorer audit quality in terms of higher
discretionary current accruals for firms with short auditor tenure. In contrast, Stanley and DeZoort
(2007) document that audit fees (but not nonaudit fees) are associated with improved audit quality in
terms of lower likelihood of restatement for firms with short auditor tenure. Another set of studies
examines the interaction between auditor tenure and auditor specialization, but results differ
depending on the proxy for audit quality. Myers et al. (2003) find no such interaction with
discretionary accruals. In contrast, using discretionary accruals and restatements as proxies for audit
quality; other studies document this interaction (Gul et al. 2009).
However, for third hypothesis which related to the effect of auditor audit tenure and audit fee
simultaneously on the audit quality, it is not easy to describe and measure service quality objectively
with multiple indicators because service quality is an elusive and vague concept, thus, there is often an
error in determining the nature and quality. With this in mind, we conjecture that when an auditor
starts a new audit engagement he would spend more time to learn about the entity's business and it is
also possible that the auditor may face special audit problems earlier in the tenure because of
unfamiliarity with the client’s business, and thus may lead the auditors to increase his efforts, and
therefore audit fees, to get information and make judgments on the accrual estimation errors.
However over time, the auditor and his client will get close to each other, therefore, the Bonding
Effect is likely to dominate in the later years of auditor tenure, It follows that, all else constant, audit
effort should decrease, and hence audit fees. Consequently, the auditor might become lax enough to
allow more (and larger) estimation errors than he or she would otherwise allow. Therefore, economic
bonding reduces accrual quality even if the auditor is competent to detect the errors. On the basis of
prior discussion, we set the following hypothesis:
H3: The positive association between accruals quality and audit fees in the earlier years of auditor
tenure became negative in the later years.
3. Auditing Profession in China

The Chinese audit profession is managed by the Chinese Institute of Certified Public Accountants
(CICPA) and the Ministry of Finance (MOF) of China, and is jointly regulated for capital market
practices by the China Securities Regulatory Commission (CSRC) and the MOF. To reinforce the
accountability of CPAs who issue audit reports, the Ministry of Finance released a supplementary
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regulation on the signing and stamping CPAs’ names on audit reports on July 2, 2001. This regulation,
Notice of the Ministry of Finance on Related Issues of CPAs’ Signature and Seal on Audit Reports,
required that the audit report should be signed and sealed by two CPAs who are licensed to issue the
related audit report and should be sealed by the accounting firm of the two CPAs. More specifically,
the regulation requires that the signers should include the audit partner, chief CPA or an entrusted
deputy chief CPA, who makes the final review of the audit, and another CPA who is in charge of the
daily work on the audit. These two signing auditors are required to assume the same legal liabilities
(unless one can prove the contrary).
On April 13, 2003, the Ministry of Finance issued a revised version of No. 7 Independent Audit
Standards—Audit Report, which became effective on July 1, 2003. Similar to the original version, the
revised version states that audit reports should be signed and sealed by CPAs, and also sealed by the
accounting firm. In addition, the revised version provided a template for the audit reports, which
indicated that two CPAs were required to sign and stamp their names. On February 15, 2006, the
Ministry of Finance issued No. 1501 Audit Standards of Chinese CPAs—Audit Report to replace No.
7 Independent Audit Standards—Audit Report. This batch of audit standards became effective from
January 1, 2007. With respect to the requirements on the signature and seal of CPAs on audit reports,
it is identical to the prior audit standard revised in 2003. The specific requirements on who should sign
and seal audit reports are still the same as set out in the Ministry’s Notice that was issued in 2001.
Thus, China has a relatively long history of requiring signatures of the two key auditors on an
engagement.
4. Methodology
4.1. Sample and data collection
We begin to select sample firms from China Stock Market & Accounting Research Database
(CSMAR), which is widely used by many prior studies (e.g., Giannetti, Liao, and Yu, 2014). CSMAR
database provides us with the data including audit fees of auditing the annual financial statements, the
names of CPAs who signed the audit report, and the name of the audit firm, and the number of years
as auditor with a current client, from all companies listed on both the Shanghai Stock Exchange and
the Shenzhen Stock Exchange. Our raw sample includes 14334 observations during the period of
2007-2013. We start from 2007 because China’s Ministry of Finance issued new basic standards
(namely Ministry of Finance’s 33 Action) for enterprise accounting in 2006, which were enforced
from January 2007. Therefore, our sample starts from this year in order to keep consistence between
cross-sectional data. Furthermore, in the calculation of the proxy for audit quality, we need related
data during the five-year period between t-4 and period t (in order to keep sample, we don’t require the
five year period to be consecutive). In this way, we get 6993 firm year observations whose proxy for
audit quality is available from 2009-2013. Combing with data of audit tenure, audit fees and other
control variables and dropping observations that lack the necessary data for estimating our models, our
final data set contains 6957 observations (1318;1340;1411;1451;1437 observations in 2009-2013,
respectively).
4.2. Empirical model

First: Measure of audit quality
Dechow and Dichev (2002) argue that uncertainty in accruals can best be measured by the extent to
which working capital accruals map into cash flow realizations. The key insight to their model is that
accruals quality is affected by measurement error in accruals, irrespective of management’s purpose
(e.g. imposing intentional or unintentional errors in the estimation of accruals). According to Francis
et al. (2005) and from a practical perspective, the Dechow and Dichev (D&D) model is limited to
current accruals (because of the long lead/lags between noncurrent accruals and ultimate cash flow
realizations). Thus, consistent with McNichols (2002), they augment the D&D model by incorporating
the fundamental variables included in the modified Jones model. This augmented model produces a
better specified expectations model and, therefore, a better set of residuals. Following Francis et al.
(2005), we estimate a cross-sectional accrual model as depicted in the following equation:
TCAt = β0 + β1 OCFt-1 + β2 OCFt + β3 OCFt+1 + β4 ΔREVt + β5 PPEt + vt (1)
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Whereas; TCA is total current accruals are calculated as (change in current assets – change in cash –
(change in current liabilities – change in short-term debt included in current liabilities)), OCF is
Operating cash flow obtained from cash flow statements, ΔREV is Changes in sales revenues, and PPE
is gross values of property, plant and equipment. Consistent with Francis et al. (2005) we estimate
equation (1) separately for each Fama and French (1997) industry group in year t. We winsorize the 1
percent extreme values from each tail and use the residual from equation (1) as our estimate for
abnormal accruals. Subsequently, we use the estimated firm year residual during the five-year period
between t - 4 and period t and calculate the standard deviation of these residual. In turn, we term the
calculated standard deviation and use it as our proxy for accruals quality. A large standard deviation
implies that discretionary accruals vary over time yielding low-accrual quality.
Second: Audit Quality and Audit Fees model.
Previous studies have modeled fees as a function of size, risk, complexity, auditor type and
profitability. Our fee prediction model draws on Simunic (1984), Larcker and Richardson (2004) and
Hay et al. (2006). However, in order to study the relationship between audit fees and audit quality
proxy by accruals quality and as in Srinidhi and Gul (2007), we model AQ as a function of the fee
variables and other determinants
AQ = β0 + β1 AF + β2 LNTA + β3 ROA t + β4 LOSS +β5 BIG4+ β6 SUBS + β7 FOREIGN + β8

LEV + industry dummiest + year dummiest + ut…….(2)
Whereas, AF is natural log of total audit fees paid to the auditor, LNTA is the natural log of the firm’s
total assets, LOSS is An indicator variable equal to one if the audit client reported negative net income
in either of the two previous fiscal years (zero otherwise), BIG4 is An indicator variable equal to one
when the auditor is a member of the BIG4 (zero otherwise), FOREIGN is an indicator variable equal
to 1 if the company has foreign operations (zero otherwise), LEV is total liabilities to total assets ratio.
Third: Audit Quality and Audit Tenure model.
In order to test the second hypothesis, the current study runs an OLS pooled regression on the
following model:
AQ = β0 + β1 T + β 2T^2+ β3 LNTA + β4 ROA t + β5 LOSS +β6 BIG4+ β7 FOREIGN + β8 LEV +

industry dummiest + year dummiest + ut….(3)
Whereas, T is the number of consecutive years that a firm has retained the auditor, T^2 is the square
of T, LNTA is the natural log of the firm’s total assets; ROA is Return on assets defined as net income
divided by total Assets, LOSS is an indicator variable equal to one if the audit client reported negative
net income in either of the two previous fiscal years (zero otherwise); BIG4 is an indicator variable
equal to one when the auditor is a member of the BIG4 (zero otherwise); FOREIGN is an indicator
variable equal to 1 if the company has foreign operations (zero otherwise), LEV is total liabilities to
total assets ratio, however, this equation includes control variables based on prior literature (Dechow
and Dichev, 2002; Myers et. al., 2003; Krishnan, 2003; Reichelt and Wang, 2010).
Note that higher AQ indicates higher audit quality. Hence, to test the second hypothesis, we test
whether the coefficient β1 on T is positive, and the coefficient β2 on T^2 is negative, indicating that
audit quality increases in the earlier stage of auditor tenure and decreases in the later stage of auditor
tenure. In addition, in my sensitivity tests, I also use alternative measures of auditor tenure to test the
robustness of my results.
Fourth: Audit Tenure, Audit fees and Audit Quality model.
AQ = β0 + β1 AF+ β2 AF*T + β 3 AF*T2+ β4 LNTA + β5 ROA t + β6 LOSS +β7BIG4+ β8

FOREIGN + β9LEV + industry dummiest + year dummiest + ut…..(4)
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5. Empirical Results
5.1. Descriptive statistics
Table 3 Descriptive statistics

variable N Mean Median 1st 3st Min Max Std Dev.
Quartile Quartile
AQ 6993 0.0900 0.0700 0.0400 0.110 0 0.700 0.0700
AF 6993 13.32 13.22 12.90 13.59 12.21 15.52 0.610
T 6993 2.480 2 1 3 1 7 1.600
T2 6993 8.720 4 1 9 1 49 10.87
LNTA 6993 21.72 21.53 20.78 22.44 0 30.57 1.530
ROA 6993 0.0400 0.0400 0.0100 0.0700 -0.260 0.250 0.0700
LOSS 6993 0.0900 0 0 0 0 1 0.290
Big4 6993 0.0500 0 0 0 0 1 0.220
FOREIGN 6993 0.470 0 0 1 0 1 0.500
Lev 6993 0.480 0.470 0.290 0.640 0.0400 1.610 0.260
Table 1 summarizes the descriptive statistics for accrual quality and other variables used in this study.
The mean (median) of AQ is 0.0900 (0.0700). The average total fees are 13.32. The average tenure
(T) is 2.4 years with a minimum of 1 year and a maximum of 7 years whereas the minimum and
maximum values of the square of auditor tenure (T2) are 1 and 49, respectively. The mean (median) of
Size of the firm is 21.72 (21.53). Big 4 international accounting firms audit only 5% of the sample
companies, which is very different from the audit market structure of the more developed capital
markets (such as the U.S., Australia, or Taiwan). Most of the continuous control variables have an
approximately symmetric distribution.
AQ AF T T2 LNTA ROA LOSS Big4 FORE Lev

IGN
AQ 1
AF - 1
0.064***
T - 0.195*** 1
0.056***
T2 - 0.197*** 0.967*** 1
0.049***
LNTA - 0.701*** 0.173*** 0.172*** 1

0.117***
ROA - 0.025*** - - 0.013 1

0.041*** 0.054*** 0.052***
LOSS 0.071*** - 0.014* 0.016** - - 1

0.058*** 0.123*** 0.642***
Big4 - 0.413*** 0.094*** 0.096*** 0.411*** 0.008 - 1

0.078*** 0.025*
**
FOREIG - 0.018** 0.007 0.004 0.002 0 -0.012 - 1

N 0.093*** 0.017*
*
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Lev 0.170*** 0.200*** 0.069*** 0.070*** 0.241*** - 0.250* 0.100* - 1
0.372*** ** ** 0.093*
**
5.2. Univariate analysis

Table 2 reports the correlations among the variables in the regression. Audit fees are positively
correlated with audit tenure and the square of audit tenure. We observe a negative and significant
correlation between audit fees and our measure of accruals quality (AQ). These results suggest that
higher fees are associated with higher audit. Notably, our measure of accruals quality is negatively
correlated with auditor tenure T and the square of auditor tenure T2, suggesting that longer tenure is
associated with higher audit quality, consistent with prior literature. It is not surprising that auditor
tenure and firm size are highly correlated (0.195***), so are the T and the square of auditor tenure
T2and firm size (0.197***). The significant results in later regression analyses indicate that the multi-
collinearity between auditor tenure and firm age is not a problem.
However, care needs to be exercised when interpreting the Pearson correlation coefficients; this is
because they cannot provide a reliable indicator of the association in a manner that controls for
additional explanatory variables (Pallant, 2001). Therefore Tests were performed for detecting the
level of collinearity among the independent variables in the mode for detecting the multi-collinearity
among the independent variables in the model. The Multicollinearity was tested by finding the
variance inflation factor values for independent variables relevant to the model. The values of the
variance inflation factor greater than 10 and tolerance factor closer to zero will show the presence of
Multicollinearity in the audit fees model. The result shows no signs of Multicollinearity in the models
5.3. Empirical Analysis

This section discusses the results from the tests of my hypotheses presented in the third section of our
study. We first present the results of the relation between auditor fees and audit quality. Next, the
current study discusses the results on the impact of auditor tenure on audit quality. We end this section
with the results on the effect of audit fees and audit tenure both simultaneously on audit quality.
5.3.1. The Impact of Audit fees on audit quality implied accruals quality
In this section, we examine the relation between audit fees and audit quality. As described in previous
sections, we employ the accruals quality measured by standard deviation of the residual (AQ) as the
proxy for audit quality. We posit that a positive association between audit fees and audit quality,
therefore, negative relationship between audit fees and the proxy for audit quality (AQ). This
assumption is consistent with economic bonding rather than auditor reputation concerns.
We observe that audit fees are significant and positively related to the proxy which has been used for
audit quality AQ; i.e. the higher the total audit fees the lower the quality. Audit fee is found to be
positively related to our proxy of audit quality at 10% significance level (β = -0.024, p < 0.10). This
association is significant and inconsistent with the univariate results presented in the previous section.
The coefficients on the control variables are, by and large, also consistent over time. These results
provide evidence in support of the view delineated above and those suggested in Kinney and Libby
(2002); i.e. that economic bonding between clients and incumbent auditors can be empirically
discerned by segregating the unexpected portion of the total fees. Furthermore, the presented result is
inconsistence of the view of several studies which suggest that higher audit fees are associated with
higher audit quality in order to compensate for the high-price of reputation (see Simunic, 1980;
Ferguson and Stokes, 2002). It can be concluded that the first hypothesis (H1) is rejected, meaning
that audit fee has significant effect on audit Quality, but The influence of audit fee on audit quality is
negative, which means that the higher audit fee, the lower the audit quality is. The results are
inconsistent with a research conducted by Yuniarti (2011) and Venkataraman, Weber and Willenborg
(2008) which state that audit fee affect the audit quality. However, the results consistent with studies
conducted by Sundgren and Tobias (2011) which state the audit fee have a negative impact on audit
quality.
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Table 3 Regression Analysis

The Impact of Audit fees on Audit Quality
AQ = β0 + β1 AF + β2 LNTA + β3 ROA t + β4 LOSS +β5 BIG4+ β6 SUBS + β7

FOREIGN + β8 LEV + industry dummiest + year dummiest + ut
Variable Name Coeff. T-statistic P-value

Constant 0.120*** 4.27 0.0000
AF 0.024* 1.82 0.0690
LNTA -0.059*** -9.77 0.0000
ROA -0.080*** 4.9 0.0000
LOSS 0.010*** 3.12 0.0020
Big4 -0.025*** -3.43 0.0010
FOREIGN -0.016* -1.84 0.0660
Lev 0.056*** 15.26 0.0000
Year YES
Industry YES
Number of Observations= 6578

T-statistics in parentheses , *** p<0.01, ** p<0.05, * p<0.1
R-squared = 0.412
Adjusted R-squared = 0.408
F statistic = 16.11
AF = natural log of total audit fees paid to the auditor;

LNTA = the natural log of the firm’s total assets;
ROA =Return on assets defined as net income divided by total Assets;
LOSS = An indicator variable equal to one if the audit client reported negative net income in
either of the two previous fiscal years (zero otherwise);
BIG4 = is An indicator variable equal to one when the auditor is a member of the BIG4 (zero
otherwise);
FOREIGN = an indicator variable equal to 1 if the company has foreign operations (zero
otherwise);
LEV = total liabilities to total assets ratio.
5.3.2. The Impact of Auditor tenure on audit quality implied accruals quality
Table 4 presents the results of model (3) testing the auditor tenure effects. The regression results for
the full sample do indicate significant coefficients for audit tenure T, but don’t indicate significant
coefficients for the square of audit tenure T2. However, the negative relation between T and AQ (the
coefficient on T is -0.014) indicates that accrual quality improves as tenure lengthens. As predicted,
the coefficient on T2 is positive (0.004), but its insignificant. The statistically significant negative sign
on T suggesting that accrual quality initially increases with tenure at the early stage but there is no
evidence supports that at later decreases with tenure at the later stage. One could draw the conclusion
that the Learning Effect is likely to dominate the Bonding Effect in the earlier years of the auditor-
client relationship. Even though the business environment is dynamic and constantly changing, the
incremental information to learn over time tends to decrease and evens out at a certain point. The
result for earlier years is consistent with Jackson et al. (2007) which state that the audit tenure can
provide auditor a better understanding of his clients, thus increasing audit quality However, over the
time, the insignificant coefficient of the square of audit tenure T2 don’t support our second
167
hypothesis. One possible explanation for such result that our study's period is only for five years, in
such short period, we can't discover long term effect.

The Impact of Auditor tenure on Audit Quality
AQ = β0 + β1 T + β2 T2+ β3 LNTA + β4 ROA t + β5 LOSS +β6 BIG4+ β7 FOREIGN + β8
LEV + industry dummiest + year dummiest + ut
Constant 0.151*** 6.06 0.0000
T -0.014** -2.06 0.0400
T 2 0.004 1.14 0.2530
LNTA -0.062*** -11.80 0.0000
ROA -0.083*** 5.25 0.0000
LOSS 0.009*** 3.00 0.0030
Big4 -0.032*** -3.16 0.0020
FOREIGN -0.014** -2.14 0.0320
Lev 0.057*** 16.02 0.0000
Year YES
Industry YES
Number of Observations= 6,957

T-statistics in parentheses , *** p<0.01, ** p<0.05, * p<0.1
R-squared = 0.388
F statistic = 17.33
T = the number of consecutive years that a firm has retained the auditor;
T2 = the square of T;
otherwise);
otherwise);
5.3.3. The Impact of audit fees and audit tenure simultaneously on audit quality
With regard to Model 4 that includes only audit fees AF and audit tenure AF*T and AF*T2, we
observe significant and negative coefficients between our proxy of audit quality AQ and AF*T, but on
other hand, we observe insignificant positive coefficient between AQ and AF*T 2. However, the
negative and significant coefficient of AF*T (-0.031**) enhances the notion that when an auditor
starts a new audit engagement he would spend more time to learn about the entity's business and it is
also possible that the auditor may face special audit problems earlier in the tenure because of
unfamiliarity with the client’s business, and thus may lead the auditors to increase his efforts, and
therefore audit fees, to get information and make judgments on the accrual estimation errors, therefore,
we observed higher audit quality in the earlier years of the auditor-client relationship. On the contrary,
168
the insignificant confection of AF*T2 don’t support our third hypothesis which suggest the in the later
years of auditor tenure there is negative relationship between audit fees and audit quality.

The Impact of audit fees and audit tenure simultaneously on audit quality
AQ = β0 + β1 AF+ β2 AF*T + β 3 AF*T2+ β4 LNTA + β5 ROA t + β6 LOSS +β7BIG4+ β8
FOREIGN +
β9LEV + industry dummiest + year dummiest + ut

Constant 0.055*** 4.36 0.0000
AF 0.026** 2.1 0.0360
AF*T -0.031** -2.08 0.0370
AF*T2 0.007 1.11 0.2670
LNTA -0.055*** -9.82 0.0000
ROA -0.078*** 4.82 0.0000
LOSS 0.010*** 3.07 0.0020
Big4 -0.035*** -3.22 0.0010
FOREIGN -0.013* -1.84 0.0650
Lev 0.055*** 15.05 0.0000
Year YES
Industry YES
Number of Observations= 6578

T-statistics in parentheses , *** p<0.01, ** p<0.05, * p<0
R-squared = 0.453
F statistic = 15.92
AF = natural log of total audit fees paid to the auditor;

T = the number of consecutive years that a firm has retained the auditor;
T2 = the square of T;
otherwise);
otherwise);
6. Conclusion
This study was conducted to determine the effect of audit fee and audit tenure on audit quality either
partially or simultaneously in the Chinese capital market setting. One important characteristic of
China's reforms is the very uneven economic and legal development across the country. We believe
that the differences in regional development can have profound effects on auditing (including audit
quality. Using Chinese data and the standard deviation of residuals from regressions relating current
accruals as proxy for audit quality, we document a negative effect of audit fess on audit quality and
this result is consistent with economic bonding being a determinant of auditor behavior rather than
auditor reputational concerns. However, for audit tenure and audit quality we propose that audit
169
quality is likely to increase with audit firm tenure due to a Learning Effect and decrease with audit
firm tenure due to a Bonding Effect. The results support our argument that in the earlier years of audit
tenure when the Learning Effect dominates Bonding Effect, then the audit quality will be higher.
However, we fail to find significant relationship between audit tenure and audit quality in the later
years due to shorthand of study's period. Furthermore, taking audit fees, audit tenure and audit quality
together, we find positive association between audit fees and audit quality in the earlier years of
auditor tenure.
The findings of our study have important implications for policymakers, auditors, multinational firms,
and users of financial reports. As the rapid growth of China's economy gains global recognition, the
Chinese stock market is capturing the attention of international investors. One important question that
international institutional investors who enter the Chinese stock market must consider is whether the
auditors and related arrangements play an effective role in mitigating information asymmetry. Given
that other transitional and emerging markets exhibit some similar characteristics to China (e.g., poor
legal and market infrastructure); our results may have some resonance for these countries.
Furthermore, this study sheds some light on the debate about the boundaries of securities regulation.
Many scholars support the helping hand theory of regulation, which argues that regulation by means
such as mandatory audit rotation is beneficial, because it protects investors and promotes the growth of
markets by increasing the supply of reliable information. Furthermore and importantly, our findings
suggest that high audit fees do not always correlate with high audit quality. This has implications for
academic research that uses audit fees as a proxy for audit quality or earnings quality. For audit fees
literature, the present study indicates that the relationship between audit fees and accruals quality
depends on the time period examined and the length of auditor tenure.
Our study is subject to a number of limitations. First, to simplify our empirical analysis, we assume a
quadratic model correctly captures the true relation between auditor tenure and audit quality.
However, future research may refine this simplified model and assumption. Second, this study relies
on accrual quality to measure the audit quality. Using accruals might be a noisy proxy and thus, the
measurement error associated with any estimation model may still drive my results. Third, our sample
spans a timeframe consumed by regulatory changes and we only include audit fees in our empirical
analysis to address the relationship between audit fees and audit quality due to the data constraints we
couldn't find non-audit fees data. Fourth, perceived audit quality is vital for the efficient allocation of
limited resources in the capital market. Therefore, whether my results extend to perceived audit quality
also merit the consideration of future research. Finally, the audit committee takes on critical
responsibility in ensuring the quality of financial reporting and the hiring and monitoring of auditors.
Thus, without considering the effect of the audit committee, this study may have a correlated omitted
variable problem. Therefore, it is worthwhile for future research to explore the role that the audit
committee plays in the relation between auditor tenure and audit quality. Thus, we defer further
investigation of this limitation to future research.
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Acknowledgement
Firstly, I would like to express my sincere gratitude to my supervisor Prof. Wang xiong yuan, for his
patience, motivation, and immense knowledge. His guidance helped me in all the time of research and
writing of this article. My sincere thanks also goes to Mr. Albitar Khaldoon and Mrs. Jin Ping for
the stimulating discussions, for the sleepless nights we were working together to write this article.
Without their precious support it would not be possible to conduct this research. I would like also like
to thank Zhongnan University of Economics and Law, the staff at the Accounting School for their
efforts and assistance.
173
Women on “board”: Economic turmoil and the presence of women in positions of

influence in Greece
Anastasiou, S.1, Siassiakos, K2., Dermatis, Z.3 and Lazakidou, A.3

1
Business School, TEI of Central Greece, Greece, sanastasiou@teiste.gr
2
Supreme Council for Civil Personnel Selection (ASEP), Greece, k.siassiakos@asep.gr
3
Department of Economics, University of Peloponnese, Greece, zderm@uop.gr; lazakid@uop.gr
Abstract
Since the beginning of the current global financial crisis, governments across Europe are trying to deal with
recession and rising unemployment. Amidst this fierce international crisis, it would be “easy” to put aside issues
such as gender equality and “focus” on economic recovery but this is a short-sighted perspective. Gender
equality is vital for social and economic stability, long term sustainable development and growth. Societies that
discriminate have a negative effect in their economic growth, weaker governance and a lower overall quality of
life. The purpose of this paper is to examine the current situation and recent trends regarding the gender “balance”
in key decision-making positions in Greece. For this purpose, a random sample from large organisations was
surveyed. A gender gap was exhibited in several parameters including the wage differentials, female under-
representation in higher levels decision-making positions in the public and the private sector and entrepreneurship.
In fact, during the economic crisis the participation of women in Boards decreased in Greece and increased in the
EU. The challenge for countries and international institutions is to prevent gender inequalities at work,
particularly when societies experience financial hardship, as Greece is currently experiencing so dramatically.
Keywords: Equal Opportunities, labour market, gender gaps, financial crisis, Greece
1. Introduction
Since its beginning in 2008, the global financial crisis had an impact on the socioeconomic parameters
of many national economies, affecting among other things banking systems and fiscal policies of
many developed countries.
National governments are trying to deal with recession, credit freezes, and sharp decline in aggregated
demand, investment and consumption, massive layoffs and the consequently dramatic rise in
unemployment.
Although there is a sign of some improvement in labour market conditions in a number of countries,
the recovery from the global economic crisis is uneven among national economies. Although in many
economies, job losses initially affected mainly male employees, the medium effects seem to affect
even more young people and women.
In Greece, the labour market situation remains till today very difficult with the lowest employment
rate (50%) and the highest unemployment rate (25.6% in March 2015) in the OECD (OECD, 2015a).
It has been estimated that 3 out of 4 unemployed people in Greece have been looking for work for
longer than one year. In 2015 (June), long term unemployment rate in Greece was 18.2 % compared to
5.7% in the Euro Area. In 2015, almost 50% of 15-24 years old in Greece is declared unemployed
while the unemployment rate of women is almost 30% compared to 10,2% in the EU28 (OECD,
2015b).
Amidst this international crisis, it would be “easy” to put aside issues such as gender equality and
“focus” on economic recovery. This is a short-sighted perspective.
The purpose of this paper is to examine the current situation and recent trends regarding the gender
“balance” in key decision-making positions with particular reference in Greece amidst the current
financial crisis.
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2. The issue of gender (in)equality in the labour market
2.1. Gender Equality
Gender equality is an important issue of a country’s economic and social development and
effectiveness. It includes political, social and cultural dimensions. Economies that discriminate have a
negative effect in their growth, weaker governance and a lower quality of life.
Main objective of gender equality policies is to ensure that everyone has the possibility to realise
his/her full potential irrespective of their gender.
Gender equality at work is a multidimensional issue. Its key dimensions include: labour force
participation, employment, earnings, job quality in terms of benefits, rights, opportunities for skills
development (World Bank, 2013).
Despite the introduction and enactment of Laws and Directives for the provision of equal opportunities
at work and the establishment of a general framework for the equal treatment and accessibility in
employment and occupation, the phenomenon of gender inequality at work continuous to be a
longstanding issue seen in various areas (Anastasiou and Siassiakos, 2014; Anastasiou et al, 2015).
There are many barriers that have been accounted for the difficulties women face in their efforts to rise
to high level decision making positions. Apart of the “structural” barriers of bias and discrimination
that to a large extend have been removed through relevant legislation and EU Directives, there are
“stereotypical” barriers regarding the traditional preconceptions of gender roles where women are seen
as primary caretakers of the household and family responsibilities and men as the primary family
earners who hold high status positions in society (Kyriazis, 1998). These gender norms, where men are
regarded as the main family “breadwinners” with women acting as “secondary earners,” often lead to
unequal treatment in employment issues such as layoffs, job retention and rehiring (Green et al,
2010). Additional stereotypes involve perceptions on gender-based personal characteristics about the
professional abilities and role(s) of men and women at work, male dominance in the administration,
lack of awareness of the promotion system, lack of female role models, mentoring, peer support and
networking (Lips and Kenner, 2007; Anastasiou and Papakostantinou, 2013).
2.2. Gender (in)equality and employment: The international reality
Research internationally suggests that organizations with a higher female representation at the most
senior levels deliver stronger organisational and financial performance and better corporate
governance. On the contrary, in cases where women have limited access to employment opportunities
as in Asia and the Pacific, loses US$42 billion to US$47 billion annually have been reported (ILO,
2011).
Relevant research across countries underlines the reality that despite high level of education and the
large percentage of female participation at work, there are still inequalities between man and women
in issues like: wage gaps and female under-representation in higher levels decision-making positions
both in the public and private sector (European Commission, 2013).
In fact, still there is no full equality between male and female employees in issues like:
- Political empowerment,
- Career advancement and participation in managerial and higher levels decision - making positions,
- Gender pay gaps. The gender pay gap can be seen in all countries irrespective of their Gross
National Income (GNI) revealing that the issue of gender (in)equality at work permeates both wealthy
and poorer countries. The average difference between male and female earnings is more than 15%
while in several countries, like Estonia, exceeds 20% (European Commission, 2013). In OECD
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countries, on average, women earn 16% less than men, with female top-earners paid 21% less than
men. Women are more likely to work part-time and are over-represented in job activities that are not
well paid. Since pension benefits are often earnings-related, disappearances in career profiles
between men and women can lead to large gender disparities in pension payments (OECD, 2015a).
Relevant research in 2011 pin points that across OECD countries, pension payments to individuals
aged 65 and over were on average 28% lower for women while even larger are the pension gap in
European countries like Germany (pension gap almost 45%) (OECD, 2015a).
Similar is the case regarding women’s career advancement and participation in managerial and higher
levels decision - making positions although gender diversity of European boards has slightly increased
over the recent years. In 2014, about 20% of board directors were women compared to 8% although
less than 3% of board chair positions are held by women. Women hold just over 12% of committee
chair positions in Europe, suggesting that as more women gain experience in board service, gender
diversity in top board leadership roles may increase (Egonzehnder, 2014). Of the 33 European
countries covered by the Commission database in 2013, only two (Iceland and Norway) managed to
achieve gender balanced boards of large companies (European Commission, 2013).
Even worst is the case regarding female political empowerment where women occupy less than a fifth
of parliamentary seats worldwide (OECD, 2015a). In 2012, for example, only about 20 % of national
parliamentary seats worldwide were held by women politicians, who usually hold ministries with a
socio-cultural focus (OECD, 2012). In the EU, women account (Aug. 2015) for 27% of senior
ministers in national governments.
Similar to the international experience, in Greece, gender disparities can be viewed not only regarding
pay differences but in broader areas especially in economic participation and opportunity and political
empowerment (Table 1). Till today and in spite the large percentage of women’s enrolment in tertiary
education, there are inequalities between man and women in Greece in issues like: wage differentials,
female under-representation in higher levels decision-making positions in the public and the private
sector and entrepreneurship (Tables 2, 3).
Table 1. Gender Gap Index – Greece’s overall Rank since the beginning of the crisis (2008-2014)
Gender Gap Index - Greece Rank Score *
2014 91st out of 142 Countries 0,678
2013 81st out of 135 Countries 0,678
2012 82nd out of 135 Countries 0,633
2011 56th out of 135 Countries 0,692
* The highest possible score is 1.00 (equality) and the lowest possible score is 0.00 (inequality)
Source: Information extracted from WEF. The Global Gender Gap Report 2014 (November 5th
2015)
Women are still noticeably under-represented especially in senior public decision-making positions, as
in the case of the political realm where women are outnumbered by men as MPs and in ministerial
positions (Table 3).
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Table 2. Greece’s Score in 4 main Gender Gap Index parameters (2008-2014)
Educational Health & Economic Political

Attainment Survival Participation Empowerment
(Score) (Score) (Score)
(Score)
Year 2014 0.995 * 0.979 0.643 0.096
Year 2013 0.995 0.974 0.647 0.097
Year 2012 0.994 0.974 0.633 0.086
Year 2011 0.994 0.971 0.624 0.177
Year 2010 0.994 0.971 0.621 0.177
Year 2009 0.993 0.979 0.607 0.086
Year 2008 0.994 0.979 0.631 0.086
* The highest possible score is 1.00 (equality) and the lowest possible score is 0.00 (inequality)
Source: Information extracted from WEF. The Global Gender Gap Report 2014 (November 5th
2015)
Table 3. Share of female participation in Education, Senior Office, Legislative& Ministerial

positions, Boardrooms, Firms’ ownership (2014)
Indices of female participation in % of Women

positions of influence in Greece
Enrolment in Tertiary Education 50.7
University Professors 26.9
Wage equality for similar work 39.4

(survey)
Legislators, Senior Officers, 25.4

Managers
National Parliament (MPs) 21.2
Ministerial Positions 5.7
Board Members on listed Companies 9.0
Participation in Firms’ ownership 24.0
After WEF. The Global Gender Gap Report 2014 (November 7th 2015)
The economic crisis did not improve the gender gap in the participation of women in Boardrooms. In
fact, during the economic crisis the participation of women in Boards decreased in Greece and
increased in the EU (Figure 2).
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25
EU %
% Women in Boardrooms
20 GR%
15
10
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Figure 1. Participation of women in Boards in Greece (squares) and in the EU (triangles) during the
economic crisis. (Data extracted from Eurostat database)
2.3. Equality at work and economic crisis
In periods of economic crises “everybody loses”. Internationally, progress in gender equality at work
is stalled or even increased during recession, worsening economic conditions and deteriorating even
more the position of women at work (World Bank, 2011; Kazandziska et al, 2012).
At the onset of the current economic crisis, both male and female employment was dramatically
reduced. In countries like Germany, UK, Denmark and Slovakia male employment was hit first by the
crisis but was soon reversed as economic sectors with more female employees were affected
negatively after a few years into the global financial crisis (Lindström, 2013). Female job losses were
higher, reviving and/or reinforcing traditional norms on gender roles and the key role of men as primal
breadwinners and as such as the “legitimate” job holders.
In Greece, the current micro and macroeconomic conditions resulted in reduced government earnings,
rising public debt and business uncertainty and unfavourable conditions for economic growth. Under
such economic conditions, social inequality and the proportion of the population living in poverty has
risen with unemployment in Greece and other neighbouring countries reaching unprecedented levels
(Nicolik et al, 2013).
In countries like Greece, that have undergone recessions, austerity, major fiscal consolidation, long
term wage and benefit cuts had a disproportionate impact on women and the gender gap. It could be
argued that men and women were equally hit by the collapsing Greek economy. The international
experience shows that the job market is segregated with men predominately employed in jobs that
receive the “first” blow of a collapsing economy, like durable goods manufacturing industries and
construction, whereas women may be more frequently employed in services, health, social services,
teaching and family business (Otobe, 2011).
Women may have globally suffered initially less in terms of the number of jod losses, nevertheless in
some cases this has been disproportionately more than men. In the private sector, for example, women
frequently engage in forms of employment such as “non-standard paid work”, “informal paid work”
and “unpaid work”, characterised by insecurity, temporality, seasonality and self-employment
(Castells, 2000; Beck, 2000). Such forms of employment are related to higher levels of uncertainty,
compared to a permanent work and characterized as precarious (Kim and Kurz, 2003; Mills and
Blossfeld, 2003) with workers who experience such forms of employment facing economic, temporal
and social uncertainty.
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In Greece, after the implementation of austerity measures, depression has been much deeper than
expected, inducing among other things a sharp rise in unemployment, especially for the young and
women. Since 2010, the percentage of female employment in Greece has dropped, from 49% to
41.5%. In late 2011, 67.4% of Greek young women (15-19 years of age) were unemployed – an
almost 40% increase since 2008 (Anastasiou et al, 2015). At the end of 2012, the highest
unemployment rates were 48.2% for young women (20 –29 years of age) as against 39.2% for men of
the same age (G.S.G.E., 2012). In the EU, Greece has the largest female unemployment and the most
important gap between female and male unemployment (Tudora et al, 2015).
After six years of recession and although Greek economy is showing some signs of recovery,
unemployment has reached unprecedented levels with both male and female employment keep
decreasing (Figure 2). More than 70% of the unemployed have been without a job for more than one
year and almost half for more than two years. In July 2015, 48.6% of young active population in
Greece was unemployed - the highest in the European Union - with 21.5% male unemployment rate
compared to 29.4 % female unemployment rate (ELSAT, August 2015).
Figure 2. % change in Female (squares) and Male (triangles) employment in Greece during the current
economic crisis
The risk of poverty and social exclusion continues to increase and private investment is too weak to
lead to a sustainable employment recovery in Greece (ILO, 2014).
Under economic crises and austerity, gender inequalities persist and new forms of discrimination may
emerge (Tsiganou, 2014). Austerity measures impair work and pay equality progress and may even re-
enforce the “traditional” stereotypes on gender roles and responsibilities (Karamessini and Rubery,
2013). Traditional views on gender roles, with men having the primal role as breadwinners with
women’s role mainly on household responsibilities, can act as a barrier between women and their
opportunities for a career (Eccles, 1987).
The slight decrease of gender gaps in employment, wages and working conditions in Greece over the
last years does not reflect a “real” progress in gender equality but instead it has been attributed on the
lower employment rates, the higher unemployment and the reduced earnings of both male and female
workforce (Tsiganou, 2014).
3. Conclusion
Female labour force participation remains lower than male participation. Women account for most
unpaid work, they are overrepresented in the informal sector and among the poor, face pay
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differentials while female representation in senior public and private sector positions and
entrepreneurship remains low (Elborgh-Woytek et al, 2013; Anastasiou and Siassiakos, 2014).
The costs of unequal opportunities at work are multirole: high turnover rates, skill shortages,
constraints on growth and income (Bruegel and Perrons, 1985).
Apart of the social benefits of achieving gender equality, microeconomic and macroeconomic benefits
of closing the gender gap include (Daly, 2007; European Union, 2012):
- Improvement of the global economy, employment growth, competitiveness and economic

recovery - especially in periods of economic crises. Raising female labour force participation
rate to specific male levels would raise, for example, GDP in the United States by 5 %, in
Japan by 9% and in the United Arab Emirates by 12%.
- Positive implications for equity market performance and pension sustainability since more
working women will have disposable income.
- Improved organizational and financial performance and anhancement of the quality of

decision-making.
- Greater and better pool of skilled and motivated labour force.
- Enhancement of organizations’ reputation as equal opportunities employers. In Switzerland,

for example, organizations can be awarded an equal pay logo if they have successfully
implemented a “fair wage policy”.
- Creation of a fairer society.
Removing unlawful discrimination does not by itself guarantee that full participation and equality
can been achieved. It is important to make up for the effects of unequal treatment in the past.
Towards this direction, apart of the legislative measures, non-legislative initiatives (European
Commission, 2012, 2014) in national and corporate level can also help toward this direction.
These include:
- Regular audits, gender equality plans and voluntary targets and quantitative goals for
achieving equal representation of women in senior management and company boards. In
Belgium, for example, a law has been introduced since 2012 specifying that differences in
gender pay and labour costs should be outlined in companies’ annual audit.
- Transparent pay systems as a tool in achieving equal pay. This has been introduced in a
number of European countries like Germany and Luxembourg aiming at monitoring whether
equal pay exists between male and female employees.
- Work evaluations’ systems that are gender “unbiast” to ensure that work carried out -
irrespective of gender - is of an “equal value”. In the U.K, for example, a Statutory Code of
Practice on Equal Pay is published since 2011, acting as a guide on how equal pay legislation
can be implemented in organizations.
- Publicity over the issue of equal opportunities at work. In Europe, a number of countries have
taken initiatives like the Equal Pay Days with multiple activities taken by trade unions and
women’s organizations like the provision of information regarding gender pay gap or holding
meetings with government officials.
- Corporate policy in encouraging coaching, mentoring and networking for female employees
and training provisions for female employees aiming at higher level positions.
- Promotion of a family oriented organizational culture and reconciliation between family and
professional life by offering, for example, flexible work hours and further training and
coaching for mothers returning to their work after maternity leave.
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It is necessary to try and create a shift in attitudes and culture to support a positive change towards
limiting inequalities at work and achieving greater female representation at senior public and private
decision making positions allowing women to make full use of their professional skills and abilities.
Since gender equality is vital in achieving employment growth, competitiveness and economic
recovery, it is vital that is not undermined as cuts are made across the labour market internationally
(European Commission, 2013).
The challenge for national governments and international institutions is to prevent gender inequalities
at work, particularly when societies experience financial hardship, as Greece is currently experiencing
so dramatically.
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& Schwartz, G. (2013), Women, Work, and the Economy: Macroeconomic Gains from Gender Equity.
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182
“Metalmanu, A Cluster of Metal Businesses in Western Macedonia, Greece”
C. Voulgaraki, A.Maropoulos, S.Papanikolaou, D. Stimoniaris and S. Maropoulos

Department of Mechanical Engineering & Industrial Design, ΤΕΙ of Western Macedonia,
Koila Kozani, Greece.
E-mail: xaritini.voulg@gmail.com
ABSTRACT.
Metalmanu is a Cluster of metal enterprises in Western Macedonia, Greece. It is an initiative of the

Technological Research Centre of West Macedonia and is supported scientifically by the Technological
Education Institute. It is made up by the Scientific Team (Members of Staff from scientific establishments) and
the Metal Enterprises of the area. It was formed in 2008 and comprises approximately 250 businesses divided in
five sectors quite different to each other but all with the same objective: Viability and Expansion.
It is hoped Metalmanu will become one of the approximately 800 clusters worldwide and will develop into one
of the few successful clusters in Greece.
KEYWORDS Cluster, Metal Enterprises, Viability and Expansion, Scientific Support
1. INTRODUCTION
1.1 Regional Clusters
The role of clusters in a region is very important as they can offer opportunities for innovation
and they can bring a wide range of benefits to both businesses and to the local and regional
economy [1].
Regional Clusters promote innovation, enhance the economic growth of a region and give the
opportunity to small and medium sized firms to develop. The problem of such firms is that
they usually cannot afford to grow and modernize on their own so it is vital for them to be
part of a network of similar enterprises so as to co-operate and thus be able to compete with
large multinational firms. Regional Clusters are usually formed by SME’s in a certain
geographical area where they stimulate and support collaboration, diffusion of knowledge and
competitiveness among them [2].
Regional Clusters assist the firms to decrease their disadvantages and to change them into
advantages, so they can participate in new markets [3]. In a Regional Cluster, there is co-
operation between enterprises, universities and research centers of the region so that there is
promotion of productivity of the firms, development of innovative strategies and increase in
their competitiveness. In order to achieve Regional Clusters’ goals, cluster policies should be
developed [4].
1.2 Cluster Policies
A cluster policy includes the development of the region and the promotion of innovation. It
takes into consideration the type of enterprises that are going to collaborate with each other so
they will contribute to successful operation of the cluster. Obviously, a cluster policy needs to
183
be in tune with the regional policy. For instance, in Greece there is no determining cluster
policy but general cluster policies are all included in the regional policies which are under the
umbrella of the Greek government policy. So, in many countries a cluster policy is not
defined as an autonomous policy but it is part of regional policies [5-6].
The role of a cluster policy usually contains the diffusion of knowledge so there will be a
guide to develop new and already existing clusters. Consequently, a fertile business
environment will be provided suitable for the growth of clusters and adjusted to their needs. It
is important that except for a cluster policy there are many factors that affect the creation and
the development of clusters. There are a lot of cases that a government financial support is
vital for the viability of a start up cluster but on the other hand there are instances that private
actors undertake this financial role and they do not involve the public sector. Moreover, the
presence of all types of enterprises in a cluster determines its successful growth, because there
is a need for the existence of larger companies, of SME’s and start up’s so there will be a
completed form of it [7].
Cluster policies strengthen cluster initiatives to create networks of cluster companies, research
centers, universities and financial institutions [8]. The development of collaboration and
networking of regional clusters promote R&D, support enterprises throughout their
businesses, encourage and forward business products and services, so the potential benefits
are the development and expansion of cluster firms and all the above contribute to the
sustainable growth of the region [9].
1.3 Case Studies
The case studies reflect the relationship among the presence of clusters, innovation, regional
and economic growth. Successful regional economic development matters only in
combination with a good social and economic viability of a community [10-12]. The
experiences gained from most clustering efforts seem to have been limited in most cases to a
regional level, with very little transfer of knowledge or lessons learned to other clustering
efforts at national or EU level [13-14].
Two case studies were selected and are presented bellow to show their successful duration
(they exist until today). These examples also have specific characteristics that are similar to
the key characteristics identified for the Region of Western Macedonia.
1.3.1. Cluster Effort in Sophia, Bulgaria [15]:
The Bulgarian ICT cluster Foundation “Bulgarian Cluster for Information and
Communication Technologies” is a cluster initiative supporting emergence and development
of clusters in the field of ICT in Bulgaria. The cluster was created in 2005 as a platform for
fruitful dialogue and collaboration between ICT businesses and state administration. The
Bulgarian ICT cluster has enjoyed government support, effectively defined and established
itself within a broad range of organisations from business to infrastructure to education, and
was launched with an agreement among ICT actors on the need for progress and active policy
work at the government level. In the beginning, the main activities of the foundation were
184
focused to support government in elaboration of the basic ICT policies. Its main objective is
ICT SME growth and development through promotion of cooperation, building
competitiveness and creation of new business opportunities. ICT Cluster is a horizontal
organization. It has ambition to create and to be a mentor of successful vertical clusters in
different segments of ICT sector.
According to new economic challenges, in 2008 the organization changed its main priorities
and focused all activities to help ICT SMEs to increase their competitiveness and to develop
internationally. ICT Cluster is recognized as one of the core centers of cluster knowledge in
Bulgaria. It is a member of several European cluster platforms and networks and maintains a
very good relationship with many European and world clusters.
The main activities are devoted to reach the following goals:
 Creation of a favorable eco-system for further development of world class clusters in

Bulgaria, particularly in ICT sector;
 Development of entrepreneurship, foundation of business skills, supporting

establishment of national system for technology risk financing;
 Supporting ICT SMEs to increase their competitiveness, educate and train their
management meet the challenges of global economy;
 Supporting innovation processes, boosting technology R&D in Bulgaria.
 Stimulate and support dialogue between state administration, enterprises and

universities and research centers based on a triple helix approach.
1.3.2. Cluster Effort in Styria, Austria [16]:
Wood Cluster Styria (Austria, Holzcluster Steiermark GmbH) was established in 2001, and
has grown into a mature cluster organization acting as (i) a vital regional interface between
government, research, and business with manifold linkages beyond Styria and the forest-
based sector; and (ii) essential innovation driver on regional to international level to improve
the forest-based value added chain, and thus contributes to the overall regional economic
development, especially in rural areas.
Wood is a potential regional strength for Southern Austria. The Technology Funds Program
was an innovation scheme which focuses on strengthening the regional innovation system by
implementing cross enterprise projects especially with intra-regional impact. This program
was performed at the beginning of the cluster on very broad basis—enterprises need to
address technology or skill issues common to a number of enterprises. The amount of funding
(grants and subsidised loans) depends on factors such as the project difficulty, innovativeness
and the number of companies that could potentially benefit.
Austria has adopted targeted support for innovation and technology transfer within the wood
and digital media sectors. There is a high share of small businesses in the region and the
program should result in increased competitiveness. Three types of activities are eligible:
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intra-regional cooperation projects, projects in key sectors (wood is one of them) and co-
operation projects between enterprises and R&D institutions.
Implications for the local and regional support institutions
• Start the clustering efforts with a open perimeter, do not set up the cluster players from the
beginning, first define the new business or service the cluster should address, and then set the
perimeter of the needed new value chain.
• Define the strategy to address the lead market together with the industry but independently
from them, listen to the market leaders wherever they are, not only at your local industry. In
close collaboration with its currently 147 cluster partners from forestry, sawmilling, pulp and
paper industry, carpentry, window and flooring industry, HCS operates the Wood Innovation
Center, a technology park dedicated to forest industries, and the ECW, a prototyping
workshop and test bed for innovative ideas.
For several years, Holzcluster Steiermark GmbH operates its own Department for
Internationalization with a clear focus on South East Europe. The internationalization team is
active in the fields of forestry, biomass, innovation & cluster development, and timber
construction with the aim to increase the wood consumption and knowledge on wood.
However, the effects of regional and cluster development policies over time are difficult to
measure, as changes in economic indicators could be attributed to unrelated effects.
In the present work, a cluster of metal businesses is presented that has emerged out of
governmental policies and more precisely out of the provision of financial incentives in the
Region of Western Macedonia.
2. THE CASE OF METALMANU IN WESTERN MACEDONIA
2.1 The need of a metal cluster in Western Macedonia
There are many enterprises in Western Macedonia mainly in the sectors of metal, marble and
timber. The collaboration among the local industry with the five power plants belonging to
the Public Electricity Company has led to the creation of machining enterprises with
important know-how and exceptional mechanical equipment. In addition all this industrial
activity meant a great need for industrial buildings. Hence a big number of metal building
construction enterprises and aluminum frame enterprises developed.
The Regional Authorities of Western Macedonia and the scientific community of the area
realized the need for the Metal Industry of W.M with its numerous (approximately 250)
factories and enterprises to develop and expand. Therefore, a cluster of the metal enterprises
of Western Macedonia was formed, called Metalmanu (metal manufacture), in April 2009. It
is made up by the Scientific Team (Members of Staff from the local scientific establishments)
and the Metal Enterprises of the area aiming at their developing further and expanding as they
now have the technical expertise and the trained technical staff to:
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1. Claim more projects from the Public Electricity Corporation as some of the total budget is
claimed by other enterprises outside W.M. To do this, local companies will have to co-operate
so as to undertake the big projects which they cannot do individually.
2. Cross the borders of W.M. and find other markets within Greece.
3. Cross the borders of Greece towards the Balkan Countries which are now a new market
within Europe and even aim at the Middle East.
4. Cover the need for R&D and Innovation.
The Technological Research Centre of Western Macedonia together with the Technological
Education Institute have the suitable scientific and technical personnel, possess essential
laboratory equipment in order to support scientifically this initiative and assist to enhance the
further development of the metal cluster in Western Macedonia.
2.2. Description of “Metalmanu”
Metalmanu includes about 250 metal-enterprises in five sectors quite different to each other
(machining, metal-construction, aluminum frames, special construction, trade materials and
equipment), Table 1.
Table 1. Number of Metal Businesses in W.M.
Prefecture Machining Metal Aluminium Special Trade Total/

Construction Frames Construction Prefecture
Materials
Equipment
KOZANI 27 27 74 3 4 135
GREVENA 3 9 9 2 2 25
KASTORIA 6 10 6 5 1 28
FLORINA 3 20 14 6 2 45
TOTAL 39 66 103 16 9 233
The Enterprises range from very small employing two or three staff to quite big with over
fifty employees, Table 2. Most of them are family owned and this is the type of business the
Greek Economy mainly depends on. Furthermore, they have the technical expertise and the
trained technical staff to do a number of things. The entrepreneurs of the cluster have an
intense interest for collaboration between them in order to deal with the improvement of
production, competitiveness, research and innovation and entrance in new markets with high,
qualitative requirements.
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Table 2. Total Data for the Metal Enterprises in Western Macedonia
Prefecture Number of Number Turnover

Business of Employees
KOZANI 135 823 60.983.440,00€
GREVENA 25 73 6.500.500,00€
FLORINA 45 71 5.195.000,00€
KASTORIA 28 45 2.367.000,00€
TOTAL 233 1012 75.045.940,00€
The contribution of the metal businesses’ turnover, which form the cluster, to the local
economy is about 10% of the Regional Gross Domestic Product - GDP. These statistics were
recorded at the period of 2008-2011, at the beginning of the economic crisis. A new analysis
of the above data needs to be recorded again because of the new social-economic conditions.
“Metalmanu”, in general, aims to:
• Improve productivity and the quality of products and services.
• Enhance competitiveness, research and innovation.
• Develop new products and services adapted for the international market.
• Foster extraversion and access to new markets.
• Create an ‘ideal’ work environment.
“Metalmanu” has as principal target to differentiate the enterprises from the activity of the
Public Power Cooperation (Fig.1) and its main objective is to enhance their viability and
expansion. The cluster improves competitiveness and innovativeness of the metal enterprises
of Western Macedonia and it strengthens the local, regional and national economy. Regional
clustering strategies may help augment the competitive advantages of the firms, and
compensate for their weaknesses, thereby allowing them to compete more effectively with
various multinational competitors, each with their own diverse set of capabilities. This is the
reason why there should be a subsidy for the cluster from National or European programs
because “Metalmanu” needs opportunities to continue its function. “Metalmanu” started in
2009 from an initiative of the scientists of the Technological Research Centre and the
entrepreneurs of the area. There was a memorandum that the participants signed to legalize
the cluster. The participants are:
188
1. The Metal Enterprises of the Region.
2. The Research Technological Centre (Co-ordinator).
3. The Technological Institute of Western Macedonia.
4. The University of Western Macedonia.
5. The authorities of Western Macedonia (Region, Municipality, etc).
6. The Chambers of W.Macedonia (chamber of commerce, technical commerce, etc).
(a) (b)
Figure1. Map of Greece (a) and Map of PPC Stations in Western Macedonia (b)
Moreover, Metalamnu’s activities are:
1. The collaboration between the metal enterprises (participation in research programs,

development of common projects).
2. The development of new products and patents research, technology and innovation.
3. The participation in National and European Programs.
4. The organization of scientific congresses, meetings, and the diffusion of knowledge

between metal enterprises.
5. The promotion of extraversion and infiltration in new markets.
6. The use of laboratory equipment.
7. The certification of materials and products (resistance of materials, analyses, quality

control).
8. The development of co-operations and the networking through, scientific institutions in

national and international level.
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2.3. “Metalmanu”Present Situation
Through a subsidy from the local development fund Metalmanu has visited Sweden
(Jonkoping), Italy (Region of Toscany) and Germany to see best practices and gain
knowledge and know-how and transfer it to the local busineesses in order to transform
Western Macedonia in a Greek Region with a successful metal cluster. Furthermore,
Metalmanu has developed a digital platform through which it advertises all the member-
enterprises. This tool also informs all the members about the new research programs,
exhibitions, congresses, new opportunities, new markets and technological news. Metalmanu
supports with its experts and its state of the art technological equipment the enterprises so
they find immediate solutions to their problems.
Specifically, at Technological Education Institute (TEI) of Western Macedonia there is a

modern test center for industrial products and materials, the Center for Testing οf Materials
and Constructions (CTMC). Its laboratories are equipped with hi-tech equipment and the
highly trained professional staff guarantees precision measurements and analyses. As part of a
higher education institute it is involved in applied research and participates in National and
European programs.
Although “Metalmanu” has made a great effort, the economic crisis in Greece didn’t finally
help it to address the barriers to higher competitiveness and innovation. The main problem is
that the subsidy of the local development is over. Now, there is a need for new funding in
order to continue its function which is vital for the whole region of Western Macedonia.
Despite the economic difficulties, the cluster management team of “Metalmanu”, has
organized a lot of meetings for its members and in this way it managed to bring together the
entrepreneurs so as to communicate to each other, assist co-operations between them, to
inform them about European or National Programs and also to update their knowledge with
new information such as ISO, quality control, etc. Moreover, “Metalmanu” has participated in
conferences in order to promote its activities.
Finally, “Metalmanu” was benchmarked by the “European Secreteriat for Cluster Analysis”
and was awarded the Excellence Initiative Bronze Label Certificate.
3. CONCLUSIONS
Nowadays, the intense competition and the rapid technological development require the co-
operation of enterprises which are active in the same sector. It is important to create a network
of metal clusters in Europe as a key factor in enhancing knowledge diffusion and best practice
transfer. There will be an investigation of the geographical dispersion of firms in the regions
and a digital platform of collaboration will be developed as it will be a useful tool with which
the firms will be able to find ways to compete with multinational enterprises. Regional
clustering strategies may help augment the competitive advantage of the firms, and
compensate for their weakness, thereby allowing them to compete more effectively with
various multinational competitors. This will be achieved if there is a benchmarking tool about
the needs to be covered, and the techniques, the technologies and strategies that have to be
190
followed. So “Metalmanu” is important for the growth of the region of Western Macedonia
and it also contributes to the prosperity of the state. The success of “Metalmanu” depends on
new funding so there will be a motive for continual function of the cluster, whose role is
crucial for the region of Western Macedonia.
4. REFERENCES
[1]N.Yelkikalana, E.Söylemezoğlua, A. Kıraya, R. Sönmeza, B. Ezilmeza and M. Altunb,

“Clustering Approach as a Regional Development Tool”, Procedia - Social and Behavioral
Sciences, vol.58, pp. 503-513, 2012.
[2]E.J.Feser and B.M.Edward, “National Industry Cluster Templates: A Framework for

Applied Regional Clusters Analysis”, Regional Studies, vol.34.1, pp.1-19, 2000.
[3]S.Herliana, “Regional Innovation Cluster for Small and Medium Enterprises (SME): A
Triple Helix Concept”, Procedia - Social and Behavioral Sciences, vol.169, pp. 151–160,
2015.
[4]D.D. Fundeanu and C.S. Badele, “Regional Innovation Cluster for Small and Medium
Enterprises (SME): A Triple Helix Concept”, Procedia - Social and Behavioral Sciences,
vol.124, pp. 405–414, 2014.
[5]C.Ketels, G. Lindqvist and O. Solvell, “Strengthening Clusters and Competitiveness in

Europe. The Role of Cluster Organisations”, The Cluster Observatory, 2012.
[6]J.Nishimura and H. Okamuro, “Subsidy and Networking: The Effects of Direct and
Indirect Support Programs of the Cluster Policy”, Research Policy, vol.40, iss.5, pp. 714–727,
2011.
[7]T.Broekel, D.Fornahl and A.Morrison, “Another Cluster Premium: Innovation Subsidies

and R&D Collaboration Networks”, Research Policy, vol.44, iss.8, pp. 1431–1444, 2015.
[8]M.Porter, “Location,Competition and Economic Development: Local Clusters in a Global

Economy” Economic Development Quartely, vol.14,iss.1, 2000.
[9] D.A. Wolfe, and M.S. Gertler, “Clusters from the inside and out: Local dynamics and
global linkages”, Urban Studies vol.41,pp. 1071-1093, 2004.
[10] C.Chaplin, P.Cooke, L. D. Propris, S. MacNeill and J. Mateos-Garcia “Creative

Clusters and Innovation: Putting creativity on the map”, NESTA, 2010.
[11] K. Dvojeda, F. Nagtegaal, M. Lengton & P. Datta, “Creative industries Analysis of

Industry-Specific Framework Conditions”, Enterprise and Industry Directorate-General,
Directorate D – “SMEs and Entrepreneurship”, Unit D5 – “SMEs: Clusters & Emerging
Industries, European Union, 2013.
[12] A. Rodríguez-Pose, F. Comptour, “Do Clusters Generate Greater Innovation and

Growth?, An Analysis of European Regions”, Department of European Economic Studies,
2011.
191
[13] Z.Yang, “The Role of Economic Clusters in Improving Urban Planning Support”
Department of European Economic Studies.
[14] www.clustercollaboration.eu/documents/19868/0/best_practices_clusters-site.pdf
[15] http://www.ictcluster.bg/en/
[16] http://www.reram.eu/partners/consortium/hcs-wood-cluster-styria-austria.html
192
Exploring the Relationship of Youth Entrepreneurship, in the light of entrepreneurial

lectures in tertiary education, intentions and cultural background
Bampasis Eleftherios
Scientific Associate of Innovation & Entrepreneurship Unit, University of Athens, Stadiou 5 str., Athens P.C
10562, Greece, ebabasis@elke.uoa.gr
Abstract
In the context of this paper we examine the relationship of Youth Entrepreneurship in the light of entrepreneurial
lectures in tertiary education, intentions and cultural background. We suggest a form of Entrepreneurial
Motivation Model based on “Theory of Planned Behaviour” which formed by (Ajzen, 1991). Theory of Planned
Behaviour has also used of (Fayolle and Gailly, 2004; Krueger et al., 2000; Veciana et al., 2005). Our
Entrepreneurial Motivation Model is evaluated for its validity by Structural Equation Modeling. We test the
hypotheses that social norms influence the human behaviour in two ways: a) have an impact to personal traction
to undertake business activities and b) a positive impact to self-efficacy (Edelman and Manolova, 2008;
Peterman and Kennedy 2003). As independent variable will be set the intention of our sample to undertake
entrepreneurial initiatives. That method allows the examination the causal factors of dummy variables. The
collected variables are used in a multivariate multiple regression model formulation to evaluate the relative
performance associated with them. For the results of econometric analysis we used the programme IBM SPSS
AMOS 21 and IBM SPSS 20. Our final results of a research project based on 550 questionnaires (raw data)
selected on a three years time period (2012-2014) by graduated students in University of Athens. It seems that
entrepreneurial sessions among the students have positive attitudes on undertaking new business activities.
(Zhao et al., 2005).
Keywords: youth entrepreneurship, motivation, education
1. INTRODUCTION
In the context of this paper we examine how the entrepreneurship courses in higher education can
contribute to positive change in the business culture by encouraging the entrepreneurial initiatives of
students and graduates (Zhao et al., 2005; Bandura, 1982; Gist, 1987). The effective simulation of
entrepreneurial activities in the educational process seems to affect the confidence of young potential
entrepreneurs (self- efficacy) to undertake a business activity in the real economy, after their studies
(Edelman and Manolova, 2008; Souitaris et al., 2007; Peterman and Kennedy, 2003). The assumption
of the proposed model is that social norms can influence human behaviour in the direction of
establishing a new start up enterprise by impacting both personal attraction he feels for entrepreneurial
initiatives and effectiveness (self-efficacy). The raw data for further statistical analysis has been
compiled from a specially designed questionnaire to be used for this purpose (Behling and Law,
2000). Most questions in the questionnaire constructed in a range of five possible answers (5-point
likert-type scale). The questionnaire has been used with few variations and from other researchers
(Kickul and Zaper, 2000); (Veciana et al., 2005; Ajzen, 1991, 2001 and 2002).
2. LITERATURE REVIEW - CONCEPTUAL FRAMEWORK

The Theory of Planned Behaviour was originally presented as a Theory of Reasoned Action to predict
the tendency of a person to behave in a certain way at a certain time and space (Ajzen and Fishbein,
1980; Fishbein and Ajzen, 1975). A key component of this model is that incentives human behaviour
influenced by the attitude of the individual and depend on the subjective assessment of the risks and
benefits of the result (Ajzen, 1985). The Theory of Planned Behaviour has been successfully used to
predict and explain a wide range of behaviours around the Health and incentives, such as smoking,
193
alcohol, the use of health services etc. Theory of Planned Behaviour in the fiend of Education,
distinguishes between three types of incentives: a) behavioural incentives, b) regulation incentives and
c) control of behaviour incentives. Especially about control incentives, the Theory of Planned
Behaviour consists of six theoretical structures which together represent control of a person in his
behaviour. (Ajzen, 1991):
 Attitudes - Refers to the degree to which a person has formed favorable or unfavorable
evaluations of his behaviour.
 Behavioural motivation - Refers to mobilize factors which influence a given behaviour. The
more powerful is the motivation for the implementation of the behaviour, the more likely this
behaviour eventually implemented.
 Subjective norms - Refers to personal beliefs of a person. The implementation of his
subjective beliefs depends on whether other important people of his life applaud or not
applaud this certain behaviour.
 Social norms - Refers to the usual social codes of conduct at a group of people or a larger
cultural base. Social norms are considered regulatory about the way a group of people take
decisions in their own lives.
 Perceived strength - Refers to the perceived presence of factors that facilitate the positive
performance of behaviour. The perceived strength contributes to perceived behavioural
control of the individual at each of these factors.
 Perceived control behaviour - Refers to a person's perception of the ease or difficulty of
applying a certain behaviour. The perceived behavioural control varies depending on the
condition and action of a person. So, an individual has different perceptions of behavioural
control according to the situation. This structure of the theory was led from Theory of
Reasoned Action to Theory of Planned Behaviour. (Azjen, 1985; Ajzen and Madden 1986).
The conceptual framework of this work is presented in Figure 1. Based on the Theory of Planned
Behaviour (Ajzen, 1991; Kolvereid, 1996; Fayolle and Gailly, 2004; Krueger et al.,2000; Veciana et
al., 2005, Linan, 2004). In the first stage of our analysis the model that we use is as follows:
Behavioural Model of Entrepreneurial Motivation
External
(demographic)
variables
Personal attraction
Perceived Social Norms Entrepreneurial

incentive
Perceived
Control
Behaviour
Fig. 1: Model Specification of this Work
194
According the conceptual framework of this paper the main purpose of the questionnaire is to include
questions intended to explore the impact of entrepreneurship education and culture in entrepreneurial
incentives in the tertiary education. Specifically, we examine:
A) basic personal attributes of an aspiring entrepreneur (the need to achieve high targets, ability
to self, creativity, a feel of independence, risk-taking appetite)
B) Cultural - social environment that affects a person's behaviour (Azjen, 1991; Bandura 1993).
The sample selection concerns graduates and postgraduates students from University of Athens. All
the students who have responded to the questionnaire have had attended at least one entrepreneurship
course and economy during their university studies. The final sample concerns 550 respondents and
the raw data selected in three years time period (2012-2014). The questionnaire used to gather raw
data consists of three (3) separate sections and thirty two (32) questions.
The first section includes ten (10) questions relating to social-demographic data. More specifically, in
this section the respondents are asked to report their gender, in what age they attended
entrepreneurship course, place of birth, religious beliefs, the department of University of Athens which
was attended entrepreneurship lectures, the place of parents residence, as regards, the maximum
educational level of parents, employment of father, mother. This section is important because it
reveals the influence of cultural background in entrepreneurial incentives.
The second section of the questionnaire consists of a total of eleven (11) questions examining the
intentions of students to create their own start-up company. Specifically, respondents are asked to
report what they believe will offer them to start their own business, what factors will be an obstacle to
their entrepreneurial decision, how capable they find themselves for entrepreneurship initiative, how
likely they consider to start their own business at a five year period and in which sector they would
like to start a new business. Also respondents answered what impact had the recent economic crisis in
the decision establishing their own company and finally to answer what factors, such as the high cost,
could be an obstacle for the development of youth entrepreneurship.
The third section, also consists of eleven (11) questions, which are aimed to evaluate the importance of
entrepreneurial activities in tertiary education. Particularly, students evaluated the quality of education
for entrepreneurial programs in higher education and also referred the factors that led them to desire
attend entrepreneurship courses. According to the above review, we formulate the hypotheses to be
empirically tested through the use of multivariate multiple regression. We propose the following
hypotheses:
 H1: The social-demographics have a significant effect on incentives for establishing a new
business.
 H2: The motivation of potential entrepreneurs are mostly personal choice that depends on
incentives linked to the opportunity.
 H3: Personal attributes and self-efficacy of the aspiring entrepreneur have significant effect on
the cultural elements and socio-demographic elements in establishing a new business.
195
3. METHODOLOGY – VARIABLES AND MEASURES

Our Model of Entrepreneurial Motivation used variables arising indirectly through the answers to
individual questions in the questionnaire. These variables are referred to the literature as «latent
variables» (Wooldridge, 2009) and intended to approach the six theoretical structures, as they listed
above in section “literature review – conceptual framework”. Applying factor analysis (principal
component analysis) we are able to determine whether the questions in the questionnaire approach
these six theoretical structures effectively. Initially, it is assumed that Question 15 refers to the
“personal attraction” of the respondent. In this question the respondent is invited to express its
intention and how likely is set up his own business in five year period. The figure below shows how
we approach the concept of personal attraction (question 15): "How likely do you consider starting a
real business in a five year period. In our analysis integrate a random error e1 for the q15 variable
which based on the answers of respondents (figure 2).
Figure 2: Personal attraction as a non-observed variable

Source: Author
Moreover, we approach the concept of "perceived social norms" by the responses to questions 17, 18,
19, 20 and 21, and examine the components that influence respondents to establish their own business,
the impact of the economic crisis on their decision, how the economic crisis influence the decision to
start a new business, under the general conditions prevailing in the country. The below picture shows
that the perceptions social norms, as a non-observed variable it is approached by the responses to the
questions 17, 18, 19, 20, and 21. Each of these observed variables associated with the corresponding
random errors, as it shown in figure 3.
Figure 3: Recruit social norms as non observed variable

Source: Author
196
The "perceived control behaviour" of respondents, approached from questions 13 & 14. These
questions examine the self-efficacy of the individuals to establish a business in the future. In the
picture below it seems that the "perceived control behaviour" approached from the answers to
questions 13 & 14. The non-observed variable "perceived control" approached by the questions 13 &
14, which are observed variables with their corresponding random errors, as it is shown in figure 4.
Figure 4: Recruit control as non observed variable
Source: Author
Finally, the non-observed variable "business incentive" is approached from questions 11 & 12, which
are expressing the motivation of respondents to the direction of taking business action. In the picture
below shows the approach of non-observed variable of the observed variables which are shaped from
the answers to questions 11 and 12. Thus, each of these questions displays random errors associated
with these variables.
Figure 5: Business incentive as non observed variable

Source: Author
By using principal component analysis we examine whether the questions (q11-q21) measure the four
different theoretical structures: "Entrepreneurial incentive", "perceived social norms", "perceived
control behaviour" and"personal attraction" (Freedman et al., 2012). Below, we present the results.
197
Table 1: Table of factors (using principal component analysis)

Πίνακας παραγόντων
Παράγοντας
1 2 3 4
q11 0,741 0,078 -0,069 0,026
q12 0,656 -0,118 0,267 -0,25
q13 0,043 0,765 -0,276 0,085
q14 0,204 0,766 -0,168 0,063
q15 -0,02 0,187 0,511 0,453
q17 -0,055 0,151 -0,083 0,755
q18 -0,226 0,204 0,253 0,395
q19 0,389 -0,369 -0,006 0,457
q20 -0,001 -0,09 0,395 0,725
q21 0,218 -0,293 0,143 0,618
Principal Component Analysis.
As shown in the table, via the above questions we approach sufficiently the four conceptual structures.
Through these conceptual structures we extract the four factors compatible with the original
assumptions we have made. It is also important to examine whether the questions assumed that
measure the same dimension, indeed measure the same factor. This appears from the correlations
shown in the above table. High degree of correlation for each question indicates the factor that best
explains (Freedman et al., 2012).
4. ENTREPRENEURIAL MOTIVATION MODEL

The behavioural Model of Entrepreneurial Motivation is evaluated for its validity through the
Structural Equation Model (Structural equation modeling (SEM)). This statistical technique allows to
test the causal relationships using a combination of statistical data and qualitative assumptions. The
structural equation model is a general, very powerful multivariate analysis technique that includes
specialized forms of a number of other analytical methods (Kline, 2010). We use the “path analysis”
method, according to which are assumed causal relations between the variables that concerns: a) the
basic personal attributes of an aspiring entrepreneur and b) the cultural - social environment which
affects a person's behaviour. As a dependent variable will be the intention of the sample for
undertaking business activity. This method was chosen because it makes it possible to examine the
causal relationship between the dummy variables.We investigate the relationships between variables
using ANOVA variance analysis and cross tabulation analysis. Also we use a statistical test Pearson
chi-square for testing independence between the variables. In the implementation of ANOVA analysis,
the null hypothesis is that all groups are random samples of the same population. This is important
because if the null hypothesis is not rejected, this will automatically mean that for different groups,
resulting different averages and, therefore, there is a factor which also affects the results (Freedman et
al., 2012). Based on the analysis of variance ANOVA, we check whether the demographic data of the
sample have a significant impact on entrepreneurial incentives. For this purpose two different
variables were created: the score of each respondent to Question 11 (q11) and the score to Question 12
(q12) which captures entrepreneurial disincentives. The higher the score to (q11), the more the
respondent is mobilizing for entrepreneurship. Also, the higher the score in (q12), the more the
respondent has disincentives to establish a new business (Table 2).
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Table 2: Test results ANOVA entrepreneurial incentives and disincentives based on demographic data of sample.
ANOVA (p-values)
Entrepreneurial Entrepreneurial
incentives disincentives
Gender 0.045 0.045

Age 0.976 0.976
Place of Birth 0.427 0.065
Relegion 0.352 0.371

Department 0.000 0.038
Residence of 0.339 0.183
parents
Educational 0.705 0.239

Level of
parents
Employment 0.372 0.267

father
Employment 0.427 0.189
mother
As seen from the above table, the average score received by each student to questions 11 and 12 differ
significantly by gender (p-values: 0.045 <0.05) and the department of university (p-values: 0.00, 0.038
<0.05). For all other categories, there is no statistically significant difference between the means of the
groups regarding incentives, meaning that there is not significant affection to the entrepreneurial
mobilization of respondents.
Also, we check whether the personal attributes and self-efficacy influence statistical significantly the
entrepreneurial incentive and disincentive. For this purpose two different variables were created: the
score of each respondent to Question 13 (q13) and the score to Question 14 (q14). They were created
on this basis two variables which cumulatively indicate how high the degree of self-efficacy. Question
13 represents the personal attributes and question 14 the self-efficacy. As shown in the above table, the
personal attributes, and the self-efficacy appear to have a significant effect on the business incentive
and disincentive, as the p-value of the test is less than a significance level of 0.05. The results of
variance ANOVA are presented below (Table 3):
Table 3: Test results ANOVA entrepreneurial incentives and disincentives, based on the personal attributes
and self-efficacy.
ANOVA (p-values)
Entrepreneurial Entrepreneurial
incentives disincentives
Personal attributes 0.00 0.00

Self-efficacy 0.00 0.037
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Test results of ANOVA analysis to entrepreneurial incentives and disincentives which based on
demographic data, personal attributes and self-efficacy of sample analyzed by path analysis, according
to the model laid down in Chapter methodology. It seems that entrepreneurial education as a factor
affects significantly the trend of undertaking a new business venture. Also, the entrepreneurial
knowledge of the students appears to be applied prospectively for starting a new business. In
conclusion, it seems that both personal attraction and entrepreneurial education (which affects
perceived control through self-efficacy) are important variables of determing business motivation. On
this basis, it is interesting to examine, if there is a dependency relationship between the entrepreneurial
mobilization level (if total score is greater or smaller than zero) and whether respondents believed that
implementation of entrepreneurial education can help them to start a new business activity. It is
examined in what way business education affects the business motivation. In table 4 represented the
results of cross-tabulation analysis with Pearson’s chi-square test is appropriate for categorical
variables.
Table 4: Cross-tabulation of mobilization and entrepreneurial education

Cross - tabulation
Does Entrepreneurial education Total
help you to start a new
business activity?
Yes No other
Motivation Negative 9 10 4 23
Motivation Positive 363 88 76 527
Total 372 98 80 550
As shown in the above table, respondents who have a negative mobilization tend to respond more
“No” in relation to the learning process of the entrepreneurship courses and starting a new business.
The opposite happens with those who have a positive mobilization who tend to respond more “Yes”.
Pearson’s chi-square statistical test gave height = 11.89 with a p-value 0.003 significance level. This
means independence between the answers of motivated and non-motivated respondents undertaking a
new business activity. In that case, there is a direct relationship between entrepreneurial education and
business mobilization: if entrepreneurial knowledge provided is satisfactory, it will mobilize more
aspiring entrepreneurs to start a new business.
Cross-tabulation
Personal Total
Attraction
Establish-ment Probably No Probably Yes Probability

of (till betwee (0%)
enterprise 50%) n
probabilit (51%-
y (100%) 99%)
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Motivation Negative 0 12 6 5 23
Possitive 65 206 238 18 527

Total 65 218 244 23 550
As shown in the above table, respondents who have a negative motivation in establishing a new
business. These results may be verified through the statistical Pearson chi-square. Specifically, the
statistical test is = 23.29 with a p-value 0.00. This demonstrates independence between the views of
groups and hence the personal attraction actually affects a total mobilization.
Finally, for the purposes of the "path analysis" method, we suggest a variable which was created for
demographics data and particularly for what seemed to have an effect on motivation (gender and
university department). A dummy captures both the influence (multiplication of gender and age). Also,
another variable was created: the business motivation (which represents scores of respondents on
questions relating to incentives minus disincentives) to entrepreneurial activity. On this basis, when
the result of subtraction is positive, it will mean that there are comparatively higher incentives, while if
it is negative, there are more than disincentives.The table below shows the rates of the individual
regressions and which expresses the above path analysis diagram.
Table 5: Analysis regression model with generalized least squares

Regression Analysis (Generalised Least Squares)
Depended Variable Independed Variable Factor Standard
Error
Perceived behavioural External (demographic) 0.05 0.06

control variables
Perceived Social norms External (demographic) -0,05 0.09

variables
Personal Attraction External (demographic) 0.00 0.01

variables
Perceived behavioural Perceived Social norms 0.32 0.03
control
Personal Attraction Perceived Social norms 0.00 0.00
Business Incentive Perceived behavioural 0.33 0.03

control
Business Incentive Personal Attraction -0,24 0.25
Business Incentive Perceived Social norms 0.01 0.03
As seen from the above individual regressions, the demographics of the respondents seem to have a
positive effect on hires control (0.05), negative perceptions in social norms (-0.05) and no effect to
personal attraction (0.00). Therefore, demographics (gender and age) have not any significant effect to
the personal attraction, perceived social norms and perceived control behaviour in the sample. The
perceptions social norms seems to have positive impact on the perceived control behaviour (0.32) and
no effect to personal attraction (0.00). Finally, the Business Incentive seems to be affected of the
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perceived control behaviour (0.33) and the personal attraction (-0.24). Also, the perceived social
norms seems to have little effects to the business case (0.01).
5. CONCLUSION
Based on the methodology followed in the context of this paper it seems that demographics play a
small role in the formulation of the variables related to personal attraction, perceived social norms and
perceived behavioural control. The perceived behavioural control seems to be the most important
variable affecting the business case, along with personal attraction. In conclusion, the entrepreneurial
lectures in tertiary education positively affects the self-efficacy and attitudes of students in the way of
learning how to make a business plan and how to establish an enterprise, after their studies. Also, the
empirical consideration of students who have attended entrepreneurship courses at the University of
Athens shows that students increase their abilities, skills and knowledge by stimulating their business
motivation and intention to undertake a business activity. It also came out that the fear of risk-taking is
not an obstacle for those students who have completed courses in entrepreneurship.
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Service-Oriented Systems and Service Level Agreements applied in Health Information

Technologies
Stella Christopoulou1, Theodore Kotsilieris2, Ioannis Anagnostopoulos3 and Vasiliki

Dimopoulou4
1
Dept. of Business and Organizations Administration, Technological Educational Institute of
Peloponnese, Kalamata, Greece, stellachristop@gmail.com
2
Dept. of Business and Organizations Administration, Technological Educational Institute of
Peloponnese, Kalamata, Greece, thkots@gmail.com
3
Dept. of Computer Science and Biomedical Informatics, School of Sciences, University of Thessaly,
Lamia, Greece, janag@ucg.gr
4
General Hospital of Kalamata, Greece
Abstract
In nowadays, the majority of health care provision supported by Information Technology (IT) services including
Internet, cloud tech, e-commerce, e-health etc. Some emerging issues around the application of these
technologies and services are on the one hand their quality assurance, reliability and security. On the other
hand research efforts also focus on their costing so as to allow potential users to enjoy the agreed service.
Accordingly, a healthcare organization must fully investigate risks and its costs (operating, maintenance etc.)
and apply appropriate metrics to assess the contribution of Information and Communication Technology (ICT)
resources services and applications.
Towards this objective in cases that an organization outsourcing IT resources and services a useful tool that is
widely used from enterprises within the contracts of information technology services trading is Service Level
Management and Service Level Agreement (SLA). SLA is a contract between the user and the provider of the
service. It is a document with legal validity that is part of a broader contract that accrues through the
assignment and the provision of services to a third party partner.
The compilation of an SLA and the efficient monitoring of the offered services are of crucial financial
importance. The SLAs management and the assessment of the measurements results performed are within the
scope of every enterprise that provides such services in the field. Furthermore, software tools that focus on
developing, managing and monitoring SLAs, are well-established.
Our work, thoroughly studies the issues of contract specifications, languages, standards and modelling of
resource dependability for SLA-Based Services within the healthcare domain and analyzes them under the prism
of the literature, research and business gained experience. Alongside, a detailed survey is attempted on specific
characteristics of the SLAs of existing studies and especially in the healthcare field will be presented. Finally, we
propose the development of an Integrated Health Economic Model for the Service Level Management in the
health market.
KEYWORDS: Service-Oriented Systems; Service Level Agreement
JEL CLASSIFICATION CODES Health Economics (HE22)
Introduction
Health economics [1], [2] is a scientific sector that consists of the ‘economics of health’ and the
‘economics of health care’. These sub disciplines are connected by the relationship between the state
of health and the use of medical services. The ‘economics of health’ tries to explain individual health-
related behavior on the basis of modern microeconomic theory and moreover seeks to determine
whether there are health policies that are welfare improving. Also, the main issue of the ‘economics of
health care’ is to explain the factors which determine the quantity and quality of medical services
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produced in the economy and deals with the question of designing incentives for both suppliers and
users of medical services.
Health economics involve methods and tools for the identification, measurement, valuation, and
comparison of the costs (inputs) and benefits (outcomes) of two or more alternative options in order to
improve medical and healthcare decision. Alternative options refer to the range of ways (treatments or
activities) in which health care resources can be used to increase population health; for example,
pharmaceutical and surgical interventions, screening and health promotion programmes [3]. Economic
evaluation is used by policy makers and healthcare payers to inform medicine pricing and
reimbursement decisions [4].
Generally, there several type of models, according to:
 whether all the model variables are deterministic, economic models can be classified as
stochastic or non-stochastic models;
 whether all the variables are quantitative, economic models are classified as discrete or
continuous choice model;
 the model's intended purpose/function, it can be classified as quantitative or qualitative;
 the model's ambit, it can be classified as a general equilibrium model, a partial equilibrium
model, or even a non-equilibrium model;
 the economic agent's characteristics, models can be classified as rational agent models,
representative agent models etc.
The various approaches to economic evaluation of health [1] compare the benefits of a health
intervention to its cost. With regard to the benefits of the intervention, three alternative units of
measurement can be distinguished:
 Natural units on a one-dimensional scale evaluation. The corresponding method of this

evaluation is called Cost-effectiveness analysis. It measures outcomes in 'natural units', such as
mmHg, symptom free days or life years gained.
 Units of a cardinal utility function evaluation which maps the multi-dimensional concept of
health into a scalar index. The corresponding method is called Cost–utility analysis that
measures outcomes in a composite metric of both length and Quality of Life (QoL), the
Quality-adjusted life year (QALY).
 Units of money evaluation. The corresponding method is called Cost–benefit analysis. It costs
and benefits are both valued in cash terms. Also in this category is included the Cost-
minimization analysis in which the effectiveness of the comparators in question must be
proven to be equivalent and Cost consequence analysis in which the outcomes are reported
independently from costs.
A basic aspect in economics is the resource management. Consequently, a metrics framework for
evaluation of economic resource allocation usually is used in service-oriented architectures (SOA). A
SOA is an architectural pattern in computer software design in which application components provide
services to other components via a communications protocol, typically over a network e.g. web and
cloud services that supports content resource management [5]. A SOA provides a flexible architecture
that unifies business processes by modularizing large applications into services. SOA management
includes many interrelated functions such as Auditing, monitoring, and troubleshooting, Dynamic
services or resources provisioning, Service lifecycle/state management, Scalability/extensibility and
the Service-level agreement (SLA) management [6]. More specifically, an SLA identifies the service
commitments of both service supplier and service buyer to each other at the limits of their
responsibilities. SLAs include the definitions, the auditing functions, processes or outputs delivered
from the service provider, and a set of pre-agreed performance levels [7].
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The increasing use of SLAs can likely be explained by the increasing attention for outsourcing, which
has become a popular and often used management technique [8]. Important reasons for the
outsourcing of services include reduced costs, improved service quality and risk avoidance.
Furthermore, outsourcing allows the client to exploit its expertise without distraction caused by non-
core activities [8].
SLAs can be divided into two basic types: direct and indirect or support services [7]. The most
frequently outsourced processes are Information and Communication Technology (ICT) applications
[8]. SLAs are therefore most often used in the world of ICT and can be defined as “formal negotiated
agreements that enable ICT organizations and their customers to collaboratively identify, discuss and
manage ICT service expectations” [9]. An SLA should contain the following information: (a) services
(b) service element requirements (c) service levels and (d) forms [7].
The SLAs are defined also at different levels, based on whether are targeted to different customer
groups and/or supports different types of services e.g. Customer-based SLAs, Service-based SLAs, and
Multilevel SLAs.
Moreover, an organization may use an SLA as an internal business activity such as in ICT or in Human
resource units, to enable quality of service to be benchmarked across different locations, departments
or external service providers.
Some of the common uses for an SLA would be for network operators and service providers,
telecommunication service providers, Application Service Providers, Content Service Providers,
Internet Service Providers, cloud computing service providers and outsourcing.
Aim and objectives of this study

The broad aim of the study is to present the emerging models, applications, tools, and the factors likely
to affect the success or failure of the Service Level Management (SLM) in health market. It also
assesses whether the use of SLA contracts on ICT provides the tools with the capacities both for the
implementation of the health as much as the proper evaluation of the services in order to be proposed
for broader market entry.
More analytically, the general objectives are:
1. Show the relative studies about the Healthcare management via ICTs supported by the
use of SLAs.
2. Describe the Service Level Management models for ICT and SLA contracts on access
to health services
3. Describe the formal structures that are used to describe the basic features and types of
an SLA.
4. The applications of the SLM on ICT in health market (e.g. the government,
development partners and health and medical public and private bodies) and how this
explains the operation of SLA contracts.
5. Finally to highlight the need for the development of an Integrated Health Economic
Model for SLM on ICT in the health market.
Methods
The type of this review based on the methodological approach is a narrative review while also
considered by its objective perspective [10] it is a model review.
Initially, for the needs of our research we searched in electronic databases (e.g. Scholar Google78 and
ScienceDirect79) in accordance with specific searching criteria. We used as searching keywords the
78
www.scholar.google.com
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proper combinations of the terms: service level agreement, service level management, health
economics, Health Informatics, Health Information technologies and Information and Computer
technologies. Accordingly we selected a large number of articles. We considered the relevance of
these articles on the basis of our subject and of them chose finally 33 articles (Table 4) and included
them in our review.
Table 4: The included articles in the review

Νο Articles
1 (Aazadnia & Fasanghari, 2008)
2 (Bakalos, Kyriazis, Protonotarios, Varvarigou, & Barreto)
3 (Benharref & Serhani, 2014).
4 (Berbée, Gemmel, Droesbeke, Casteleyn, & Vandaele, 2009)
5 (Brandis, Dzombeta, & Haufe, 2014)
6 (Czajkowski, Foster, Kesselman, Sander, & Tuecke, 2002)
7 (Czekster, Fernandes, Sales, Webber, & Zorzo, 2011)
8 (Dinh, Lee, Niyato, & Wang, 2013)
9 (Evaluation, 2001)
10 (Faniyi, Bahsoon, & Theodoropoulos, 2012)
11 (Flynn, Gregory, Makki, & Gabbay, 2009)
12 (Group & Committee, 2006)
13 (Jrad, Tao, Brandic, & Streit, 2015)
14 (Karadsheh, 2012)
15 (Kertesz, Kecskemeti, & Brandic, 2014)
16 (Lamanna, Skene, & Emmerich, 2003)
17 (Larson, 1998)
18 (Liu & Ma, 2005)
19 (Lourenço, Santos-Pereira, Rijo, & Cruz-Correia, 2014)
20 (Ludwig, Keller, Dan, King, & Franck, 2003)
21 (Mac\'\ias & Guitart, 2015)
22 (Maurer, Emeakaroha, Brandic, & Altmann, 2012),
23 (McLaughlin, Burns, Toal, McKillen, & Sezer, 2012)
24 (Meziane & Benbernou, 2010)
25 (Mohanty & Xie, 2007)
26 (Nikolow, et al., 2013).
27 (Ranaldo & Zimeo, 2015)
28 (Reichl, Hausheer, & Stiller, 2003)
29 (Robert, Otrok, Quttoum, & Boukhris, 2012)
30 (Tebbani & Aib, 2006)
31 (Tikotekar, et al., 2008).
32 (Vilaplana, Solsona, Abella, Filgueira, & Rius, 2013)
33 (Yang, Nasser, Surridge, & Middleton, 2012)
Consequently the selected studies are compared and summarized on the basis of the existing theories
and models. The results are presented in a qualitative rather than a quantitative level and discussed.
Subsequently a Delphi method is used to gather expert opinions and to estimate our ideas. Then an
introduction of a new model in the specific field of research is proposed.
79
www.sciencedirect.com
207
Hence in following sections we will discuss about:
1. The healthcare management via ICTs (i.e market and ICT applications in healthcare),
2. the Service Level Management (i.e. Service Level Management models for ICT, the
ICT services of providers described in SLAs and the measurements of SLAs) and
finally
3. We focus on the SLM for ICT applications in the health market and proposed the
development of a relative Integrated Health Economic Model in the specific domain.
Results
Healthcare management via ICTs
Outsourcing in information technology and e-business technologies (e-services, including IT
applications, web, and cloud services) has led the software industry from software as products to
software as services [11]. Initially in 2005, the researchers in the article [11] examined and estimated
that service level management is an important factor concerning the adoption of application services.
Using the Technology Acceptance Model obtained positive results about the use of service oriented
electronic medical records.
Another study [12] about the management of primary care via eHealth services (Prescriptions, Medical
Records, Email, Appointment system etc.) revealed that some patients perceive advantages (choice of
appointment times and GP, easier communication with the practice, independence from receptionists),
while others identified several disadvantages (lack of human contact, preference for conventional use,
lack of IT or Internet experience and registration problems).
Also, the results of the study [13] depict that service oriented management along with the use of SLAs
are useful for hospitals, as they improve people’s insight into processes, stimulate people to think
about performance measurement and, in some cases, also lead to improved services. The main
advantages of SLAs lie in improved process mapping and improved performance measurement. The
contracts include SLAs relevant with different health domains and departments e.g. cleaning program,
pharmacy (e.g. agreements on cooled medication), maintenance and operation of equipment, materials
and technology, food services etc. [13].
Moreover, nowadays novel approaches are required to deal with increased demand for healthcare due
to the growth of the aging population and the need for more innovative and cost effective solutions.
A valuable research [14] in Portuguese hospitals revealed that Service Level Management is one of the
most critical processes for the management of information technology and products as services begin
to be almost a necessary condition for the survival of ICT vendors. Also, it is identified that it is
necessary to establish monitoring metrics to help in the evaluation of quality of service and provide
real time information.
Market and ICT Applications in Healthcare

Health care costs refer to the available resources of the health care system; for example, clinical staff
and healthcare providers, capital equipment and buildings and consumables such drugs [3] and ICTs.
ICT is a significant type of resource as may support eHealth services.
Accordingly, in creating an economic model of an eHealth application, we need to determine all the
costs in a way that allows for a rational comparison. For example if we move from local to cloud
computing architecture, we may compare the incurred cost of infrastructures and services as resources
e.g. a server, storage, network, backup and archive, disaster recovery, software maintenance, help
desk support, operational support personnel and infrastructure software costs. From the Quality of
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Service perspective these resources can be dynamically reconfigured to optimum resource utilization.
This pool of resources is typically exploited by a pay-per-use model that is ruled by customized SLAs
[15].
Service Level Management

Service Level Management models for ICT
The SLA Parameter Framework [16] provides a matrix for organizing parameters into six categories.
The three parameter categories are 1) technology-specific, 2) service-specific and 3)
technology/service-independent. The Customer has two interests: 1) impact on the single user and 2)
aggregate performance for a defined period.
An essential issue in ICTs is to map activities such as computation or data transfer onto resources that
meet the quality of service metrics requirements e.g. performance, cost, security, etc. [17].
We present the most common resource management models which require negotiation among
application and resources to discover, reserve, acquire, configure, and monitor the required resources
and the development and implementation of the relevant SLAs to deliver and perform the relative
activities. Thus, some indicative examples from different ICT domains and research fields are depicted
below.
Cloud models: The potential of accessing an infinite pool of computational resources at a drastically
reduced price has made cloud computing popular. In nowadays, users have the option of selecting
between multiple cloud providers and subsequently switching to a more reliable one in case of a
provider’s inability to meet its SLA. In [18], the authors propose a novel dynamic data-driven
architecture capable of realizing resource provision in a cloud federation with minimal SLA violations.
One important element of any market mechanism is the pricing strategy adopted by both buyer and
seller agents. Consequently, in this paper the jobs of the SLA are priced. For example is depicted the
buying price computation. Thus, buyers (simulator instances) determine their private valuation for a
job based on the following SLA parameters: (a) job priority and (b) expected job completion time.
Their private valuation is determined by their utility function, which for buyer MS when allocating job
J is defined by:
α β (1)
where x1 and x2 represent price and reliability respectively;
U(x1) and U(x2) are price and reliability distribution functions respectively;
and U(J) is the payoff derived from the execution of job J.
The co-efficients α and β represent the priority and expected job completion time as defined in the
SLA.
The values of α and β are specified by the cloud user in the SLA such that the buyer’s objective
reflects the actual weight of the job.
Consequently, the buyer seeks to maximize its utility function by meeting the job’s SLA constraint.
On the other is depicted the Selling Price Computation. Sellers (CSPs) compete in the cloud federation
market to increase their profit. This means that they make trading decisions based on the utility they
expect to derive from the execution of the job. The utility of a seller, when executing a job J is defined
by:
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(2)
where S (J) is the selling price decision functions and C(J) is the cost incurred for executing the job.
Eventually, the seller’s objective is to maximize its utility function at any given time.
Also, [19] presents a trust model for cloud markets, a capacity-driven utility model is adopted in [20]
and a business-oriented cloud federation model for real-time applications in [21]. Moreover, [22]
presents a framework for governance architecture management in cloud environments using a
semantic perspective. Also, an interoperable and self-adaptive approach for SLA-based service
virtualization in heterogeneous cloud environments has been established in [23].
Moreover in [24], the authors proposed a mapping approach that adapts SLA templates based on SLA
mappings of users. It allows cloud users to define mappings between a public SLA template, which is
available in the cloud market, and their private SLA templates, which are used for various in-house
business processes of the cloud user. The simulation results of this research revealed that the use of
heuristics within adaptation methods allows balancing the costs and benefits of the SLA mapping
approach.
Finally, a study that describes architectures, applications and approaches of mobile cloud computing is
described in [25].
Models for distributed systems: A resource management model applied in distributed systems is
proposed in [17]. The model distinguishes three kinds of resource-independent service level
agreements (a task SLA, a Resource SLA and a Binding SLA), formalizing agreements to deliver
capability, perform activities, and bind activities to capabilities, respectively. Also a model of QoS
Management in a Distributed Data Sharing and Archiving System is discussed in [26].
Web models: A stochastic model [27] for performance evaluation proposed as a model for QoS
assessment in multi-tier web services, a dynamic privacy model is described in [28] and the Cumulus
Pricing model as an adaptive framework for feasible, efficient, and user-friendly tariffing of Internet
services described in [29].
Security models: A security policies and service level agreement to IaaS service model proposed in
[30] to enhance security and transition.
Models for Networks and wireless systems: Nowadays, there is an explosion in the bandwidth
consumed by sophisticated mobile communication devices. Consequently, QoS for traffic classes and
flows has become a major issue for emerging wireless technologies, where the provisioning of SLA
and QoS guarantees are vital for future operator business models and providers [31].
[31] proposes a full hardware implementation of a Weighted Fair Queuing packet scheduler. The
architecture that has been implemented provides fine granularity QoS support for Internet traffic at
multi-gigabit throughput rates. The circuit is ideal for deployment with high bandwidth wireline and
wireless technologies where tiered services based on SLA’s are emerging for users and content
providers.
Also, a distributed autonomic resource management model for Virtual Private Networks (VPN) is
presented in [32]. This model needs to satisfy the VPN operators that have signed a SLA with the ISP
to guarantee their QoS level.
Finally, a performance analysis of a novel Architecture for ubiquitous Mobile Communications (AMC)
to integrate heterogeneous wireless systems is presented in [33]. The researchers’ proposal AMC
eliminates the need for direct SLAs among service providers by using a third party, Network Inter-
210
operating Agent (NIA) and moreover, the number of SLAs required in AMC is also well determined
for a given number of network operators.
Business models: There are some frameworks such as Information Technology Infrastructure Library
(ITIL) for IT Service Management that consists of a set of guidelines that specify what an IT
organization should do. More specifically in the paper [34] proposed an ITIL management based on
Six Sigma business oriented approach to improve the Information Technology Service Management
that also include one or more SLA processes. Six Sigma is a useful tool that may improve the
management performance that is based on statistical measurement, drives quality improvement, and
reduces operational costs that companies have used.
Service Level Agreement Definition Languages

A Service Level Agreement Definition Language (SLA-DL) is a formal structure that is used to
describe the basic features of an SLA. The most common characteristics are the following [35]:
 Parameterisation which refers to the ability of description of quantitative and

moreover occasionally qualitative characteristics of services using the appropriate
parameters.
 Compositionality which refers to the ability of description of the services’ synthesis
between different actors.
 Validation which refers to the ability to control validation of syntax and cohesion of
synthesized services.
 Monitoring which refers to an automatic monitoring of the service provided.
 Enforcement which refers to the possibility of agreed services in an automated manner
via the implementation of the appropriate techniques.
Some of the most known SLA-DLs are:
a) The Web Service Level Agreement (WSLA) language is designed to capture service level
agreements in a formal way to enable automatic configuration of both the service
implementing system of the service providing organization as well as the system that is
used to supervise the agreed quality of service. To facilitate automatic configuration the
WSLA comprises: (a) a description of the parties, their roles (provider, customer, third
parties) and the action interfaces they expose to the other parties of the contract, (b) a
detailed specification of the service level parameters (SLA parameters) guarantees are
applied to, and (c) a representation of the parties’ obligations that define the service level
that is guaranteed with respect to the SLA Parameters defined in the service definition
section [36].
b) The Service Level Agreement Legal and Open Model (SLALOM) that proposing an initial
set of management mechanisms enhancing the SLA lifecycle. It consists of a specification
for cloud SLAs that will allow the concise and clear description of SLAs in terms of the
defined service quality attributes (objectives) and metrics [37] .
c) The Generalized Service Level Agreement Model which is a language for SLA defined as
an XML schema which implements the Generalized Service Level Agreement information
model. It supports multi-party service relationships through a role-based mechanism. It is
intended to catch up the complex nature of service interactivity in the broader range of
SLA modeling of all sorts of IT business relationships and can be used by service
providers, service customers, and third parties [38].
d) Service Level Agreement Language (SLAng) is a formal structure in an XML-based form
for defining SLAs which rests on the description languages of the Web services (WSDL)
and the server applications (J2EE, CORBA) [35].
211
Types of SLAs
In [35] are defined seven different types of SLAs. The authors of the article order the possible
agreements between the different types of parties i.e. on the one hand identified in a reference model
the Vertical SLAs which are the Application between applications/web-services and components, the
Hosting which is between container and component providers, the Persistence between a container
provider and an SSP and the Communication between container and network providers. On the other
identified the Horizontal SLAs are the Service which is between component and web service providers,
the Container between container providers and finally the Networking between network providers.
Responsibilities and Parameters (metrics) of SLAs

For each kind of SLA a general structure is defined, including responsibilities of the client of the
service, responsibilities of the service provider and mutual responsibilities to be complied by both of
them. Responsibilities are expressed in terms of end-point, contractual and Service Level Specification
(SLS) parameters (metrics or indicators) [35]. Metrics are definitions of values of service properties
that are measured from a service providing system or computed from other metrics and constants.
Metrics are the key instrument to describe what SLA Parameters mean by specifying how to measure
the parameter values [36].
Some of the more common metrics that measure an SLA may include many measurements [7] [14]
[16] [39] e.g. hours of service, response time, deadline for resolution, security service, serviceability,
reliability, availability, performance, capacity, user satisfaction, business hours, request resolution
time, recovery time, escalation procedures, emergency procedures, penalties, exclusions,
interoperability, performance, responsibilities , integrity, confidence, latency, consistency etc. Finally,
where a service provider fails to achieve the agreed service level, the service provider may pay
“failure credits” to the client [7].
ICT Services of Providers described in SLAs

More analytically, some of the more common ICT Services of Providers described in SLAs may be the
following:
 Network Infrastructure
 Wireless and Mobile Computing
 Telephony
 Email
 Web
 User Account Provisioning
 Application Software
 Software licensing & patching
 Minor software upgrades
 Application server backup and recovery
 User security & account management
 Application data backup and recovery
 Automated server monitoring
 User security & account management
 Application data backup and recovery
 Automated server monitoring
 IP Service with DSL Access
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 Application service provided by the ISP to its Customers
Towards the development of an Integrated Health Economic Model for the Service Level
Management in the health market
The largest part of the health services are the hospital units. Consequently, it is necessary to equip
hospitals with the means and methods needed to assure quality in their health services [13], which are
the following:
 Conduct process mapping and performance measurement effectively and efficiently;

 Efficiently manage the human and technological resources;
 Concentrate on their core business - patient care;
 Provide services at the highest quality possible
Moreover, in case of outsourcing health market services between the provider and the recipient of a
service a SLA is applied. The relevant contracts made with healthcare organizations must respond to
questions such as: (a) what services are included? (b) What impact exists when services do not work?
(c) What actions can be taken by both parties? d) Who is responsible in case of default? [40]
Accordingly we can imagine a health care organization as (a) a service buyer but also as (b) a service
provider (i.e. telehealth and telecare services provision).
For example, when a mobile user (recipient of health services) executes a mobile health application on
the cloud, this may involve a software and/or data service provider (providing a software/data license),
a mobile service provider, an Internet service provider and a cloud service provider. The recipient’s
healthcare costs should be allocated between these actors with an accurate and reliable manner. Thus
distinct SLAs are required among the entities that provide/enjoy a service from the other. All these
SLAs must be compatible, complementary, clearly determined and complete.
Mobile service Mobile service

Provider (1) Provider (2)
SL
6
A
A1
SL
Cloud service
Provider SLA
2
SLA5
Recipient of
SLA
3
Telehealth service health services
Provider
A4
Internet
SL
SL
(Hospital/Healthcare center)
service
A6
Provider (1)
Software/Data Internet
service service
Provider Provider (2)
Figure 4: An SLA representation for mHealth application
As depicted in Fig. 1, the services of the service provider (e.g. telehealth), a hospital or a medical
center requires the prior provision of ICT services and the corresponding application of the relevant
SLA from the other providers (the cloud service provider, the Internet service provider etc.). In this
case, it is useful to construct an integrated health economic model using a Cost–Utility analysis, and
the relevant SLAs as a resource management tool. Thus SLAs may link costs of ICT services with
213
health services in QoL or QUALY (e.g. cost of service per patient’s earned year or improved health
year). In this health economic model, the metrics of the services of the different SLAs must be
connected by a suitable manner such as those resulting from the technical and clinical trials.
The largest part of the health services is the hospital units. Consequently, it is necessary to provide
health entities with the means and methods needed to enable quality of their health services [13],
which are the following:
 Conduct process mapping and performance measurement effectively and efficiently;

 Efficiently manage the human and technological resources;
 Concentrate on their core business - patient care;
 Provide services at the highest quality possible.
Moreover, many articles present the design of e-health systems especially in the cloud, modelled by
SOA architectures and the use of SLAs to support QoS in healthcare domain [41], [42].
Also the researchers in [43] designed an ontological model for a semantic description of the problem
and developed a novel utility-based genetic matching algorithm for selecting the cloud services with
respect to the user requirements and the properties of the clouds. It was applied a simulation-based
evaluation with a real DNA sequencing healthcare workflow as application. The results had shown the
effectiveness of this approach in reducing the total costs and fulfilling the requested service quality
even with large-scale service compositions.
Finally it's known that the hospitals are heavily dependent on the proper functioning of ICT. This
operation is agreed between supplier / customer based on SLAs that describe how the system should
work and penalties in case of failure. In the research article [14] two Portuguese hospitals were
examined for performance and maintenance of their SLAs. The results of the analysis point to the need
for significant improvements in the details of the SLAs.
Discussion and Conclusion

Present health systems face major challenges associated with the continuous scientific developments
in the health sector, economics models, organizational reforms, the continuous increase of the pressure
on public finances, the need to control deficits and debt, increase the demand posed by users and the
society, and the use of new health practices due to technological developments.
These challenges imply the adoption of new management tools from existing health information so as
to be capable of meeting the modern requirements especially in SOA. Major issues are the widespread
application of these tools and the efficient management of limited resources that healthcare
organizations have. The most essential features of these tools must promote a health system that
supports the principles of quality, effectiveness, efficiency, equity and access to health care [14].
The implementation of SLAs in health domain is important for (a) Economical (b) Clinical/medical (c)
Administrational/managerial/operational and (d) Technical reasons.
The major sectors of health market identified in the following areas:
 Health care financing market (e.g. pharmacies and pharmaceutical companies)

 Physician and nurses services market (general practitioners and private
physicians/clinicians of all specialties)
 Institutional services market (e.g. hospitals, health centers, hospices, nursing homes,
medical centers, clinics etc.)
214
 Input or factor markets80 and

 Professional education market.
This review identified many applications relative to SLAs applied in HIT between IT companies as
providers and hospitals as buyers. However, despite many studies, research and case studies in this
domain we observe nonexistent evidence of similar applications on a business level applied between
patients and hospitals. Furthermore, until today is totally absent an integrated health economic model
and the relevant SLAs that operate as a resource management tool which additionally links properly
the costs of ICT services with health services provided to the patients (inpatients and outpatients). Our
future work intends to fill this gap as we include in our objectives the development of the indicators
for the assessment of the modern ICTs (i.e. mobile web and cloud) that support health services. These
indicators will be used as metrics of the proposed integrated health economic model to support SLAs
contracts. Overall, an important conclusion of this review is that SLM is expected to play a potential
role in improving the quality and access to healthcare services using ICTs and may reduce the costs.
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218
Operating within Legislative Restrictions. Marketing Funds for Urban Restoration

Supporting the Fight against Aesthetic Pollution.
Odysseas N. Kopsidas1, Leonidas Fragkos-Livanios2
1
Department of Industrial Management & Technology University of Piraeus 80 Karaoli&Dimitriou
Str., 18534, Piraeus, Greece, e-mail: odykopsi@yahoo.gr
2
Division of Natural Sciences and Applications, Hellenic Army Academy, 16673, Vari, Attiki,
Greece, e-mail: leonfragkos@yahoo.co.uk
Abstract
We suggest a novel marketing approach operating within legislative restrictions such as the
prohibition of outdoor advertising in a city environment. The case examined is the city of Athens. The
purpose of this study is to present a modified model of internalizing external costs caused by the
operation of a manufacturing unit in conjunction with a new reality created. The model is shaped by
means of marketing practices. The environment is characterized as a public good.
Contingent Valuation Method and expert opinions were used to evaluate the effect of aesthetic
pollution and estimate the potential of our proposal. The proposal describes an exemplary
collaboration between private and public sector that brings multiple benefits without burdening any
social group, on the basis of a Pigouvian subsidy scheme for renovation of city building facades,
including motive to encourage advertising on the scaffoldings used for the renovation (which is
allowed by law). Advertisers will place advertising screens on the scaffold while revenues from
advertising will fund the renovation of the facade of the building. The suggested solution combines two
seemingly competing activities of the city, outdoor advertising and the aesthetic reconstruction of
building facades. Activity is transferred from micro to macroeconomic level, while at the same time
Pareto criterion of optimality is met.
Keywords: scaffolding advertising Aesthetic Pollution, Contingent Valuation Method, restoration
1. INTRODUCTION
Outdoor advertising is an activity that causes aesthetic (Flad, 1997) as well as material pollution
(posters, billboards, sticker material etc.). In Europe alone there are between 2 and 8 million billboards
displayed at any given time and this number is constantly growing. Every 2 weeks, over 6 million
square metres of poster paper are thrown out. The paper is not recycled, the ink is not eco-friendly,
and the glue used is toxic (ECOBOARD, 2014). Due to this, billboard advertising has a disastrous
effect on the environment, and this issue needs to be addressed. The negative effects are pronounced
on large urban centers, such as Athens. For many years the Greek Capital faced the problem of
unrestrained advertising. The situation led to a legal ban and final dismantling of outdoor advertising.
Businesses and advertisers no longer find legally physical space to display their products. One way out
is the online advertising. The online advertising however does not fully cover the needs of the
advertiser since a number of social groups (eg the elderly) have no - or limited at best- access to
electronic technology. Consequently, the justified concern for aesthetic enhancement deprived the
possibility of advertising to businesses and led to income loss for dozens of employees.
On another note and completely unrelated to the above, the aesthetic state of the city of Athens
is scarred by the poor condition of the facades of a great number of private or public buildings. The
dark gray and black color (literally) dominates the streets of large areas of the city, creating an
atmosphere of depression. On certain streets sunlight is 'stifled' between 'black buildings'. Many
buildings of great architectural value lay convicted under the 'gray' pollution accumulated over
decades. There is a strong relationship between the perceived lightness of a building and the opinion
219
that it is dirty (Brimblecombe & Grossi, 2005). Blackening of light coloured fabric eventually reaches
a point where it becomes publicly unacceptable and raises pressure for cleaning (Hamilton and
Mansfield, 1992).This aesthetic, more specifically, this visual pollution has an important -albeit
undefined- cost to the social and financial life of the Greek capital.
A relevant subsidies program with the name ‘ΠΡΟΣΟΨΗ’ ('Facade') was put in place by the
Municipality of Athens. The aim of that program was the improvement of the city’s general aesthetic.
The effect of this effort was negligible, with the vast majority of the affected buildings remaining in
this plight. In the mind of the public, external renovation of buildings is a difficult or even impossible
goal. Planning authorities have a statutory responsibility to plan for the sustainable development of
their areas, primarily through the development plan process but also through local area plans.
Nonstatutory framework plans and site development briefs can supplement but not replace the
function of statutory plans (Government of Ireland, 2009).
2. FORMULATION OF THE PROBLEM
Building darkening due to particle deposits is up to a point a negative externality, since the
property owner is not responsible for the air pollution which is a major factor of the process. From the
other hand, fouling due to time passing, as well as damage and corrosion has to be dealt with by the
land owner. The end result is an aesthetically polluted neighborhood and -by extend – city. This
pollution affects functionally and financially the city, thus becoming a negative externality itself from
the city’s point of view. Being hard, even impossible to pinpoint the responsible for this externality,
the burden for its internalization is left mainly on the land owners and in many cases they are just not
willing – or simply cannot afford- to pay, leading to total or partial neglecting of the necessary
restoration.
Outdoor advertising on streets, building walls and terraces, is prohibited by law in Greece. This
caused a crucial blow to an already struggling sector, especially the last 5 years of recession and led to
job losses and shrinkage of the industry.
The arguments against outdoor advertisement traditionally have followed an aesthetic narrative
with varying degrees of success in terms of restricting the proliferation of billboards. The public has
consistently found outdoor advertising to be intrusive, ugly, crassly commercial, and a taint on nature.
With billboards being an emblematic tool of the industry and marketing, the story of outdoor
advertising is an ongoing struggle between an expanding industry and a resistant public. Signs are
affecting seriously the visual environment of a city. They are prominent structures that are typically,
and deliberately, highly visible in the public. From their first appearance in the late 19th Century
through today, billboards have met resistance on aesthetic grounds. Flad (1997) comments that
“…they [billboards] also do not perform an effective function. They simply encourage consumption’’.
Historically, the regulation of outdoor advertising has prompted a surprisingly prodigious

amount of controversy and litigation. It has been challenged as a denial of free speech, due process
and equal protection. It has been upheld on nuisance and real property grounds, and sustained on the
basis of public health, safety, morality, comfort and convenience, aesthetics and the right to be let
alone (Shutton, 1972). The argument against outdoor advertising which appears most often focuses on
billboards’ adverse visual and aesthetic impact on the surrounding community. Advertising billboards
are openly accused for “visual pollution” and how they “desecrate the landscape” (Flad, 1997).
In a study regarding the impact of billboards on real estate prices in the City of Philadelphia,
USA, (Snyder, 2011) it was revealed that properties purchased within a small radius of billboards have
a significant decrease in sale price and the correlation is statistically significant (p ≤ .05). Further, the
analysis reveals a correlation between billboard density and home value. Billboards negatively impact
home values.
There is compelling evidence that distraction is a major contributor to crashes (Lee, McElheny
and Gibbons, 2007; Wang, Knipling & Goodman, 1996; Stutts et al., 2001; Klauer et al., 2006). The
studies that have been conducted show convincingly that roadside advertising is distracting and that it
220
may lead to poorer vehicle control. However, the evidence is presently only suggestive of, although
clearly consistent with, the notion that this in turn results in crashes. Studies providing direct evidence
that roadside advertising plays a significant role in distraction based crashes are currently not
available. A review by Austroads (2013) identifies the issue of distraction due to roadside advertising
but suggests that it is reasonable to conclude that far less than 1% of all crashes and near crashes
involved distraction from roadside advertising.
2.1. Methodology
2.1.1. Contingent Valuation Method
In this research, the Contingent Valuation Method (CVM) was used (adapted by Mitchell &
Carson, 1989). Questioners were distributed to residents of selected neighbourhoods of Athens, in
order to estimate their willingness-to-pay to support restoration projects on their neighbourhood and
other areas in central Athens. The questioner format aims to probe the general attitude of citizens on
restoration projects and extract quantitative data in monetary units on how they value abstract ideas
such as visual pollution. Additionally, it screens citizen preference on alternative strategies for urban
environmental improvement. Preferences of people are examined by asking people directly their WTP
or WTA a change in environmental quality.
The survey is part of an on-going wider study regarding the aesthetic pollution of the city. Since
it is not formed to investigate solely the idea presented here, the quantitative data analysis is out of the
scope of the present work and therefore is not presented. We present only qualitative conclusion on
‘discomfort levels’ due to aesthetic pollution from building facades darkening and an estimate on
WTP/WTA. A representative questioner sample can be seen in Appendix A, along with the answer
results from a specific neighbourhood.
2.1.2. Getting expert opinions
To acquire the views of experts in the fields of advertising and real estate market, telephone
interviews were conducted.
Six (6) professional advertisers were interviewed. Specific questions were addressed.
Advertisers were questioned whether they would be interested to advertise on scaffolding if it is legal
and if there is a relevant municipal program in place for the restoration of building facades, what
would be the amount considered reasonable to allocate for the period that the restoration will last
according to the size of the building and the time (for example, a seven-storey building with a width of
15-20 meters and for one month), what type of advertising they consider most appropriate for
scaffolding (general commercial or industrial) and finally asked what was their opinion on the
operation of such a venture.
Eleven (11) realtors were interviewed. They were asked on the real estate price trend on specific
areas in Athens and Kozani, before and after restoration or improvement project on the area. They
were asked on the importance of the facade state and how it is affected by darkening.
3. TOWARDS A SOLUTION OF THE PROBLEM
3.1. Results
Regarding the CVM questioners, the answers show two seemingly contradicting trends. The
majority of residents are annoyed by the visual pollution in their neighbourhood and believe that
restoration programmes are the key to the solution. They seem, however, not willing to pay -or at best,
willing to pay very little (around 20-30 euros each in average) - for the improvement of the aesthetic
of their environment.
The questioner presented in Appendix A is a representative sample. From the questionnaire

circulated in the area of Thisio, respondents were separated by gender, age, whether working at the
221
aesthetically affected area or not, whether residing or not at the aesthetically affected area, whether
they own real estate properties at the affected by aesthetic pollution area. We then applied Variance
Analysis. The dependent variable is the amount of WTP. Independent variables are the nominal
variables of the questionnaire. In a brief the results can be summed up as follows: WTP is dependent
by age, respondents consider that effective treatment of aesthetic degradation will substantially benefit
professionals (73% positives) and residents on the area, the impact of the renovations would be
significant, they would have a practical benefit from a concerted effort by the municipality and
citizens to address the aesthetic pollution (Great benefit 33%. Moderate 36%, Small 31%) and yet, in
the absence of funding, respondents were willing to pay only 19.71 € in average.
On the other, advertisement experts, after admitting that outdoor advertisement is aesthetically
unpleasant but it was (and still is in some cases albeit illegal) a substantial percentage of their income,
were in general positive to the idea of scaffolding advertisement. Two of them suggested that
electronic screens are the best way to go, since moving images attract more public attention. They
raised concerns regarding the cost, considering that the restoration of a seven-storey building façade
(working example) will last roughly a month and would cost 12000 euros or more. They unanimously
agree that the endeavour would be successful only if a relevant municipal scheme is put in place,
organising the activity, offering support in the form of a subsidy and buffering any ‘price war’ that
might arise between marketing firms, something that would cut out small firms from the deal.
Realtors unanimously verified the hypothesis that aesthetic degradation of a location leads
inevitably to lower market value of the neighbourhood properties. The opposite happens when the
aesthetic value of the location is improved by restoration projects, with the land property prices
following an upward trend. They generally agreed that properties next to billboards or on
neighbourhoods that unrestricted outdoor advertising is in practice have lower prices. They
unanimously agreed in the most emphatic way on the positive correlation between the price of the
property and the appearance of the building facade, especially the shading of the colour. As one realtor
said: “no one will buy a flat on a dirty building”, proving that in his mind a darkened façade implies an
overall unclean building.
3.2. Aesthetic pollution and urban restoration.
The valuation of aesthetic pollution from buildings in the centre of Athens can be made with the
tools offered by the Environment Economics. Environmental Economics, as a branch of economics,
has a parallel course to the general economic theory at least since the 18th century. Each resource
alone or in combination with others can be used in alternative ways. The problem that arises is how
natural resources are distributed optimally on options presented. To establish a conceptual framework
for our working hypothesis, we assume that environmental issues are basically microeconomic
problems (discussed in Tye, 1985; Kinnaman, 2013). Consequently, their examination involves the use
of basic concepts and analytical tools of neoclassical microeconomic theory. Any suggested plan must
satisfy the principles of sustainable development: Financial, social and environmental sustainability.
The trend of area redevelopment first appeared in Western European metropolitan areas,
particularly at cities with heavy urban heritage and fewer suburbanization tendencies. In the late 60s
the demand for maintaining / upgrading of the cultural heritage in cities or regions with strong
historical character was vocalized. At the same time, existing models and methods of urban
development were challenged (Loures, 2015). At that period the renovation of the Jordaan district in
Amsterdam and Harlem and VINGO in Stockholm began. In North America, an area with lighter
urban tradition, the reuse of central areas for housing occurs largely combined with the questioning of
the suburban model from an economic perspective. The oil crisis made the middle class realize the
advantages of the central areas. Residential rebirth of neighborhoods developed in the 19th century,
with massive renovation of old residential buildings, cannot be classified as redevelopment in the
sense of total intervention in the public and private urban space, it gives however a vivid picture of the
problems arising from upgrading a low-income strata residential area to a high income one
(Karadimitriou, 2013). Similar cases, but in milder form, appeared in European cities, such as Maris
district of Paris.
222
Redevelopment projects of building facades have already been completed on five locations in
the city of Athens. In those cases private companies, acting as donors, played a pivotal role. Moreover,
seven building blocks located at Prospsygika Dourgouti area were completely renovated with funds
deriving from private sponsors and the Municipality of Athens. More specifically:
1) Varvakeio Market, sponsored by «LIQUIMAR TANKER MANAGEMENT SA".
2) Pangratiou square, sponsored by the company "Titan AE “.
3) Athanasios Kanellopoulos square, sponsored by " VIOHALCO GREEK COPPER AND
ALUMINIUM INDUSTRY".
4) Dexamenis Square, sponsored by "TERNA TOURIST AND SHIPPING COMPANY SA".
5) Madrid square, sponsored by "TOYOTA HELLAS SA".
6) Dourgouti Area, sponsored by the companies «J & P Avax SA" and "ATHINEON SA".
3.3. The case of the municipal garden at Kozani
In an attempt to screen a quantitative correlation between the aesthetic upgrade of a location and
the benefits acquired by the land owners, the neighbourhood and the municipality it is relevant to refer
to the positive effects by the creation of the municipal garden at the city of Kozani, effects reflected at
neighborhood as well as city level. The decision to reform the former military camp, placed within the
urban area of Kozani, was a turning point for the wider upgrade of the region, from the point of
utilising the existing space as well as promoting the construction of new infrastructure, leading to the
redevelopment of the area and eventually the creation of a "cultural neighbourhood ", a centre for
multiple activities just a short distance from the commercial centre. The construction of the garden
with all its technicalities marked the beginning for the aesthetic improvement of the area as well as its
enrichment with cultural and sporting activities with substantial benefits that exceeds the scale of the
neighbourhood and reaches the scale of the entire municipality.
Regarding the impact of the project in financial terms, two factors should be considered: a) the
increase of the neighbourhood property values b) the additional municipal revenues due to the
activities in the region. Following an investigation on real estate pricing from agencies activated at the
city of Kozani, the years between the construction of the park and the burst of the financial crisis, the
real estate values was steadily increasing for properties in the vicinity of the municipal gardens.
Specifically, the average land price in the region in 2002-2004 amounted to 500 euro / sq.m. This
value increased to 600 euro / sq.m. the next few years, an increase of 20%. According to city realtors
(6 experts who replied anonymously to a telephone inquiry), real estate property values have trended
upward, estimated that it would have risen even further if not for the financial crisis in 2009 which
marked a sharp decline in construction activity and a consequent drop of commercial prices for land
and buildings properties. Despite the recession though, prices have not dropped to levels below those
of 2004. Further, according to the same realtors operating in the region, while rental housing prices
follow the general downward trend in prices, the neighbourhood rents remain relatively high, even
higher than the city's commercial centre.
4. DISCUSSION
It is obvious that the effect of the restoration of a neighbourhood, either by restoring the
buildings or improving existing space is – as it was expected- positive in general, both in economic as
well as environmental and aesthetique terms. Property values go up, recreational and cultural activities
are boosted, the commercial activity is healthier and the satisfaction level of residents and visitors is
increased. On the other, property value and social containment is negatively affected by the
‘darkening’ of building facades as well as outdoor advertising. The obvious course of action should be
the removal of the negative factors and the promotion of the positive ones. The necessary restoration
(painting and /or cleaning the facades) has a cost. Further, the ban of outdoor advertising deprives
physical space from the marketing industry, leading to income loss and increased unemployment
among the industry professionals. It is pivotal to emphasize that the proposal presented here is
applicable only when and where there is legislative restriction to outdoor advertising
A Pigouvian subsidy scheme can be established on the grounds that the activity would generate
external benefits, or else positive externalities. The externality caused by time and pollution, affecting
223
directly the property owners and indirectly the city (as shown above) is, in turn, internalized mainly to
the advertised parties. As the marketing experts pointed out, the advertised parties would be more
willing to participate if they can demonstrate corporate social responsibility (CSR). And CSR is a
source of competitive advantage (Porter & Kramer, 2006). The private provision of public goods can
generate value (McWilliams, 2011), and urban environment is a public good. Subsequently, the
necessary investment on advertisement becomes also a tool to demonstrate CSR.
Our proposal describes an exemplary collaboration between private and public sector,
presenting multiple benefits without burdening any social group. Energy is transferred from micro to
macro level of economic activity, elevating practices from unit to the sum. According to V. Pareto, an
activity is beneficial to society when improves the socioeconomic status of individuals, without a
corresponding worsening of the socio-economic situation of others. It is then assumed that these
activities tend to maximize social welfare. In this case, the Pareto criterion is met. The activity benefits
the sum of society without harming any of its parts. The case combines issues addressed by different
disciplines, such as Marketing, Natural Resources Management and Public Economics for reaching the
socially optimal solution.
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APPENDIX A
Quantitative Data for Aesthetic Pollution
From the questionnaire circulated, respondents were separated by gender, age, whether working at the
aesthetically affected area or not (employee), whether residing or not at the aesthetically affected area
(citization), whether they own real estate properties at the affected by aesthetic pollution area
(building) as follows:
226
227
We then apply Variance Analysis. The dependent variable is the amount of WTP. Independent
variables are the nominal variables of the questionnaire.
Tests of Between-Subjects Effects
Dependent Variable:V5
Source Type III Sum
of Squares Df Mean Square F Sig.
a
Corrected 864362,990 4 216090,748 1,565 ,219
Model
Intercept 804100,165 1 804100,165 5,824 ,025
V1 ,000 0 . . .
GENDER 371588,518 1 371588,518 2,691 ,115
EMPLOYEE 372,135 1 372,135 ,003 ,959
CITIZATION 15076,127 1 15076,127 ,109 ,744
BUILDINGS 239636,982 1 239636,982 1,736 ,201
Error 3037325,306 22 138060,241
Total 4839504,000 27
Corrected Total 3901688,296 26
a. R Squared = ,222 (Adjusted R Squared = ,080)
We observe that the WTP is not affected by any of the above variables (sex, work, residence and
possession of the property) at 5% significance level.
There is dependency by age. Participants, according to age class, accept to participate financially
(WTP) in the regeneration of facades as shown in the following chart. The classes are: 1: 18-25, 2: 26-
35, 3: 36-45, 4: 46-55, 5: 56-65, 5: more than 65 y.o.
From the linear regression analysis the following can be deduced:
We note that the coefficient of determination of the regression model where the dependent variable is
WTP and the other identities from all other questions in the questionnaire are taken as independent
variables is 0.853. Therefore the adjustment of the model is quite good.
228
According to the Kendall index we observe that the WTP is positively correlated with the volunteer
work of the respondent for reconstruction of the facade, at a significance level of 5% (P-value = 0.027,
r = 0.321) and the correlation is moderate. It appears that as the voluntary work of the respondent for
redevelopment of the façade increases, so does the amount WTP as well.
Question: In an effort of the Municipal Authority in restoring the external of buildings and the
absence of available financial resources, we make the assumption that citizens are asked to participate
financially in a special account. In this case, how much you would you be willing to contribute?
Average value: 19.71 €
We observe that the WTP is positively correlated with the contribution of the respondent to the
account for the improvement of facades in Athens at 1% level of significance (P-value = 0.000, r =
0.692) and the correlation between them is strong. It appears that the more the contribution of the
respondent to the account for the improvement of facades in Athens, the greater the WTP amount.
Question: Do you consider that effective treatment of aesthetic degradation will substantially benefit
those who are active professionally on the area?
YES 87 73%
NO 31 26%
Question: What is the significance for you in general of the impact of environmental rehabilitation
works (natural and urban) in the current economic situation?
- Great 39%
- Moderate 37%
- Some 22%
- Insignificant 3%
229
Question: Do you have a practical benefit from a concerted effort by the municipality and citizens to
address the aesthetic pollution;
Great 33%
Moderate 36%
Small 31%
Question: Educational level of respondents:
Primary school 1%
Gymnasium 7%
High School 29%
College Degree 41%
Postgraduate studies 23%
230
A new index to measure the human well-being in Wallonia and its communes (South of
Belgium)
Burny P.
Centre wallon de Recherches agronomiques, Rue du Bordia 04, 5030 Gembloux, Belgium
Gembloux Agro-Bio Tech (University of Liège), Passage des Déportés 02, 5030 Gembloux, Belgium
E-mail: burny@cra.wallonie.be
Abstract
In 2012, the Walloon Government ordered the Walloon Institute for Prospective, Evaluation and Statistics
(IWEPS) to calculate five indexes in order to guide and evaluate the public actions, together with the GDP. The
index for the conditions of human well-being (CWBI) is presently the first step in the elaboration of the well-
being index. The methodology is the one used by the Council of Europe. Actually, the CWBI is calculated by
using 60 basic indicators, gathered into 8 families. After normalisation, the CWBI is the arithmetic mean of the
60 basic indicators, each of them having the same weight. The CWBI was calculated for the 262 communes of
Wallonia and varies from 0.428 to 0.674, with a regional mean of 0.572. An opposition between urban and rural
communes clearly appears, the last ones having the best scores. Communes along the borders of Germany and
Luxemburg have the highest indexes, while communes in the old industrial areas have the lowest scores.
Employment, income, family relations and security are the factors which are the most narrowly linked to the
CWBI. At the communal level, social and security expenses per capita have a significant and negative
correlation coefficient with the CWBI. In the future, in order to elaborate a finer index, new data, up to now not
directly available, will be collected at the communal level, about quantitative and qualitative aspects.
Keywords: well-being index, Wallonia, local development
7. Introduction
During the period 2009-2014, the Walloon Government included in its “declaration of regional policy”
and in its priorities action plan, the “Marshall Plan 2. Vert” (in reference to the economic plan
developed in Europe by the US general G. Marshall just after the Second World War), a specific
action devoted to the development of new indicators complementary to the Gross Domestic Product
(GDP). On November 8, 2012 the Walloon Government ordered the Walloon Institute for Prospective,
Evaluation and Statistics (IWEPS) to calculate five indexes in order to guide and evaluate the action of
the government, together with the GDP: an index of the social situation, a well-being index, an index
evaluating the ecological print and the bio-capacity, an index of environmental situation and an
economic capital index. The index for the conditions of human well-being (CWBI) is a step to lead to
the well-being index (WBI), which is still under elaboration. This paper presents the methodology to
build the CWBI as it is defined in 2015, the results at the regional and communal levels and the
discussion of these results, leading to further research.
8. Elaboration of the CWBI
The perception of well-being depends on many factors and also on personal experiences. It is a
relative notion. So, the approach which has been adopted is the concept proposed by the Council of
Europe in its Social Cohesion Strategy (Council of Europe, 2010). The concept of well-being is
considered as “the product of complex interrelations between material and immaterial goods, between
private and public goods, between private and public life, between personal and social equilibrium”.
This interpretation of human well-being means that there is interdependence between individual well-
being and social fairness within a sustainable perspective.
In practice, the SPIRAL methodology used by the Council of Europe was implemented in fifteen cities
and communes representative of the Walloon territorial diversity. Groups of persons from different
social origins were surveyed about their meaning of well-being (Ruyters et al., 2011).
231
The collected information and data were analysed and then organised into “families”, which gather
“dimensions”, which are themselves composed by “under-dimensions”, elaborated by gathering all the
expressions of the citizens which have the same meaning, though delivered in different ways (Laffut
and Ruyters, 2014). Finally, 60 indicators are gathered into 19 dimensions and 8 families (Table 1).
Table 5 List of basic indicators and their gathering into dimensions and families
Families Dimensions Basic indicators
Family 1: means of Dimension 1: Life expectancy-Years of life lost at 70-Chronic
living Health diseases-Handicapped persons-Consumption of anti-
diabetic drugs- Pedestrian access to a pharmacy-
Access to a hospital with emergency service-Access to
a medical house.
Dimension 2: Mean price of land for housing-Mean price of houses
Housing as a share of the mean income-Houses without
bathroom nor central heating-Households candidates
for social housing.
Dimension 3: Persons with no diploma or a diploma from the
Teaching/Education primary school-Pupils on time at the secondary school
– Access to a nursery or a primary school.
Dimension 4: Employment rate for the 15-64 year old-Involuntary
Employment part time workers-Occasional workers-Unemployment
rate of the 15-64 year old-Long term unemployment-
Median salary-Professional diseases.
Dimension 5: Median income-Children in households without
Income and income from work-Beneficiaries of social support-
purchasing power Failing borrowers- Indebted persons.
Dimension 6: Access to public transport.
Mobility
Family 2: Living Dimension 7: Air polluted accommodation-Soil-polluted
environment Natural spaces and accommodation-Waste-Pedestrian access to a green
environment area-Accommodation near a green area.
Dimension 8: Small Pedestrian access to a food shop.
scale trade
Dimension 9: Heavy accidents-Badly injured or killed persons-Car
Security robbery-Burglaries-Attacks on physical integrity.
Family 3: Relations Dimension 10: Quality of commune website
with the institutions Communication
Dimension 11: Measures in favour of employment implemented by
Institutions way of the communes- Measures in favour of employment
working and public implemented by the state-Percentage of public
management subsidised accommodation-Percentage of social loans
in housing borrowing-Popularity of digital public
spaces.
Dimension 12: Percentage of non-voters-Openness to use the internet
Democratic process to express opinion.
Family 4: Personal Dimension 13: Single-parent households-Old isolated households-
relations Family relations Divorce rate.
Family 5: Social Dimension 14: Difference of lost years of life between men and
equilibrium Equity of access to women.
health care
Dimension 15: Difference of unemployment rate between the 18-24
Equity of access to year old and the 25-49 year old-Salary differences-
a good job Median salary differences between men and women.
Dimension 16: Taxable total income differences.
Equity of access to
a reasonable salary
Family 6: Personal Dimension 17: Relative capacity of nurseries-Number of places
232
Families Dimensions Basic indicators

equilibrium Time management subsidised in nurseries.
Family 7: Well-being Dimension 18: Rate of suicide.
feeling Feeling of
(un)happiness
Family 8: Dimension 19: Percentage of gifts in the tax declaration-Importance
Values/attitudes/ Involvement in the of the declared gifts.
initiatives/involvement society
The building of an index based on many variables is recommended by the OECD (2014): “to elaborate
a multidimensional system of well-being indicators, which takes into account the advantages of
specific location, is a crucial part of the way which public policies must follow to reach a better
realization of the goals of the society”.
So, the index for the conditions of human well-being is a synthetic index combining 60 indicators,
which is calculated for the Walloon Region as a whole, but also for each of its 262 communes.
How is the CWBI calculated?
Firstly, all the values of the 60 basic indicators are normalised, thanks to the Min-Max normalisation
method. So, the values of all the indicators vary from 0 to 1. For the indicators which have a negative
impact on well-being, like the unemployment rate for example, it is the complement to 1 which is
used.
The CWBI is simply the arithmetic mean of the transformed values of the 60 basic indicators. So, this
method gives the same weight to each of the 60 basic indicators.
The collection of the basic data at the regional and the communal levels is uneasy, so a first synthetic
index was calculated in 2014 and a second one in 2015, with finer and more relevant indicators.
9. Results
Among the 262 communes of the Walloon Region, the CWBI varies from 0.428 to 0.674 (Figure 1),
the regional mean reaching 0.572 and the median being a little bit higher (0.579).
N
u
m
b
er
s
of
co
m
m
u
n
es
Figure 5 Distribution of the CWBI calculated for the 262 communes of the Walloon Region
Among the communes, 43% have a CWBI between 0.57 and 0.61; and 39% have a CWBI between
0.48 and 0.56 (Ruyters et al., 2015).
The minimal value is obtained for Charleroi (0.428), one of the two biggest cities of the region, which
was prosperous in the past but which declined later with the progressive disappearance of the coal
mines and the steel industry. The highest CWBI is registered in Amel (0.674), a rural commune with
large forest areas, near the German border.
The value of the CWBI for each commune in Wallonia is illustrated in Figure 2.
233
Figure 6 Value of the CWBI in the communes of Wallonia

The clearest areas represent the weakest CWBI: they essentially correspond to the old industrialised
areas, from Verviers, Dison and Liège in the East, to Charleroi, La Louvière and Mons in the West,
together with Froidchapelle, Couvin and Hastière along the French border.
On the contrary, the highest CWBI are observed in the communes belonging to the German-speaking
Community and the communes along the borders of Germany and Luxemburg. High CWBI are also
noted in rural communes of all provinces, residential communes (South of Brabant, Hesbaye, around
the biggest cities), touristic communes of the valley of the Meuse and along the North-South axis
Brussels-Namur-Arlon.
As far as “dimensions” are taken into account, it can be observed:
- that the level of well-being considerably varies in a given region, according to the considered
“dimensions”, the variation being weakened in the global index;
- the multidimensional approach, implemented at each specific territory, allows a better
understanding of the equilibrium between different factors and the possible synergies through
their corresponding policies.
9.1 Correlations between the CWBI and the “dimensions” of indicators
The correlation coefficients calculated between the CWBI and the dimensions of indicators are
presented in Table 2.
It appears clearly that economic aspects are very important to explain the feeling of well-being:
employment, income and purchasing power are narrowly linked to the CWBI. However, a qualitative
and entirely non-economic variable, family relations, is also strongly linked to the feeling of well-
being. Security, involvement in the society, education and the environmental factors are also
important. The equity of access to a reasonable income is strongly, but negatively correlated to the
well-being. It is explained by the fact that when income increases, the inequality also increases.
Some indicators, like time management or communication, have a low correlation with the well-being
index. Some of them represent factors which are not distributed in all communes.
234
Table 6 Correlation coefficients between the CWBI and the dimensions of indicators
Dimensions Correlation coefficients
Employment 0.896
Income and purchasing power 0.878
Family relations 0.730
Equity of access to a reasonable salary -0.730
Security 0.694
Involvement in the society 0.644
Teaching/education 0.571
Natural spaces and environment 0.525
Small scale trade -0.423
Institutions way of working and public management -0.408
Democratic process 0.359
Equity of access to health care 0.353
Mobility -0.352
Housing 0.320
Health 0.286
Feeling of (un)happiness 0.225
Equity of access to a good job -0.120
Time management 0.106
Communication 0.034
9.2 Correlation between the CWBI and the basic indicators

The basic indicators which are the most correlated, positively or negatively, with the well-being index
are presented in Table 3.
Table 7 Basic indicators the most correlated with the CWBI
Indicators Correlation coefficients
Unemployment rate 15-64 year old -0.890
Failing borrowers -0.868
Children living in households without labour income -0.863
Involuntary part time job -0.819
Employment rate 15-64 year old 0.808
Pupils on time at secondary school 0.783
Median income 0.767
With no surprise, unemployment and financial difficulties have a highly negative correlation with the
CWBI. On the contrary, employment, income and a good schooling have a positive impact on the
well-being.
On the opposite, some basic indicators are weakly linked to the CWBI (Table 4).
Table 8 Basic indicators the least correlated with the CWBI
Indicators Correlation coefficients
Access to hospital with an emergency service -0.087
Access to green spaces 0.082
Measures in favour of employment implemented by the state -0.051
Difference of the median salary between men and women 0.044
Quality of the commune’s website 0.034
Use rate of digital public spaces -0.025
Several of these indicators have a weak correlation with the conditions for well-being index because
they do not have a complete cover of the Walloon territory.
235
9.3 Correlation between the communal budget and the CWBI
Two components of the communal budget have a significant correlation coefficient with the CWBI:
expenses per capita for security purpose (-0.36) and expenses per capita for social support (-0.47). The
correlation is negative: when expenses for security and social support are high, it means that there are
social problems, which have a negative impact on well-being, of course.
10. Conclusions
Well-being is a complex concept, including many dimensions: income, human relations, natural
environment, security… Individual perception of well-being is also very variable. So, it is necessary to
be cautious when general conclusions are drawn from a global index. However, such a
multidimensional index can be interesting and useful in order to define and evaluate public policies
which do not take into account the Gross Domestic Product only. Pure economic aspects are of course
very important, but the concept of well-being is much larger and other aspects deserve the attention of
the policy makers in our post-industrial society. Even in a region of a small West European country
like Belgium, significant differences appear from one commune to another. The feeling of well-being
is lower in big cities from the old industrial zones, with low income and high unemployment rate,
while it is the highest in residential areas where the income is higher and the natural environment
better. Such observations should help to define public policies which are better adapted to local
conditions. So, further work will be done in the future in order to improve such tools like well-being
indexes.
References
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cohésion sociale, approuvés par le Comité des Ministres du Conseil de l’Europe le 7 juillet
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CohesionSociale.pdf] (11 November 2015).
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Claisse, Catherine Laviolette, Min Reuchamps, Christine Ruyters (dir.), La participation en
action, Ed. Coll. Méthodes participatives appliquées. Vol.4., PIE. Peter Lang, Belgium.
OECD, 2014, Comment va la vie dans votre région?: Mesurer le bien-être régional et local pour les
politiques publiques, Editions OECD, novembre 2014, Paris, France.
Ruyters C., Laffut, M., Defays, D., and Colicis, O., 2011, Elaboration concertée d’indicateurs de bien-
être dans les communes wallonnes. Partie 1: la genèse du projet et les premiers résultats de
l’expérience en cours, Working paper of IWEPS, n°3, september 2011, Namur, Belgium.
Ruyters, C., Reginster I., Vanden Dooren, L., Charlier, J., 2014, Indicateurs complémentaires au PIB :
l’indice des conditions de bien-être en Wallonie (1er exercice), Rapport de recherche, IWEPS,
Namur, Belgium.
Ruyters, C., Reginster I., Vanden Dooren, L., Charlier, J., 2015. Indicateurs complémentaires au PIB:
l’indice des conditions de bien-être en Wallonie (2e exercice). Rapport de recherche IWEPS.
35 p. + annexes, Namur, Belgium.
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Dealing with Communication Barriers in Business Meetings - Focus on Intercultural

Aspects
Ciortescu E. and Cecal A.

Faculty of Economics and Business Administration, “Alexandru Ioan Cuza” University, Iasi, Romania
elena.cojocaru@uaic.ro, ancacecal@yahoo.com
Abstract
It is now widely acknowledged that English has become the lingua franca in the Business environment
worldwide. It is thus only natural that Business students aim, among others, to master English, in general, and
Business English, in particular. The Business English trainer’s major challenge thus resides in his/her ability to
familiarize his/her students with the appropriate language of the context they are going to participate in. As
Jennifer Cope (2015) clearly states, “in ESP instruction, there needs to be an awareness that understanding a
text is more than just knowing the meaning of the words and attention should be paid to the effect that context
has on the discourse”. In the same line of thought, Adrian Tennant (2015) points to the fact that trainers must be
able to teach students how to react in emergencies, how to ask for information, clarification, or explanations, i.e.
students must learn how to communicate and participate effectively in the contexts that might occur in their
professional lives. This paper aims to discuss the major communication barriers that may occur in international
business meetings and to identify some behavioral and linguistic strategies based on the quite recently
introduced PL (plain language) principles in order to help students cope with such situations.
Key Words: education, ESP, business communication, business meetings
Introduction
The Faculty of Economics and Business Administration at the “Alexandru Ioan Cuza”
University of Iasi organizes Business English classes (i.e., lectures and seminars) for its first and
second year students. This implies the study of Business English for four semesters (2 hours per
week). Depending on their specialization, they may continue the study of English in their third
Undergraduate year or during Master programmes. However, our students’ level of English remains
extremely heterogeneous. They are fed up with grammar rules and are hardly interested in literature
and culture. What they are particularly keen to achieve is the ability to communicate in English, both
in writing and orally. This is why our purpose is to enable them to use English in both professional
and personal contexts. However, some difficulties arise with groups which normally gather students
from the beginner up to the advanced level. Their large number is also an important issue: groups of
30 – 40 students (seminars) whose level of English, as we have already mentioned, is extremely
varied. For these reasons, the use of PL principles in teaching Business English proves extremely
efficient. In a 2012 article – Introducing Plain Language Principles to Business Communication
Students -, Rachelle R. Greer rightfully argues that, nowadays, in the increasingly globalized world,
business entities, governments, agencies, etc. must adapt their strategies in order to improve
communication. She further notes that a means to reach this purpose resides in adopting PL principles.
In order to do so, when developing a learning programme, business trainers must take into account the
above-mentioned PL principles: “Plain Language has to do with clear and effective communication –
nothing more or less” (Greer quoting Kimble, 1995: 52). Actually, the author identifies the main
advantages in using PL: users understand and find information easier, PL documents are easier to
update, PL principles can be used to train learners to write more clearly and concisely (Greer: 138),
thus responding to Adrian Tennant’s urge to help learners communicate more effectively. In other
words, what we need to accept is that the “gobbledygook” era has come to an end. We no longer want
to spend time on concentrating our efforts to display a complexity of mind based on complicated
structures and highly technical vocabulary that our negotiation partners might not understand, thus
leaving room for embarrassment and communication gaps. Under these circumstances, our purpose is
oriented towards helping students assimilate those particular structures and vocabulary which enable
them to transmit a clear message.
Meetings are an important stage in performing any type of business. Consequently, among the
communication skills that our learners must acquire, the ability to transmit and receive messages in the
context of business meetings proves of paramount importance. In order to enable them to
communicate effectively, we should primarily identify the barriers that may occur in such contexts.
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We have found that the major communication barriers in business meetings may be generally
classified in intercultural and linguistic barriers. Once learners have developed an awareness of these,
we may attempt to identify some linguistic and intercultural strategies meant to provide them with
support in overcoming the communication barriers likely to occur in such settings. It must be noted
that our target is to be reached by engaging the PL principles we have previously mentioned.
Intercultural Barriers
Theorists have sustained different, even opposing, views about the impact of culture on
business communication. Intercultural communication specialists Scollon and Wong Scollon claimed
that “The subject of ‘intercultural communication’ is beset by a major problem, since there is really
very little agreement on what people mean by the idea of culture in the first place… Cultures do not
talk to each other; individuals do. In that sense all communication is interpersonal communication and
can never be intercultural communication.” (2001: 138)
Humes and Reilly adopted a more traditional approach to the intercultural issue, stating that “
National and ethnic cultures affect the objects or things that people have as well as the ideas, values,
attitudes, and beliefs that they adopt… People make assumptions about the way things should be based
on their cultural backgrounds, and these assumptions influence their behavior in individual, group, and
organizational situations. But when individuals become exposed to other cultures, situations may not
turn out as expected based on these inevitable differences in cultural backgrounds.” (2008: 118) While
both quotations reflect facets of the truth, we must note that interpersonal and intercultural
communication are closely intertwined in international settings, on the one hand, and that cultural
barriers cause various degrees of failure in communication, controversy and conflict in meetings and
other business settings, on the other hand.
The political, economic and social environments in many regions of our world today abound
in crises and conflicts generated by cultural differences. This may be caused either by the lack of
awareness regarding cultural differences, or by the inability to adapt and integrate diversity. Besides
cultural knowledge, intercultural competence implies possessing good cultural skills, which may be
defined as “the ability to act and react in a variety of cultures, and to put this interaction to good effect.
These skills include attitudes of openness and tolerance, and the ability to cope with ambiguity.”
(Utley, 2007: 6)
“Coping with ambiguity” necessarily implies, in our opinion, becoming familiar with the
cultural aspects that may become setbacks in business meetings, aspects which will be discussed in the
following paragraphs. For a successful outcome of business meetings, both national and organizational
cultures should be taken into consideration, lest they should become barriers in communication. For
instance, some cultures support a rather assertive, almost demanding, business communication style,
whereas in other cultures a more passive approach is adopted. A culture may encourage long meetings
that require patience and self-control, while people in other cultures may prefer quick resolution. In
certain cultures, it is considered important to develop a personal relationship with business partners
participating in meetings and negotiations, but in others only superficial knowledge of the persons
involved is considered sufficient.
In terms of hierarchy, corporate culture may stimulate or hinder open discussions, depending
on the type of culture and on the hierarchical level of the partners involved in a meeting. Power
distance is quite high in hierarchical organizations where decision-making is centralized. Because of
numerous policies and procedures which impede flexibility and compromise, interactions between
employees and managers at different levels of a company’s structure may be awkward or may carry a
very high degree of formality. In international meetings, people coming from businesses with a flat
structure find a barrier in the stiff bureaucracy of companies with numerous layers of management.
Steve Cohen provides a good illustration of a situation in which levels of management act as a barrier
in negotiation meetings: “… a negotiator was once involved in negotiating with a major national
company. Eventually, he and the other party’s negotiator reached a deal they both considered fair.
Each time the other firm’s negotiator submitted a ‘final’ document, a different level of the corporate
hierarchy weighed in with objections to elements of the deal important to that part of the company.
When the negotiator admitted that the decision-making process had to be approved by five levels at
corporate headquarters, the first negotiator walked away from the deal.” (Schulman, 2003: 162)
Researchers in the area of cross-cultural communication have made use of various cultural
dimensions to describe and classify cultures around the world in attempting to ease the task of
business communicators. Hofstede’s model analyzed cultures from the point of view of power
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distance, individualism v. collectivism, femininity v. masculinity, short-term v. long-term orientation,

and uncertainty avoidance. Trompenaars’ looked at dimensions such as: universalist v. particularist,
individualist v. collectivist, specific v. diffuse, achievement oriented v. ascription, and neutral v.
emotional. Hall classified groups as monochronic or polychronic, high or low context, and past-
oriented or future-oriented. Kluckholn identified five dimensions – attitude to problems: time, Nature,
nature of man, form of activity, and relation to one’s cultural compatriots. (Lewis in Voices, 2014:8)
As for time, each of the cultural differences explained by the use of the above-mentioned
classifications can raise barriers in the way of communication in business settings. A story by David
Beadles exemplifies quite well how obstacles in business relations may appear due to different cultural
attitudes towards time: “Three years ago, my then-boss (we’ll call him Joe) traveled abroad for the
first time – to Amsterdam. Joe’s your typical American executive: fast thinking, talking and acting …
Joe and I attended our first team business dinner, which was quite the event: a five course
extravaganza with the finest of wines. Before we’d finished the second course, Joe was pacing the
room. Towards the end of the meal, just as our European colleagues began sharing their expectations
and hopes for our new venture, Joe was outside hailing a taxi.” (Schulman, 2003: 150). In relation to
how concepts of time can influence business behavior in various cultures, we may also note that being
early, right on time or late for a meeting or a negotiation session are behaviors considered perfectly
acceptable in various national cultures, depending on people’s diverse perceptions and uses of time,
and may cause frustration to culturally unaware business partners, eventually leading to
communication breakdowns.
In connection with time, timing can be seen as one of the factors with a significant, sometimes
crucial, influence on the success or failure of business communication. While carrying business-
related discussions on over the lunch break or at dinner is accepted in some cultures, in other cultures
it is generally considered rude or intolerable to extend conversations outside the business context,
when business partners and colleagues enjoy their private time. When you accidentally meet your
opponent in town, shopping with his family or having a romantic dinner, it is certainly not a good time
to ask if the contract will be signed, after all.
Body language may sometimes be an insurmountable barrier in business communication.
Reflecting on the negative impact that the lack of knowledge concerning foreign body-language
gestures may have on the success of business encounters, Allan and Barbara Pease note that
“Surprisingly … very few of today’s professionals take the time to learn international body-language
customs. When it comes to doing international business, smart attire, excellent references and a good
proposal can all become instantly unstuck by the smallest, most innocent gesture sinking the whole
deal.” (Pease, 2011: 137) Besides the OK sign with its very diverse connotations in various cultures
(Pease, 2011: 139), there are many other body attitudes and gestures which can make or break a deal.
Body posture, eye-contact, the use and extent of personal space and the smile are all very important
cultural non-verbal signals that can foster or hinder good business relations. Even the handshake,
which has been largely adopted as a symbol of business interaction, may be improper in certain
cultural contexts. For instance, “One area where handshakes have not become established is Japan,
where such bodily contact can be considered impolite. Japanese people bow on first meeting, the
person with the highest status bowing the least and the one with the least status bowing the most.”
(Pease, 2011: 143)
Adaptation seems to be the ultimate necessity in cases of intercultural interactions, both at
national or regional level and at corporate level. But, as Richard Lewis puts it, “It is hardly likely that
even the most informed and adaptable executive could envisage assuming 200 different personalities!
… Such chameleon-like behavior is out of the question and unattainable, but the question of
adaptation remains nevertheless important.” (Lewis in Voices, 2014:8)
Linguistic Barriers
While the intercultural element remains of paramount importance in Business
communication, we should also focus on the linguistic barriers which may occur in business meetings.
Meetings and negotiations are interrelated because they both imply that agreement must be reached.
Consequently, students must be taught how to react and interact in such contexts.
The major needs we have identified are: to create a safe and credible context (by showing
respect for the other participants) and by asking questions/ for opinions, to make polite requests, to
clarify content/ to manage uncertainty, to answer questions.
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Proficiency in English grammar and general vocabulary could prove useless if the speaker
ignores the basic issues which form the basis of the so-called “negotiation” discourse which is most
likely to occur in meetings. It is thus our aim to familiarize our students with the main aspects which
form the basis of the art of negotiation: meetings become necessary once an agreement needs to be
reached; that is why negotiation is closely related to meetings. Consequently, besides basic grammar
rules and business vocabulary, we need to teach our students how to react and interact in business
contexts, more particularly in meetings/ negotiations.
In order to create a safe and credible context, students must acquire knowledge related to
formulating various types of questions, e.g. open questions (i.e. “Wh-“ questions), closed questions
(i.e. “Yes/ No” questions, e.g. “Is it…?”, “Are you…?”), they must develop the ability to ask for
opinions by using structures like “What do you think…?”, “How do you feel…?”; they must
undoubtedly be able to make polite requests (in this case, among others, students must be aware of the
various uses of modal verbs: e.g. can, could, would are generally used to make requests; could and
would are more polite than can; they should also be introduced to the use of two-step questions which
is extremely useful in negotiations: “Could you do me a favour? Could you send these documents to
Clive?”). Polite requests are also addressed by means of using the past continuous form of certain
verbs “I was wondering…”, “I was thinking…” which implies that it is important for Business
students to acquire knowledge related to the formation and use of tenses (Business Spotlight, no.
5/2014: 45-7).
It is quite often that, in business meetings and negotiations, when confronted with extremely
varied points of view, meaning is lost. In order to clarify content/ manage uncertainty, students are
encouraged to rephrase ideas, to politely ask for clarifications and to use structures such as: “That’s
interesting. What do you mean when you say…”, “I’m not quite sure I understand/ Could you tell me
more…”, “So, what you are asking is … is that right?” and to avoid sounding aggressive.
Perhaps the most difficult part in meetings/ negotiations is to answer questions. The major
fears that our students face in this field are related to the inability to understand a question and to
actually answer it. In this case, we encourage them to paraphrase and ask for further information (e.g.
“Could you tell me more…?”); and, in the unfortunate case when they actually do not know the
answer, we suggest they should take on responsibility by saying “I’m not sure about this. What’s your
experience?” (Business Spotlight, no. 3/2014: 29-34).
Conclusions
Our paper has aimed to identify some relevant intercultural and linguistic barriers which may
occur in international settings and to provide significant input related to the structures that may be
successfully used in facilitating communication in business meetings and negotiations. Since time has
clearly become a key resource particularly for young professionals striving to establish the bases of
their career, our students’ communication needs represent a priority in setting the directions of our
enterprise, i.e. to familiarize them with the key concepts of business communication in general and
with those of business meetings, in particular, and to provide them with the necessary support to
actively use the intercultural as well as the linguistic patterns we teach in Business English Classes in
real life contexts. Our purpose is to identify the best means to achieve this and we have found that by
engaging PL principles in teaching Business English, we respond to our students’ needs.
Once familiarized with the intercultural and linguistic barriers specific to business meetings,
students will improve their ability to use meeting and negotiation skills in real-life cross-cultural
interactions.
References
Beadles, D., 2003, “An American Expat’s View”, in Myra Shulman, Selected Readings in Business,
Millennium Edition, The University of Michigan Press, pp. 160-163
Cohen, S. P., 2003, “Good Negotiation Equals Good Contracts”, in Myra Shulman, Selected Readings
in Business, Millennium Edition, The University of Michigan Press, pp. 160-163
Cope, J., 2014, “From Critical Analysis to Critical Literacy in ESP. Developing Skills for Greater
Understanding of UK, US and Australian English Texts”, in Current Development in English for
Academic and Specific Purposes: Local Innovations and Global Perspectives, ed. by Prithvi Shrestha,
Garnet Publishing Ltd., UK, pp. 9-26
240
Humes, M. and Reilly, A. H., 2008, “Managing intercultural teams – The reorganization exercise”, in
Journal of Management Education 32, pp. 118-137
Lewis, R., 2014, “Teaching cultural competence”, in IATEFL Voices, Issue 236, January-February,
Oxford University Press, pp. 8-9
Pease, A. and B., 2011, Body Language in the Work Place, Orion Books, London, UK
Scollon, R. and Wong Scollon, S., 2001, Intercultural Communication: A Discourse Approach,
Blackwell, Oxford
Tenant, A., 2015, “Mayday! Mayday!” in IATEFL Voices, September/October 246, p. 11
Utley, D., 2007, Intercultural Resource Pack: Intercultural communication resources for language
teachers, Cambridge University Press, Cambridge, UK
Magazines:
Business Spotlight, May-June 3/ 2014, Spotlight Verlag, Deutschland
Business Spotlight, September-October 5/ 2015, Spotlight Verlag, Deutschland
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The Effects of Endorsement Sources towards Perceived Credibility
Cara C. and Tocila T.

PhD(c), Alexandru Ioan Cuza University of Iași, 14th Lapușneanu Street
corina.cara@gmail.com, tudor.tocila@gmail.com
Abstract
Financial crises usually involve budget cuts especially for the marketing department and there is a challenge for
both researchers and practitioners to find more efficient ways to advertise. Efficiency can be achieved through a
careful selection of communication strategies and implicitly, a smart endorser selection.
This quantitative research aims to identify how different sources of endorsement (celebrities, experts and typical
consumers) are perceived in terms of credibility and to explore how the attitudes and perceived credibility could
be related to the need for cognition concept.
The sample covered 394 Romanian subjects. Each subject was exposed to three different sources of endorsement
through ad layouts. After the exposure, the level of perceived credibility towards each type of endorser and the
level of need for cognition for each respondent were measured through an adaptation of Trustworthiness Scale
of Ohanian (1990) and the Short Need for Cognition scale of Cacioppo, Petty and Kao (1984).
The implications are theoretical, as these relationships are investigated for the first time and empirical, being
useful for companies activating in the beauty industry.
KEYWORDS Endorsement Sources, Need for Cognition
JEL CLASSIFICATION CODES M31 Marketing, M37 Advertising
1. INTRODUCTION
In times of economic crisis both consumers and managers are changing their mentalities. While
consumers may seek for more rational decisions, which imply more frugal thoughts and more time to
think if a service or product is worth buying, managers usually use two kinds of approaches – they
either make cuts on the marketing department or invest the same amount of pecuniary resources on
smarter advertising. In terms of endorsement, managers find themselves at a turning point, considering
the large amount of money that this strategy implies.
On the other hand, consumers who are inclined to deeply analyze anything may spend even more
thought on making a purchase in crisis times. That could be a bigger potential problem for products
that are satisfying a hedonic need or are advertised more emotional than rational.
This study focuses on providing insights for managers regarding the effectiveness of endorsement
strategies in the beauty services industry and also aims to find if need for cognition has a role as a
personality trait in the relation between credibility and attitude formation.
Source credibility. This concept is widely approached by researchers in the persuasion area.
Essentially, it is the combination of perceived trust and expertise. It is believed that it is a key factor of
communication in order for a message to achieve persuasion (Inoue et al., 2012). The concept of
source credibility is a multidimensional one. Most often, researchers mention the expertise and the
trustworthiness as sub-dimensions of the construct. The work of Ohanian (1990) summarizes the most
important approaches until 1990 regarding the composition of the construct.
Overall, researchers agree that a highly credible source is more effective in the matter of behavioral
and attitudinal changes. If consumers have a positive perception of a specific endorser in an ad, this
situation is usually leading to a positive attitude formation towards the ad. A credible endorser is an
important antecedent in ads and brands evaluation (Goldberg et al., 1990; Mitchell et al., 1981;
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Mackenzie et al., 1986). The credibility of the endorser positively influences the purchasing intention.
This influence is based either on the attitude towards the ad or the attitude towards the brand (Yoon et
al., 1998; Ferle et al., 2005).
Considering the fact that need for cognition has a contribution to the process of attitude formation and
attitude change as a result of ad exposure (Petty, Cacioppo 1982) and the fact that source credibility is
a complex construct, influenced by numerous endogenous or exogenous factors (Yoon, 1998), this
study aims to establish if need for cognition somehow influences the relation between source
credibility and ad efficacy.
Need for Cognition (abbreviated NFC) is an individual characteristic that is used to predict attitude
and attitude change in the Elaboration Likelihood Model (Petty, Cacioppo, & Kao, 1984). NFC
construct is used for measuring the degree to which one enjoys cognitive effort. Individuals with high
NFC and low NFC tend to have different approaches to problems. While persons with high NFC have
the need to think about the given stimuli or comparing them with previous experience, persons with
low NFC tend to rely on others in the process of attitude formation or attitude change.
The Theory of Elaboration Likelihood implies that NFC trait is a constant characteristic of individuals
or even an inborn one. Individuals’ attitude is considered to be more long lasting and to have a greater
magnitude in cases of high tendency towards need for cognition (Petty, Cacioppo, & Kao, 1984).
That’s is happening because they tend to analyze more the given piece of information, on the
condition that the persuasive message includes some strong arguments that can be processed through
central route. The conceptualization of NFC as a personality trait with an important role towards the
attitude can be found in several articles (Petty, Cacioppo, & Kao, 1984; Cacioppo & Petty, 1982;
Cacioppo & Petty, 1984; Cacioppo, Petty & Morris, 1983; Cacioppo, Petty, Kao & Rodriguez, 1986).
Considering that, an individual with high NFC will base his attitudes taking into account the rational
facts rather the emotional ones. Rational facts are drawn either from arguments, from previous
experience or from personal expertise. For a person that does not have a personal experience or
personal expertise, the source of arguments could be important.
But what happens with the attitude of an individual with high NFC if an ad message does not contain
rational, strong arguments? Will he retain his initial attitude or will he make an extrapolation based on
the source of the message? The literature omitted an extrapolation effect of the source.
2. Method
394 subjects participated in an online survey. They were aged 18 – 55 years and the sample included
both males and females from different Romanian counties. The majority of the subjects (214) were
aged 18 to 25 years old. 141 subjects were aged 26 to 35, 25 subjects were aged 36 to 45 and 14
subjects were 46 - 55 years old. Out of the total of 394 subjects, 334 were females and 60 were males.
The sample covered 19 Romanian counties – Alba, Bacău, Botoșani, Brăila, Brașov, Ilfov, Buzău,
Cluj, Constanța, Galați, Iași, Maramureș, Mureș, Neamț, Olt, Sălaj, Suceava, Vaslui and Vrancea.
The questionnaire was distributed online, via several Facebook pages and groups. At the beginning it
included the measurement of the initial purchase intention (2 items on a 9-point Likert scale), the
initial intention of recommendation (1 item on a 9-point Likert scale) and the attitude towards
cosmetic services (3 items on a 9-point Likert scale). Initial and final attitude were measured, using an
adaptation of Dual Mediation Model’s constructs (Lutz, 1985)
The following item of the questionnaire referred the county of the subjects. Afterwards, three ad
layouts were presented. Each one represented a different endorsement source for the Intraceuticals
brand (cosmetic treatments). The first ad layout presented four celebrities (two international and two
national celebrities, one male and three females), the second one presented four experts (two
dermatologists and two estheticians, two Romanian, one Canadian and one from USA) and the third
one presented four typical satisfied consumers (one male and two females).
After evaluating the ad layouts, the participants rated the credibility of each type of endorsement
source - celebrity, expert and the typical satisfied consumer. The perceived credibility was measured
243
by an adaptation of the Ohanian’s trustworthiness scale and included four items – sincerity, credibility,
trustworthiness and honesty, measured on a 9-point Likert scale.
After that, the measures of attitude, purchase and recommendation intention were again introduced, in
order to track the changes after the exposure to the endorsement sources. Afterwards, the level of need
for cognition was measured (18 items on a 9-point Likert scale). Some items were reversed; the mean
was used for identifying the individual level of NFC. The final items of the questionnaire referred to
the age and the gender of the participants. For all the scales the items were averaged for identifying the
individual mean level.
The whole questionnaire, including the ad layouts, can be found in the Appendix section.
3. Results
Reliability analysis. Cronbach’s Alpha coefficients were used for identifying the internal consistency
of the scales. α = 0.943 for initial purchase intention, α = 0.973 for final purchase intention, α = 0.927
for initial attitude, α = 0.956 for final attitude, α = 0.949 for celebrities’ trustworthiness, α = 0.956 for
experts’ trustworthiness, α = 0.960 for consumers’ trustworthiness and α = 0.906 for the overall
trustworthiness. All those scales were found internally consistent.
NFC’s Cronbach Alpha coefficient was initially α = 0.650. Eighth item was deleted in order to achieve
an internal consistency of α = 0.718. This item was “I prefer to think about small, daily projects to
long-term ones”.
Differences between the three endorsement sources in terms of credibility. A Friedman test revealed
that the three categories of endorsers were perceived overall significantly different (χ 2 (2) =
154.314, p < 0.05). The lowest credibility score belongs to celebrities (M = 1.59). The closest
categories in terms of perceived credibility were the experts and the typical satisfied consumers (M =
2.31, M = 2.11). Experts were perceived as the most credible endorsers. Individual pair-wise analysis
reported that all three categories are significantly different from each other (p< 0.05), so we can
conclude that celebrities, experts and consumers are perceived in different ways in terms of credibility.
Attitudes changes. A Wilcoxon test was performed to determine if the changes in attitude, purchase
intention and intentions of recommendation were significant. 158 subjects negatively changed their
attitude after the exposure, while only 115 subjects positively changed their attitude. 121 did not
change their attitude at all. Changes were significant, as α = 0.036.
The situation was reversed for the intention of recommendation, which, overall, has increased. 94
subjects negatively changed their purchase intentions while 166 positively changed their purchase
intention. 134 subjects did not change their purchase intentions. Changes were significant, as α =
0.000.
The majority of the subjects (206) did not change their purchase intention, while 108 scored a positive
change and 80 a negative one. Changes were significant (α = 0.039).
NFC correlations with attitude. In order to verify the link of the NFC construct with the observed
components of attitude, several Spearman non parametrical correlation tests were conducted.
Significant correlations were found between NFC and initial recommendation intention (rs = 0.146, p
= 0.004), initial (rs = 0.145, p = 0.004), between NFC and final purchase intention (rs = 0.145, p =
0.004), between NFC and initial attitude (rs = 0.221, p = 0.000) and between NFC and final attitude (rs
= 0.203, p = 0.000). All the correlations were weak and positive. Attitude towards the brand (both
initial and final) had the highest correlation with NFC. NFC was not found to be significantly
correlated with any change of attitude.
NFC in the credibility – attitudes relation. The general final attitude was composed by averaging the
scores of final purchase intention, intention of recommendation and attitude towards the brand. Scores
for each endorser category significantly predicted the general final attitude. For the celebrity endorsers
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category, β1 = 0.264, t = 3.352, α = 0.001, for the expert endorsers category, β2 = 0.247, t = 3.408, α =
0.001) and for the satisfied consumers category, β3 = 0.174, t = 2.538, α = 0.012). For Need for
cognition, β4 = 0.300, t = 9.565, α = 0.000.
The combination of perceived credibility of each source and the Need for cognition indicator
explained a significant proportion of variance of the general final attitude towards the service, adjusted
R2 = 0.856, F = 586.801, α = 0.000.
In order to investigate if need for cognition has an interaction between source credibility and the
attitude after the exposure, a multiple regression model was tested. After centering the regression
terms, the interaction terms were computed. A small change in R square was present (a change of
0.002), but it was not significant (p > 0.05), thus Need for cognition does not moderate the relation
between credibility and attitude after the exposure. It is, however, a valid predictor in the model.
Negative, neutral and positive changes. In order to investigate the particularities of each group that
had a negative, positive or no change in attitudes, the whole sample was divided in three subsamples,
based on the type of change recorded after the exposure to the ad.
The first three groups were divided by the changed in the intention of recommendation. Significant,
positive and weak non-parametrical correlations were found between the group that had a positive
change in the intention of recommendation and the perceived credibility of the advertised endorsers.
Thus, the higher correlation was found between the positive change in recommendation and
celebrities’ trustworthiness (rs = 0.280, p = 0.000), closely followed by the consumers’ (rs = 0.274, p =
0.000) and experts’ trustworthiness (rs = 0.274, p = 0.000). This means that celebrities express a
slightly higher influence over the positive change of the intention of recommendation than the other
sources of endorsement. Also for the group that positively changed their intention of recommendation
manifested a higher non-parametrical correlation with the change in the purchase intention (rs = 0.224,
p = 0.004) than with the change in attitude (rs = 0.182, p = 0.019). Some differences related to the
gender of the subjects were found in the subsample that negatively changed their intention of
recommendation. In this group, females have a significantly smaller negative change of the intention
of recommendation than males (females’ mean rank = 45.41, compared to males’ mean rank = 73.50,
p = 0.07).
Furthermore, other subsamples were constructed, based on the changes in attitude. For the group that
had a negative change of attitudes, were found two significant non-parametrical correlations, one with
the trust in experts (rs = 0.210, p = 0.008) and one with the trust in the typical satisfied consumer (r s =
0.161, p = 0.043). This means that when the trust in experts and consumers increase, also increase the
negative change of the attitude. Those who positively changed their attitude have a higher change of
purchase intention (rs = 0.240, p = 0.010) and those who negatively changed their attitude have a
higher change in the intention of recommendation (rs = 0.335, p = 0.000).
The last criteria of subsample formation considered was the change in the purchase intention. The
group that positively changed their purchase intention manifested a higher correlation with both
celebrities’ trustworthiness (rs = 0.329, p = 0.001) and experts’ trustworthiness (rs = 0.291, p = 0.002)
than the group that negatively changed their purchase intention (rs = 0.224, p = 0.046 for celebrities’
trustworthiness and rs = 0.249, p = 0.026). The correlation with consumers’ trustworthiness was not
significant. The change in purchasing intention is correlated with the change in recommendation
intention for the subsample that negatively changed their recommendation intention (r s = 0.272, p =
0.015). As regarding the group that positively changed their purchase intention, the degree to which
their purchase intention changed is correlated with both change in attitude (r s = 0.389, p = 0.000) and
recommendation intention (rs = 0.437, p = 0.000).
4. Conclusion and discussion
Each source of endorsement was perceived different in terms of credibility. Celebrities were
considered the most unreliable and the typical satisfied consumer as the most reliable. Considering the
budget required for the implementation of an endorsement strategy, this result is useful in choosing
one source over another.
245
All the measured changes, in attitude, in intention of recommendation and in purchase intention were
found to be statistically significant, so the exposure to the ads definitely had an effect over the
subjects.
The analysis of subsamples formed by dividing subjects according to their positive or negative
changes in intention of recommendation revealed that the group that scored positive changes had the
highest trust in celebrities and the lowest trust in experts. It means that celebrities are most suitable if a
change in intention of recommendation is desired. Further results implied that within the same group is
more probable that the positive change in recommendation to be accompanied by a change in the
purchase intention than a change in attitude. Within the group that negatively changed their intention
of recommendation, males scored a significantly higher negative change than females.
The subsamples that depended on the change in attitude towards the service category exposed that the
negative changes are linked to a higher trust in experts and typical satisfied consumers. This group
also has a higher change in the intention of recommendation, while the positive changes of attitudes is
associated with a higher change in purchase intention.
Regarding the particularities of the subsamples formed by the changes in purchase intention, the group
that positively changed had higher associations with the trust in celebrities and experts than the group
with negative changes. Essentially, it is more likely that a higher trust in those two types of sources to
lead to a positive change of purchasing intention. The typical satisfied consumer does not have a role
in the change of the purchase intention. The negative change of the purchase intention is linked to the
change in the intention of recommendation, as the positive change of attitude is linked with both
changes in attitude and recommendation intention.
Need for cognition was found to be a significant predictor, along with the perceived credibility of
endorsers, for the final state of subjects’ attitudes. However, in this case, the construct does not act like
a moderator. The relationship between need for cognition and the general final attitude, which includes
final attitude towards the service, final purchase intention and final intention of recommendation, is
positive, fact that implies that when a subject’s need for cognition is high, he tends to have a higher
general attitude regarding this particular service. Even if we initially expected to found that differences
between perceived credibility of each source would be explained in some extent by the individual
levels of need for cognition, this was not the case with our sample. However, the fact that need for
cognition was a valid predictor of attitude needs some further investigation in order to identify what is
leading a subject with high need for cognition to a higher general attitude towards a service after the
exposure to a message that purposely failed to include strong arguments of the advertised service.
This study has some limitations, the most poignant one being the sample size, which is not statistically
significant for Romanian population. A shortcoming emerging from the sample composition is the
heterogeneity of the subjects. A homogenous sample in terms of service usage, gender and age could
offer more specific insights.
Acknowledgement
This work was co-financed from the European Social Fund through Sectoral Operational Programme
Human Resources Development 2007-2013, project number POSDRU/187/1.5/S/155656 „Help for
doctoral researchers in economic sciences in Romania”.
References
Cacioppo, J. T., & Petty, R. E. (1982). The need for cognition. Journal of Personality and Social
Psychology, 42, 116-131;
246
Cacioppo, J. T., & Petty, R. E. (1984). The need for cognition: Relationship to attitudinal processes. In
R. P. McGlynn, J. E. Maddux, C. D. Stoltenberg, & J. H. Harvey (Eds.), Social perception in clinical
and counseling psychology (pp. 91-119). Lubbock: Texas Tech University;
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evaluation, recall, and persuasion. Journal of Personality and Social Psychology,, 45, 805-818;
Cacioppo, J. T., Petty, R. E., Kao, C. E, & Rodriguez, R. (1986). Central and peripheral routes to
persuasion: An individual difference perspective. Journal of Personality and Social Psychology, 51,
1032- 1043;
Goldberg, M.E. and Hartwick, J. (1990) ‘The effects of advertiser reputation and extremity of
advertising claim on advertising effectiveness’, Journal of Consumer Research, 17, September, 172–
179;
Inoue, Y., & Kent, A. (2012). Investigating the role of corporate credibility in corporate social
marketing: A case study of environmental initiatives by professional sport organizations. Sport
Management Review, 15(3), 330-344;
La Ferle, C., & Choi, S. M. (2005). The importance of perceived endorser credibility in South Korean
advertising. Journal of Current Issues & Research in Advertising, 27(2), 67-81;
Lutz. R. J. (1985). Affective and cognitive antecedents of attitude toward the ad: A conceptual
framework. In L. F. Alwitt & A. A. Mitchell (Eds.), Psychological processes and advertising effects;
Theory, research and application. Hillsdale, NJ: Lawrence Erlbaum Associate;
MacKenzie, S. B., Lutz, R. J., & Belch, G. E. (1986). The role of attitude toward the ad as a mediator
of advertising effectiveness: A test of competing explanations. Journal of marketing research, 130-
143;
Mitchell, A. A. (1981). The dimensions of advertising involvement. Advances in consumer research,

8(1), 25-30;
Ohanian, R. (1990). Construction and validation of a scale to measure celebrity endorsers' perceived
expertise, trustworthiness, and attractiveness. Journal of advertising, 39-52;
Petty, R. E., Cacioppo, J. T., & Kao, C. F. (1984). The efficient assessment of need for
cognition. Journal of Personality Assessment, 48(3), 306-307;
Yoon, K., Kim, C. H., & Kim, M. S. (1998). A cross-cultural comparison of the effects of source
credibility on attitudes and behavioral intentions. Mass Communication and Society, 1(3-4), 153-173.
247
Appendix - Online survey
This study is addresses to both women and men. We make a few references to beauty treatments, but
your opinion is valuable even if you do not use such services.
Please complete the following questionnaire. All the responses are confidential. The required time is
about 5 minutes.
Would you have a cosmetic treatment in the next 4 months?

Unlikely 1 2 3 4 5 6 7 8 9 Likely
Definitely not 1 2 3 4 5 6 7 8 9 Definitely
Would you recommend to a friend a cosmetic treatment, regardless if you use it or

not?
What is your opinion about cosmetic treatments?

Negative 1 2 3 4 5 6 7 8 9 Positive
Not worth the money 1 2 3 4 5 6 7 8 9 Worth the money
Bad for skin 1 2 3 4 5 6 7 8 9 Good for skin
Next, we will present three categories of opinions about Intraceuticals cosmetic treatment, which
treats a variety of skin problems.
All the presented opinions are authentic and are expressed by the persons concerned.
Please follow carefully the information of each material.
Specify the county where you live: …………………………………………………..
248
249
How sincere do you find the opinions of each group?

(1 = not sincere, 9 = very sincere)
Celebrities’ opinions 1 2 3 4 5 6 7 8 9
Doctors’ opinions 1 2 3 4 5 6 7 8 9
Consumers’ opinions 1 2 3 4 5 6 7 8 9
How credible do you find the opinions of each group?

(1 = not credible, 9 = very credible)
How honest do you find the opinions of each group?

(1 = not honest, 9 = very honest)
How trustworthy do you find the opinions of each group?

(1 = not trustworthy, 9 = very trustworthy)
Now that you have viewed the material, we will resume a few questions from the beginning of the
questionnaire.
Would you have a cosmetic treatment in the next 4 months?

Unlikely 1 2 3 4 5 6 7 8 9 Likely
Would you recommend to a friend a cosmetic treatment, regardless if you use it or

not?
What is your opinion about cosmetic treatments?

Negative 1 2 3 4 5 6 7 8 9 Positive
Not worth the money 1 2 3 4 5 6 7 8 9 Worth the money
Bad for skin 1 2 3 4 5 6 7 8 9 Good for skin
250
Finally, please answer a few questions about your profile. Indicate your degree of
agreement for the following statements (1 = strongly disagree, 9 = strongly agree):
I would prefer complex to simple problems. 1 2 3 4 5 6 7 8 9
I like to have the responsibility of handling a situation that requires 1 2 3 4 5 6 7 8 9
a lot of thinking.
Thinking is not my idea of fun. 1 2 3 4 5 6 7 8 9
I would rather do something that requires little thought than 1 2 3 4 5 6 7 8 9
something that is sure to challenge my thinking abilities.
I try to anticipate and avoid situations where there is likely a chance 1 2 3 4 5 6 7 8 9
I will have to think in depth about something.
I find satisfaction in deliberating hard and for long hours. 1 2 3 4 5 6 7 8 9
I only think as hard as I have to. 1 2 3 4 5 6 7 8 9
I prefer to think about small, daily projects to long-term ones. 1 2 3 4 5 6 7 8 9
I like tasks that require little thought once I’ve learned them. 1 2 3 4 5 6 7 8 9
The idea of relying on thought to make my way to the top appeals 1 2 3 4 5 6 7 8 9
to me.
I really enjoy a task that involves coming up with new solutions to 1 2 3 4 5 6 7 8 9
problems.
Learning new ways to think doesn’t excite me very much. 1 2 3 4 5 6 7 8 9
I prefer my life to be filled with puzzles that I must solve. 1 2 3 4 5 6 7 8 9
The notion of thinking abstractly is appealing to me. 1 2 3 4 5 6 7 8 9
I would prefer a task that is intellectual, difficult, and important to 1 2 3 4 5 6 7 8 9
one that is somewhat important but does not require much thought.
I feel relief rather than satisfaction after completing a task that 1 2 3 4 5 6 7 8 9
required a lot of mental effort.
It’s enough for me that something gets the job done; I don’t care 1 2 3 4 5 6 7 8 9
how or why it works.
I usually end up deliberating about issues even when they do not 1 2 3 4 5 6 7 8 9
affect me personally.
I would prefer complex to simple problems. 1 2 3 4 5 6 7 8 9
Gender: Female / Male

Age: 18 – 25 years / 26 – 35 years / 36 – 45 years / 46 – 55 years
251
Estimating Greek financial crisis impact on port authorities’ revenues: The case of a
regional cruise homeport.
S. Troumpetas1, C. Beneki2, D. Giannias1 & P. G. Eliopoulos3

1Hellenic Open University, School of Social Sciences, Greece
2Technological Educational Institute of Ionian Islands, School of Business and Economics,
Department of Business Administration, Greece
3Technological Educational Institute of Western Greece, School of Business and Economics,
Department of Accounting and Finance, Greece.
spytro@gmail.com
Abstract
Cruises have become one of the most dynamic and fastest growing segments of the international tourist industry
in terms of passenger demand and vessel supply. Although Greece is an attractive cruise tourist destination, it
fails to make the most of its potential in terms of revenue generated due to lack of a sufficient number of
homeports for cruise.
The cruise industry is a fast growing tourism sector and a key component of the local and national economy.
Greek ports are key players in a competitive environment throughout the Mediterranean basin. Competitiveness
in these ports depends on a number of factors such as port and terminal charges, location, services and most
importantly, cruise-oriented attractions. This paper examines the governance model and pricing policy of
twenty-two Greek ports representing nearly 75% of the overall cruise traffic in Greece. We then go on to assess
the Greek financial crisis impact for the Heraklion Port Authority S.A. in terms of both passenger volume and
revenues generated by cruise ship calls during 2008-2014 period.
Keywords: cruise industry, financial crisis, Port Authorities, port pricing, revenue estimation
1. INTRODUCTION
1.1 Cruise Industry Overview
In turbulent economic periods, like the current global economic crisis, cruise industry shows a
remarkable resistance to the Sirens calls for economic recession (Lekakou et. al, 2011). Cruises have
become one of the most dynamic and fastest growing segments of the international tourist industry in
terms of passenger demand and vessel supply. Cruise ships are constantly growing in size, expanding
their range of activities on-board in order to satisfy the complex demands of both first time and
returning passengers (Castillo-Manzano et al. 2014). Cruise tourism can benefit a destination by
increasing foreign exchange earnings, profit, taxes, employment, positive externalities and economies
of scale (Brida 2014a; Pratt and Blake 2009). In addition, cruise tourism requires less infrastructure
compared to stopover tourism at a tourist destination (Andriotis and Agiomirgianakis 2010).
The Caribbean has been the dominant deployment market of the cruise industry since its inception, but
the Mediterranean cruise market has grown substantially in recent years (Rodrigue and Notteboom
2012). According to the Cruise Lines International Association (CLIA), the Caribbean accounts for
more than a third of the global deployment capacity market share in 2015, while it is considered
complimentary to the Mediterranean in the sense that Caribbean is dominantly serviced during the
winter, while the Mediterranean experiences summer peak season (Rodrigue and Notteboom 2012).
252
During the last five years, the cruise industry has felt the impact of the financial crisis, but unlike
many other industries, it had the advantage of several counter-crisis options, such as its ability to move
ships and switch itineraries, to quickly adapt to the evolving demand and to enjoy a high perceived
value for money spent (Brida et al. 2014b). Cruise market remains an oligopoly in that, through a
process of consolidations and mergers, is dominated by three groups of companies (Carnival Group,
Royal Caribbean and Norwegian Cruise Lines) which hold a cumulative 81.6% market share
compared to 75% in 2008 (Lekakou et al. 2010; Cruise Market Watch 2015). According to the CLIA’s
annual State of the Cruise Industry Report (CLIA 2015), twenty three million passengers are expected
to sail until the end of 2015 to nearly one thousand ports of call in new exotic locations, especially in
the fast growing Asian market. CLIA members also announced the launch of twenty two new cruise
ships in 2015 for a total investment of four billion dollars.
1.2 Effects of financial crisis and the Cruise Industry in Greece
The financial crisis that hit first the US in 2007 influenced many developed and developing countries
the main cause of which was the subprime mortgage crisis in USA (Ozturk, 2015). The effects,
especially in Greece were especially deep due to its high debt level, low competitive power and
unstable political structure. Therefore, this crisis largely affected the majority of economic activities in
Greece in the primary, secondary and service sector (Papatheodorou and Arvanitis, 2014).
Despite the crisis, general and cruise tourism industry is currently undergoing a period of rapid
expansion and Greece is included among the top most popular destinations worldwide. At a national
level Greece had 24,3 million international tourism arrivals (including cruise passengers), which
accounted 13,4 billion euros in 2014 (National Bank of Greece, 2014), as presented in the following
figure:
Figure 1: Arrivals in Greece 2013-2014
25000
22033
20000 17920
15517
15000
General Tourism Arrivals
10000 Cruise Tourism Arrivals
5000
2374 2396
1428
0
2012 2013 2014
source: National Bank of Greece, Balance of Tourism Payments, 2014
In any case, Greece has about a 1.5% share of the world tourism market and a 2.9% of the European
one (Ozturk, 2015, SETE, 2014); moreover and when all different impacts are considered, tourism
253
contributes by 17,3% to the total Greek GDP generating nearly 20% of total employment in the
country (WTTC, 2015).
Although Greece is an attractive cruise tourist destination, it fails to make the most of its potential in
terms of revenue generated. One of the main reasons for this failure is the lack of a sufficient number
of homeports for cruise. In addition, the cruise industry, especially in Greece, remains an under-
researched academic field in maritime economics. In the past few years, the industry has attracted just
a handful of researchers from various fields investigating the complexity of its operational and
commercial dynamics (Pallis et al. 2010).
2. LITERATURE REVIEW
Greek debt crisis offers an extensive field of study examined by many researchers (Gibson et. al.,
2014, Mink and Haan, 2013, Karagiannis and Kondeas, 2012, Pagoulatos and Triantopoulos, 2009)
and analyzed in numerous Greek and international textbooks. The crisis impact on Greek tourism is
significantly less examined (Stylidis and Terzidou, 2014, Papatheodorou et. al., 2010, Kapiki, 2011)
while papers addressing impacts on cruise tourism in Greece are few (Lekakou et. al, 2010 & 2011).
The discussion on port pricing and its impact on maritime economics began in 1982, when Janson and
Schneerson highlighted the complexity of pricing practices at the time. References to the relation
between port charges and port costs are also present in the seminal work of Thomas Thorburn in 1960.
Pallis et al. (2010) analyzed 395 papers published between 1997 and 2008, highlighting how
contributions in the area of policy and regulation have remained rather fragmented as attested by the
few influential articles in terms of citations (Acciaro 2013). From a port economics point of view, the
cruise sector seems to be neglected. Pallis et al. (2010) identified only four papers (Baird 1997;
McCalla 1998; Butt 2007; Guerrero et al. 2008) dealing with cruise terminals (Lekakou et al. 2010).
The vast majority of research papers examining port pricing and policies mainly focus on cargo ships
and port infrastructures dedicated to host this type of vessels. Goulielmos (1999) addressed port
deregulation issues in major Greek ports, while Psaraftis (2007) discussed practical approaches in
tariff reforms for the port of Piraeus. One year later, Pallis (2006) examined forms of port governance
in Greece.
The cruise industry sells itineraries, not destinations, underlining the core importance in the selection
of a sequence of ports of call. The challenge for the cruise operators is to develop competitive
packages that optimize the deployment of their cruise ship fleet in view of minimizing operating costs
(Mylonas 2012). According to their use by cruise companies, cruise ports are commonly classified in
three categories: home ports, ports of call and hybrid ports (Lekakou et al. 2010). Home ports are the
starting and ending point of a cruise, ports of call are stopover ports. Hybrid ports are both home and
stopover ports. Our survey shows that only a small percent of cruise ports reviewed in Greece serve as
hybrid ports. Pricing policies in Greek ports are highly dependent on their governance model as we
explain in the following sections of this paper.
3. DATA
In order to estimate the impact of the crisis in terms of revenue loss, a distinction between a Port
Authority (port corporation) and a Municipal Port Fund must be made. The main reason is that a Port
Authority is required under law to publish its pricing policy and balance sheets in order to be
254
accessible to all stakeholders. On the other hand, data from a Municipal Port Fund can be collected
either directly from its personnel.
The survey was carried out on February 2015, initially aiming at including thirty eight regional ports
of call in Greece. The Municipal Port Fund personnel were contacted by telephone and were asked for
data on the port dues per ton, the berth dues per meter, the passenger dues per passenger on-board, the
waste disposal dues, the mooring dues and the pilotage dues. Overall, we collected information for
twenty two regional ports. More specifically, our sample consists of six Port Authorities and sixteen
Municipal Port Funds. In fact, this sample represents 75% of the overall cruise traffic in terms of
passenger volume, while the six regional Port Authorities represent approximately 20% of cruise
passenger traffic in Greece.
4. PRICING POLICIES AND TARIFFS ON GREECE’S REGIONAL PORTS OF CALL
Looking at the sources of revenue for ports, we find that, on the one hand, these consist of Port dues (
Pd ), Berth dues ( Bd ) and Passenger dues ( Paxd ), named Common Dues and, on the other hand,
consist of ancillary charges that differ among ports like Waste Disposal dues ( Wd ), Mooring dues (
M d ), Pilotage dues ( Pd ) and other dues. Common Dues are described as follows:
Common Dues  Pd  Bd  Paxd  x1GT  x2 L  x3 Pax ,
where Pd is expressed as the product of the charge in euros per ton ( x1 ) by the Gross Tonnage of the
vessel ( GT ), Bd is expressed as the product of the charge in euros per meter ( x2 ) by the overall
length of the vessel ( L ) and Paxd is expressed as the product of due per passenger onboard ( x3 ) by
the number of passengers onboard ( Pax ). At this point, we should stress that the above charges refer
to ports other than homeports (mainly Port Funds). Therefore, onboard passengers incur passenger
dues. For homeports (with embarking and disembarking passengers), a different pricing scheme
applies.
In Greek ports, every cruise ship calling is obliged to pay port dues. Berth dues are paid in case a ship
uses a pier. The usage of port’s infrastructure (pier) is not mandatory. It depends on numerous factors
like weather conditions, captain’s decisions, cruise company policy or congestion of vessels in the
same harbor during summer peak season. Bd equals zero at ports with no such infrastructure (e.g.
Santorini Island). Passenger dues are paid at all times. Our survey shows that Port dues are calculated
by using the coefficient 0.0095162 (as amended by the Official Government Gazette No 310/B
Bulletin dated 11/02/2004). In particular, to calculate the port dues for a cruise ship with a Gross
Tonnage of no more than 500 GT, it equals €3.20+ (GT  500)  x1 . Birth dues are calculated by using
the coefficient 0.2984901 (as amended by the Official Government Gazette No 310/B Bulletin dated
11/02/2004), except for one port. According to the personnel we contacted, there were slight variations
in the fifth decimal places of the coefficients among the Municipal Port Funds. The coefficient 0.35
applies to onboard passengers at fifteen ports, except for one. Further investigation is necessary to
identify this difference.
The calculation of the Common Dues is carried out without taking into account the same coefficients
among the six regional Port Authorities in our sample. The port tariff of charges differs substantially,
255
ranging from 0.0094 to 0.4 euros for x1 coefficient, from 0.03 to 0.42 euros for x2 coefficient and
from 0,35 to 2 euros for x3 coefficient. Compared to a Municipal Port Fund, a Port Authority is far
more flexible to choose its optimal pricing policy for the provision of services and infrastructure
(piers, terminals, security, passenger facilities, etc.)
As far as ancillary charges are concerned (Waste Disposal dues, Mooring dues), it appears that there is
a lack of a coordinated tariff policy; thus, Port Authorities and Municipal Port Funds have been pretty
much independent of one another. In many cases these services are provided by individual companies
having a contract with the port authority.
5. PORT REVENUE ESTIMATES OF HERAKLION PORT AUTHORITY S.A. Are they

affected by the financial crisis ?
Due to the lack of detailed data from all ports in our sample, it is difficult to reach an accurate estimate
of the ports’ revenues. In this paper, we attempted to estimate the revenues of the Heraklion Port, one
of the major regional ports in Greece. The selection of this port was based on the extent of cruise
traffic data provided by port executives and the well-documented port policy.
First, we identified the number of calls and passengers by using the records of the cruise traffic data in
the Heraklion port from 2008 to 2014. Due to lack of off-season data, 2011 has not been included in
the following charts. The list provided by the authorities was restrained, recording ship names and
number of passengers only. Thus, the values of the overall length and gross tonnage required for the
estimation of revenues were obtained from the ship operators’ own websites.
As shown in Figure 2 , the port has seen increased number of cruise ship visits up to October. In fact,
during the period of peak demand (May to September) the Heraklion port attracted a significant
proportion (59% in 2013; 53% in 2014) of the annual cruise ship visits. Despite this, the arrivals of
cruise ships at Heraklion port decreased significantly from 2008 to 2014, as demonstrated bellow.
Figure 2: Monthly cruise ship arrivals: 2008 to 2014
60
50 45 49
40 39 36 40
30 36
22 21 22 26
2008
20 15
10 17 18 18 2014
10 3 3 12 15
7
3
0 2 0 1
Our analysis shows that during our period of evaluation January to April arrivals are not greatly
affected by the crisis. Peak season shows remarkable decrease in arrivals. The monthly difference in
arrivals between 2008 and 2014 is displayed in the following graph:
256
Figure 3: Absolute Difference in Arrivals between 2008 and 2014.
10
5 5
3 3
0 1
-2
-5
-10 -11
-15 -15
-20
-22
-25 -24 -24
-27 -27
-30
During the 2008-2014 period, a change in the arrival’s pattern between Peak and Low season was
observed: From 2010 onwards, ship arrivals during Peak season are reduced, while arrivals during low
season tend to increase. An interesting observation is that in 2014 and despite the overall decline in
visits, low season ones held considerably better than peak season ones, resulting in an almost even
distribution. The reason for this effect is open for research. (figure 4).
Figure 4: Peak and off-season cruise ship arrivals from 2008 to 2014
80%
75%
70% 69%
65% 64%
60% 59%
52%
50%
48%
40% 41% Peak Season
35% 36%
31% Low Season
30%
25%
20%
10%
0%
2008 2009 2010 2012 2013 2014
Over time, it becomes apparent (Figure 5) that more and larger vessels are calling at Heraklion port.
Passenger behavior shows a similar trend, according to Figure 6.
Figures 5&6: Average Gross Tonnage of cruise ships and average passenger per ship calling at
Heraklion port (2008-2014)
257
60000 1600
1365
50000 1400
45074 48865 1161 1440
39071 48362 1200 1100
40000 1190
1000
33560 37752 970
30000 800
20000 600
400
10000
200
0
0
2008 2010 2012 2014 2008 2010 2012 2014
Another conclusion drawn from passenger arrivals in the 2008-2014 period is that, while the number
of individual ship calls at the port has decreased, the port's dependence on certain ships (and
consequently, cruise operators) has increased, from 63 different ships (2008) to 40 (2014)
Using data from the Heraklion Port’s pricing policy (as amended by Official Government Gazette No
654/B Bulletin dated 27-4-2007) on port tariffs, the Common Dues equation is modified as follows:
Common Dues  0.02GT  0.4L  Pax d  Pl d ,
where
Paxd  0.5  [( PaxOnboard  PaxDisembarked )  PaxBoarded  PaxDisembarked )]  PaxBoarded  Sd
and S d is the security fee for passengers boarded at Heraklion port.
Pilotage dues are measured on the following scale shown in Τable 3, according to data supplied by the
port executives, which are based on a joint ministerial decision.
Table 3. Charging Scales for Pilotage Dues
Gross Tonnage Pilotage Dues

From To
--- 500 52.95
501 1,000 70.39
1,001 2,000 123.34
2,001 3,500 203.35
3,501 5,000 283.35
5,001 7,000 353.73
7,001 10,000 433.16
10,001 15,000 512.59
15,001 20,000 600.40
20,000 and above 88,45€ per 10.000GT added
Our calculations, including all charges described, showed that the cruise industry contributes
significantly to the revenue generated by the Heraklion port Authority. This contribution amounts to
7.1 to 8.1% of its annual turnover, namely, half a million euros on average.
258
Despite the significant contribution of the cruise activity in the port Authority, the average
contribution per passenger has been in constant decline since 2008. Excluding revenues from port dues
(mooring and berthing), each passenger’s contribution to the total revenue generated from passenger
dues decreased from €0.68 in 2008 to €0.55 in 2014. This is probably due to the decline in
homeporting activity (disembarking and embarking), as shown in Figure 7. Compared to the primary
homeport of Greece, that of Piraeus, Heraklion's decline seems more steep, with a decline of nearly
83% in boarding passengers, compared to 50% decrease for Piraeus Port (figure 8). In any case, during
our evaluation period, boarding passengers’ numbers are almost reduced to half for both ports.
Figure 7: Boarded and Disembarked Passengers at Heraklion Port (2008-2014)
180.000
160.000
140.000
120.000 83.814
100.000 66.492
Pax Boarded
80.000
Pax Disembarked
60.000
40.000 83.305 25.472

67.243 23212 23.514
20.000 10.611
22733 24.080 27.274
11.592
0
2008 2009 2010 2012 2013 2014
Figure 8: Homeporting Activity 2008-2014 : Piraeus vs Heraklion Port Authority
512597
500000
400000
300000 256196
PIRAEUS
200000 HERAKLION
100000 67243
11592
0
2008 2009 2010 2012 2013 2014
Total revenues for 2012-2014 period are presented in Figure 10. According to our estimations,
revenues over 30.000€ per month are collected from June to October throughout our evaluation
period:
259
Figure 9: Revenues from Cruise Activity for Heraklion’s Port Authority
90.000 €
80.000 €
70.000 €
60.000 €
50.000 €
40.000 € 2012
30.000 €
20.000 € 2013
10.000 € 2014
0€
For year 2014, the three main sources of income for the port authority (berth, passenger and Pilotage
dues) are presented in figure 10:
Figure 10: Revenues from Dues Categories (2014) for Heraklion Port
30.000 €
25.000 €
20.000 €
15.000 € berth
10.000 € pax
pilotage
5.000 €
0€
From January to June, Berth Dues score the highest amount of revenues for the port authority. This
pattern changes in July and August when more passengers are using the port as embarkation point.
From September to December Berth Dues exceed all other charges: Although there is a significant
number of arrivals during this period, passengers on board are fewer, and embarkation passengers are
significantly reduced.
Closing our analysis and trying to answer whether port revenues are affected during our 6 year test
period (2008-2014) we would conclude that port revenues have indeed been affected, but not in the
same way. All dues categories show an average decrease of 36.8% in revenues; Passenger generated
revenues seem to be more affected with a decrease of nearly 50% which is explained by the similar
behaviour of homeporting activity.
260
Figure 11: Revenue Loss per Due Category: 2008-2014
250.000 €
200.000 €
-24,73%
150.000 € -46,66% -38,07%
2008
100.000 € 2014
50.000 €
0€
PORT DUES PAX DUES PILOTAGE
The monthly revenues between 2008 and 2014 also drop, following the same pattern of monthly
arrivals presented in figure 12:
Figure 12: Monthly revenue loss (2008-2014)
120.000 €
100.000 €
80.000 €
60.000 €
2008
40.000 €
2014
20.000 €
0€
It should be noted that, according to our calculations, passenger dues on average amount to 30% of the
total revenue generated by the Heraklion port Authority from the cruise activity. Therefore, extreme
fluctuations in the port’s activity as homeport have a significant impact on its revenues, so we need to
identify the factors affecting the eligibility of a port as homeport and how these factors are shaped
over time. This is of vital importance for the competitiveness of Greek ports in the Mediterranean
basin.
261
6. CONCLUSIONS
During the last five years, the cruise industry has felt the impact of the financial crisis, but unlike
many other industries, it had the advantage of several counter-crisis options, such as its ability to move
ships and switch itineraries, to quickly adapt to the evolving demand.
The port governance model is of vital importance in terms of information available to a researcher.
Port Authorities are required under law to publish certain indexes – mainly of economic nature – yet
municipal port funds are not. There is no common framework on information. As far as basic services
are concerned, the pricing policies that have been observed are almost common at Municipal Port
Funds. On the other hand, the pricing policies of Port Authorities are published either in Government
Gazettes or in the Decisions of the Board of Directors and are subject to frequent readjustments. Our
research has shown that there are differences in pricing.
We applied our findings using a regional port of reference, namely that of Heraklion, Crete. We tried
to estimate cruise activity revenues based on its pricing policy and the available statistical data. It
seems that the revenues generated from the calls made by cruise ships and their being in berth
constitutes approximately 7.5% of the annual turnover for 2013 and 2014. We consider this to be an
important ratio to the total port revenues, although our evaluation for a longer period of time, dating to
the outbreak of the crisis in Greece shows a deep negative impact on cruise activity. Ship calls are
reduced by 50% between 2008 and 2014 and similar reduction is observed in revenues generated by
cruise activity. This is not the case for Heraklion Port alone, since Piraeus, the primary homeport of
Greece, experiences the same effects.
Although this is a difficult period for Greek economy and debt crisis along with uncertainty affect
tourism to all extents, challenges should not be ignored. Our study shows that trends are evolving on
the cruise sector: Arrivals tend to be more evenly distributed along peak and low season and larger
ships with more passengers are calling to Heraklion Port. We suspect that this has a significant impact,
both on port’s passenger handling and personnel and civic (or/and) inland tourist destinations’
infrastructure. It is probable that port incurs additional costs by not exploiting the full potential of its
personnel due to having to serve passengers en masse once or twice a day, only a few days per week.
In our future work we will be extending our data set with more ports and relevant data.
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Domestic Tourism: Is this a chance for regional development of Thessaly under financial
crisis?
D. Kyriakou1, N. Blanas2, D. Belias3 and A. Koustelios3

1BSc, MSc, MBA, PhD Cand, Department of Economic Sciences, Aristotle University of
Thessaloniki, Greece.
2Associate Professor, Department of Business Administration, T.E.I. of Thessaly, Greece
3 Department of Physical Education and Sport Science, University of Thessaly, Greece
dimk21@gmail.com
Abstract
During the last two decades tourism in Greece has become a mass industry concentrated in the island areas.
Although they were not part of the more developed regions of the country, tourism in its current structure
contributes to the strengthening of interregional disparities in Greece. In addition, in the centers of mass tourism
socio-economical unsustainable demand and supply structures evolved. Simultaneously, a question was raised
whether the domestic tourism market can increase, and can it offer a socio-economic alternative to the further
expansion of international mass tourism. Thus, the so far little developed Center and Northern Greece, with an
abundance of historical sites and natural highlights, can offer new destinations for domestic travelers while
contributing to a sustainable development of these regions. As a precondition a national domestic tourism
policy, stable prices and a strong promotion of the new destinations are essential in these turbulent economic
times.
Keywords: Tourism Development, Tourism Planning, Regional Development, Policy,

Financial Crisis
JEL: L83, O21, R11
1. Introductory thoughts
The global financial and economic crisis has dramatically affected the quality of life of most
Eurozone countries. Increased unemployment rates, job insecurity, loss of income, the
evaporation of wealth, cuts in private and public investments and a feeling of uncertainty and
pessimism about the future are currently apparent in Southern European countries such as
Greece, Spain, Portugal and Italy (Levy & Sidel, 2009; Voon & Voon, 2012). Such an
economic context often results in massive changes in consumer behavior, including tourism
demand (Smeral, 2009), which has been severely affected by the financial and economic crisis
(Papatheodorou, Rossello, & Xiao, 2010).
As suggested by Stylidis and Terzidou (2014), tourists under an economic crisis show
heterogeneous behavior. Households or individuals who live in certain regions or countries
react differently during an economic crisis. Such distinction is relevant for the tourism
management of the crisis. The determinants of tourism demand are usually decomposed
between economic and non-economic factors (Nunkoo & Ramkissoon, 2012).). Given the
same depth of economic crisis, the reaction will be different depending on the current level of
household income. However, non-economic factors play also a relevant role in tourism
265
demand. Choi et al (2010) argues that different origins have different cultural and nationalistic
backgrounds that explain part of the heterogeneous behavior of the households. Thus,
preferences and willingness to pay of the tourists differ, especially in relation to a
geographical pattern. In this sense, the place of residence works as a benchmark tourism
destination alternative to compare the rest of destinations with. Usually traveling is more
expensive than staying at home enjoying recreational one day visits or activities. The utility
obtained from traveling needs to compensate sufficiently the additional money spent on it,
otherwise, staying at home will be preferred. Hence, the attractiveness of the place of
residence is key to understand the willingness to pay for traveling. Eugenio-Martin and
Campos-Soria (2011) show that under income increases the willingness to travel abroad
differs between countries by increasing probability of traveling abroad with income increases
in some, whereas other countries keep preferring traveling domestically under the same
income variation. The attractiveness of the place of residence works as a ‘pull’ factor to stay
at home and practice domestic tourism. At the same time, lack of attractiveness of the place of
residence works as a ‘push’ factor to travel abroad.
But what policy makers in Greece can actually do to develop and expand domestic tourism in
order to combat economic crisis as well as tackle down seasonality thus create a sustainable
and viable tourism product in Greece? Although it could be argued that the topic covered
reflects seasoned thinking about answering the question 'what can be done' and if everything
was 'well done', domestic tourism, as it can be seen in the core text of this paper, surfaces as a
means towards the light of the tunnel.
2. An insight into economic crisis and tourism
This paper focuses on the global economic crisis that affected most of the world between
2008 and 2009, although for some countries it was extended much longer such as Greece.
This crisis is characterized by a credit constraint that throttles liquidity and reduces
consumption. Thus aggregate demand and GDP are also reduced, increasing unemployment
and decreasing disposable income. Consequently, outbound tourism from affected countries is
reduced. It has an impact on the number of arrivals in tourism destinations, as estimated by
different authors (Page, Song, & Wu, 2012; Papatheodorou, Rossello & Xiao, 2010).
Destinations may anticipate the demand shift, so that prices are usually reduced to keep up
with the number of arrivals, thus decreasing expenditure at the destination (Ritchie, Molinar,
& Frechtling, 2010; Smeral, 2010).
After a significant contraction in 2009, tourism rebounded strongly in 2010 and in 2011 the
international tourist arrivals and receipts are projected to increase substantially until 2020.
The external and internal threats of the economic crisis to the tourism industry are:
 External threats: recession; currency fluctuations; and taxation.

 Internal threats: rising costs; falling revenues; unprofitability (Sian et al., 2009).
Crises occur at all levels of tourism operations with varying degrees of severity, from much
publicised environmental, economic and political disasters through to internally generated
crisis such as accidents and sudden illness (Beeton, 2001). The travel and tourism industry is
susceptible to a wide range of internal and external forces and is impacted heavily by crisis
events resulting in negative tourist perceptions (Pforr & Hosie, 2009).
The crucial role of tourism has been well documented in literature, and tourism is often
perceived as a catalyst for national and regional economic development, revitalizing
266
communities and providing benefits to the local population (Andereck & Vogt, 2000;
McGehee & Andereck, 2004). Research suggests that in times of economic uncertainty,
perceptions and attitudes are subject to various types of economic and psychological
influences (Voon & Voon, 2012). As many tourism destinations in Southern Europe are
currently in economic recession, with their residents facing budget cuts and austerity
measures, the economic context of the study, that is, the way residents perceive the state of
their local economy, is expected to influence their responses to tourism expenditure.
Nevertheless, previous research focused solely on exploring the effect of economic crises on
tourism demand (Okumus, Altiny, & Arasli, 2005; Ritchie et al., 2010; Smeral, 2010).
Literature distinguishes between local demand for external tourism (outbound tourism) and
demand for domestic tourism. The demand for domestic tourism is classified into external
demand (inbound tourism) and local demand. External tourism has a bigger multiplier effect
on the economy in the form of increased tourism income, tourism GDP, creation of jobs,
support of inter-linked sectors such transportation and hospitality industries, and finally
increased foreign reserves. Local demand for domestic tourism, while sharing some of the
benefits of external tourism, helps in reducing foreign currency leakages conditioned by
domestic tourism being a substitute for outbound tourism. The advantages of local tourism are
due to the fact that it is less susceptible to regional and global economic and political
disturbances. In addition to its economic impact, local demand for domestic tourism creates
awareness of cultural heritage and loyalty to the country, increases ties among citizens within
the country, and helps protect the environment through creating awareness. In the economic
sense local tourism creates jobs and decreases poverty, limits the effect of seasonality of
international tourism, and limits income drain from the country. The problem is in the ability
to create, increase and sustain local demand for domestic tourism. More importantly, in the
tourism demand literature, it is well acknowledged that income and tourism prices are the
leading demand antecedents in tourism demand analyses. For example, most studies focus on
income and price variables as demand antecedents for travel. Nevertheless, the literature
neglects other possible socio-economic variables although relevant theory is existent such as
family size, the availability of family and public transport, knowledge and awareness of local
destinations, household debt, sense of national duty, availability of time for leisure, the
number of hours worked in paid jobs as well as length of stay (Sheng and Chen, 2013).
As to the remaining determinants of micro level tourism expenditures, prior research has often
distinguished between trip related characteristics on the one hand and socio-demographic
variables on the other (e.g. Wang et al., 2006). On this issue there appears to be consensus
that the former type of variables explains more of the variance in expenditures than the latter
ones (Kastenholz, 2005). Among the crucial trip-related variables that consistently have
shown explanatory power when linked to tourism expenditures are: (a) purpose of trip (Jang
et al, 2005), (b) transportation mode (Fredman, 2008), and (c) various characteristics of the
destination(s) in question (Kozak et al., 2008). On the other hand though, cutbacks or
rethinking of tourism expenditure are divided into two mutually related decisions: Firstly,
whether or not the tourists decided to cut back on tourism expenditure because of the crisis;
and second, which of six options they employed as their cut-back strategy: “fewer holidays”,
“reduced length of stay”, “cheaper means of transport”, “cheaper accommodation”, “travel
closer to home” or “change the period of travel” (Eugenio-Martin et al, 2011).
Nurturing our thinking and judging from the above mentioned, the question remains on what
policy makers and professionals in Greece can actually do to develop and expand domestic
tourism in order to combat economic crisis as well as tackle down seasonality thus create a
sustainable and viable tourism product in Greece.
267
3. Methodology
The main aim of the study is to decide whether a specific policy concerning boosting
domestic tourism by promoting it would be applicable, suitable and useful for Thessaly in
order not only to combat economic crisis but also tackle down seasonality. In order to reach a
decision, tourism as an industry and the Greek tourism product are examined. Special
attention is given to the fluctuation of numbers related to the attractiveness of Thessaly's
tourism product and destinations. The impact of the economic crisis is also highlighted.
The main part of the study focuses on how the National Tourism Organization, the Ministry
of Tourism and tourism-related enterprises and professionals of the region use domestic
tourism demand and whether they are promoting domestic tourism. The information extracted
through the analysis is combined with knowledge gained after careful examination of studies
focusing on the strategies formed mostly from government agencies in order to boost
Thessaly’s domestic tourism potential. Last are discussed the political, economical, social and
technological circumstances in Greece, that could affect the undertaking.
After considering the above mentioned information, the study concludes in a proposition over
the strategy that needs to be embedded, the possible barriers towards its accomplishment and
the areas that should be further clarified before taking action.
4. Discussion
Greece is one of the most popular destinations in the Mediterranean, while tourism is
considered in general a major financial activity. According to the Greek Tourism
Confederation (SETE, 2013), Greek Tourism contributed in 2012 to the country’s GPA about
16,4%. Its contribution to employment was accounted for 18,3%. More specific, the
International Tourism Receipts, the same year, reached 10 billion Euros.
Due to the socioeconomic and political crisis Greece has undergone since 2009, Greek
tourism was characterized by a general contraction in terms of both arrivals and receipts.
However, corresponding data from the last two years show a clear tendency for the numbers
to be restored (Hellenic Statistical Authority, 2014). Based on that fact, it is believed that
tourism might be the driving force behind the country’s economic recovery (Kapiki, 2012).
As far as setting policies concerns, the authority in charge is, as expected the Ministry of
Tourism. Supervised by the Ministry of Tourism, the Greek National Tourism Organization is
basically responsible in taking theory into action or simply applying the policies set by the
government. Of course, everything mentioned above, is surrounded by a European framework
that basically allows interaction and encourages consumption of the within EU borders
tourism product.
Acknowledging though the great effect a successful regional policy might have in boosting
local tourism, regions’ and prefectures’ authorities do try to form specialized policies for the
corresponding areas they serve. It is attempted for these policies to be custom-made and as a
result, to rely on the specific and unique characteristics of the region. Among Greece’s
competitive advantages are its rich cultural legacy, natural beauty and geographic diversity
(Investingreece.gov.gr, 2015). However, what need to be considered are the not so favorable
aspects of Greek tourism. The geography of Greek tourism is one of those. It refers to the
dissimilar distribution of tourists’ visits. In particular, tourists prefer to visit coastal areas and
islands. The fact of their concentration in such geographic regions can be explained through
the establishment of Greece over the years as a destination, where visitors can enjoy sun and
sea.
268
Narrowing the selling proposition of the country in that diptych is actually the reason why
tourism appears to have intense seasonality. The tourism product selected to be the flagship of
Greek tourism can be offered only during the summer. Obviously, that fact generates a series
of issues along with little exploitation of the already existing infrastructure and increased cost
of use (Polyzos & Saratsis, 2013). Greece based its tourism development mainly on mass-
market models and included the popular sun-sea-sand destinations view. However, this model
is rather outdated and changes are needed. Hence, Greece started to evaluate its current
tourism model, tourist activities and the need of alternative forms of tourism. Out of this
evaluation, the following several weaknesses emerged (ELKE: The Hellenic Center for
Investment): i) High seasonality and high density in peak seasons, ii) Dominance of mass
tourism, iii) Lack of thematic and alternative forms of tourism, iv) Unhealthy public
infrastructure. On the contrary, the following strengths existed within the Greek tourism
(ELKE: The Hellenic Center for Investment): i) The increase in the number of tourist arrivals;
ii) Diverse natural beauty; iii) Cultural and historical heritage; and iv) Vibrant folklore and
Greek way of life.
As aforementioned it is Greek destinations which have a heavy reliance on a basic sun, sea
and sand tourism approach. Hence, Thessaly region is busy trying to diversify its tourism
product. The policy of tourism development was originally based in the specialized and
decentralized planning of tourism development with emphasis on the balance between the
economy, society and environment. In this context, structured tourism development projects
are being promoted at local level which is designed to the interface function of the different
sectors of the economy with tourism. The planned development and switching to a specialized
and often qualitative demand are the main causes of the rapid development of special and
alternative forms of tourism for the past twenty years.
Thessaly is a region located in Central Greece. It consists of four prefectures: Larissa,

Magnesia, Trikala and Karditsa. Thessaly actually covers an area of about 14.000km3 and
given the last census that took place in 2011, 732.762 people live there (Statistics.gr, 2011) .
Considering the diversity of geomorphology in Greece that changes even within relatively
narrow areas, the four counties mentioned above appear to have different characteristics based
on their location. Larissa occupies the northern part of the region, while Magnesia the
southeastern one. Both of them do have coastal areas, while Sporades islands (Skiathos,
Skopelos and Alonissos) are considered a part of Magnesia. On the other hand, Trikala,
located on the western part of the region and Karditsa, on the southwestern one are both
landlocked. The city of Larissa is the capital of Thessaly and as such, it represents the
financial, administrative, religious and scientific center of the region. As far as the ground of
the prefecture concerns, it is 48% flat, 25% semi-mountainous and 27% mountainous.
Mountains (Mount Olympus), along with rivers (Pineios) and lakes are present to Larissa’s
natural landscape. The rich history of the prefecture is delivered through its religious and
archaeological monuments and museums. Additionally, ski resorts and mountain trails already
mapped do give an extra motive for tourists to visit Larissa even in winter
(Lartourism.thessaly.gov.gr, 2015). Magnesia “combines the green mountain landscape with
the deep blue of the Aegean sea”. More specific, Mount Pilion is quite famous not only from
a natural beauty point of view but also due to the architecture of the local mansions. The three
islands of the Northern Sporades are differentiated one from the other. Skiathos is
characterized as the cosmopolitan island, while Skopelos is the more traditional one. On the
other hand, Alonissos is the ecological island. At last, Volos, the capital of the prefecture, is
supported by rich mythological background but also captures the visitor due to its unique
dynamics and modern essence (Magnesia-tourism.gr, 2015). The prefecture of Trikala is quite
distinctive as a destination due to its natural beauty. Chaliki mountain, Aspropotamos river,
269
along with lake Verlinga compose the basic landscape. However, religious attractions such as
the monasteries of Meteora and the overall Kalampaka area, is what is even more distinctive
about it (Meteorabooking.gr, 2015). As far as nature concerns, the prefecture of Karditsa is
quite similar with the one of Trikala, with the religious aspect not so clearly outlined. Instead,
there are several activities for tourists basically around Lake Plastira. Getting in touch with
local tradition is also quite easy through following routes set from village to village (Karditsa
- Tourist Guide, n.d.).
Besides the natural resources already mentioned, Thessaly possesses 19 caves and 9
medicinal spas that can be exploited for tourism purposes. In addition, across the whole
region there are several areas that have been characterized over the years as areas with special
ecological and aesthetic value. Both of them are protected through presidential decrees,
ministerial decisions or European and international agreements, like NATURA 2000,
CORINE and UNESCO sites (Department for Development Programming of Thessaly region,
2011).
Given the above and several studies examining the capacity of the region for sustainable
tourism development, Thessaly can be competitive in the global tourism market. However,
what needs to be taken into consideration is the different degree of exploitation of the
capabilities different geographic areas possess (Ministry of Development, 2003). According
to data released by the Hellenic Chamber of Hotels ('Border Research & Research of the
Regional Allocation of the Annual Tourist Spending', 2013), Thessaly ranks eighth in both
number of incoming visitors and number of overnights, out of the thirteen Greek regions. In
terms of tourist spending, Thessaly comes ninth. However, when transforming the above in
spending per overnight or spending per visitor, Thessaly falls in the eleventh and twelfth
position, respectively. As expected, most tourists spending per overnight is observed in the
islands of the South Aegean, in Crete, Attica and the islands of the North Aegean. All other
regions’ rates are below the country’s average. Judging by the above data, Thessaly is not
such an attractive destination by tourists’ perspective, no matter its potential. As a result,
tourism does not contribute to the region’s economy as much as it does in other more popular
regions.
Interesting information is also given by the percentage distribution of tourist spending per
region per sector. In descending order, tourist spending in Thessaly is distributed along
accommodation, transports, shopping, restaurants and cafes and entertainment. Comparing
Thessaly with the other twelve regions, it reveals that tourists in Thessaly do spend more than
those in the remaining ten. But how domestic tourism in Thessaly region can boost regional
development and create scales of economy?
Nurturing our thinking and judging from the above mentioned, the question remains on what
policy makers and professionals in Greece can actually do to develop and expand domestic
tourism in order to combat economic crisis as well as tackle down seasonality thus create a
sustainable and viable tourism product in Greece. One answer could be to listen and make a
list of what potential domestic visitors want or expect to live when travelling domestically, in
a few words what intrigues them to travel in their country. A synopsis of visitors' wants that
has to be taken into consideration when tourism planning and what should tourism
professionals do could be the following:
1. Introduction of low rates in hospitality sector and special family packages such as
'children go free' scheme during low season periods
270
2. Introduction of travel packages through low rates and/or reduction in travelling costs
policies between home residence and destination by all means of transport in order to
promote and increase domestic demand
3. Introduction of special coupons scheme that grants access or reduction in prices when
visiting places of cultural interest
4. Introduction of promotional schemes when booking long haul journeys such as free
nights, reduced or free travel expenses, free traditional activities in the relevant
destination but also develop city-breaks scheme
5. Introduction of activities according to destination's culture and tradition and not 'what
everyone in the world does' activities such as agro-tourism activities, mountain walks
on foot, by bicycle and/or on horse, stay overnight in a monastery, 'a look into the
ordinary life of locals' scheme
6. Introduction of a 'feeling like home' sentiment during the whole circle of pre-booking,
booking and during visiting phases of the journey and not being seeing as 'money'
7. Introduction of 'I want to visit this place' sentiment through social media or
advertisements that actually present a real place and not an imaginary one when
visited due to photo image processing techniques.
In addition to those mentioned above a more business related schemes could be introduced to
boost domestic tourism by utilising alternative ways such as:
1. Introduction of low rates and increase quality of services in planning, organising and
hosting conventional tourism
2. Introduction of special school and/or university educational field trips to boost local
economy in collaboration with the Ministry of Education
3. Introduction of special tourism areas in the concept of Exclusive Economic Zones in
order to minimize the effect of the economic crisis and actually boost domestic
tourism
Therefore both public and private tourism planners should take action to utilise ideas that are
being introduced from potential tourists wants in order to create a product that eliminates
seasonality and provides a sustainable future for Thessaly tourism under turbulent economic
times.
5. Conclusion
The crisis has particularly strong impact and negative consequences in Greece not to mention
the region of Thessaly. The country is undergoing a serious political crisis, as well, and it
seems that the forthcoming elections are the only solution for the restoration of stability and
social peace. In addition, tourism can be the driving force behind not only Thessaly's but also
Greece's economic recovery. Therefore domestic tourism surfaces as a means of development
in economic turbulent times even though locals have been severely affected by the economic
crisis. However, for its achievement the country’s policy makers should take several measures
towards restructuring and improving the sector. Although this in not something new, these
measures include: enhancement of alternative forms of tourism; environmental protection;
creation of quality infrastructure and boost of competitiveness through a tourism product that
offers value for money and can boost domestic demand.
The interregional disparities in Greece are especially high between the northern and island
provinces with the latter facing large socio-economic problems. Tourism in general is a
fragile business depending on many internal and external factors, therefore, a regional
economy based on tourism only will never be sustainable. International tourism, which is
271
subject to fashion as well as to politics, is especially susceptible to changes (Seckelmann,

2002). In Greece’s main tourism centres, however, not only the demand, but the supply
structure of tourism, too, is unsustainable. This applies to the planning process and the income
distribution in the tourism areas. The current tourism structure not only reflects the demand,
but also reflects the supply of tourism attractions and facilities. Demand will probably not
grow unless a new range of opportunities has been developed. Greece’s northern provinces
will, of course, never replace seaside holidays, but they offer a more diversified tourism
product. These regions have an abundance of historical sites and cultural heritage as well as
many natural highlights. Domestic tourists, on the other hand, are not dependent on the
instructions of a tour guide, since they speak the local language. They move freely in the
whole destination area, especially as they often use their own cars or are familiar with the
local transport system. They decide themselves where they want to shop and eat and are not
interested in commercialised cultural performances, but in regular cultural events. Thus, they
contribute to the regional income without demanding a very special infrastructure. This again
allows local people to operate part-time in the tourism sector without neglecting their usual
business, which reduces overdependence on the seasonal character of tourism (Tosun, 1998).
As a response planners and politicians in the other parts of the country strive to promote their
tourism sector to enhance the development of these neglected regions. The attractions of these
areas are mainly of cultural and natural character and cannot directly compete with the sea
resorts, but they can offer some alternatives to holidays at the coast. The historic sites and
natural areas, which offer many possibilities for various kinds of sports, might not in every
case be of interest for foreign tourists, who choose their destination out of an international
range of offers. Previously undiscovered places in the less developed regions of Greece have
the potential to become destinations for domestic tourism based upon natural and cultural
assets, although most of the sites of interest are not yet developed for commercial tourism.
Finally, tourism, even domestic tourism, will never be the main economic base for most of the
underdeveloped regions of Greece. Since it is a fragile sector depending on many internal and
external factors, this is not desirable in any case. Nonetheless domestic tourism, that does not
require an extensive investment and change as the international market, could become a basic
element of a socially and economically sustainable regional development.
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274
Macroeconomic developments in Turkey, 1980-2001
Ozlem Aytac
Baskent University, Department of Economics, Ankara, Turkey
oaytac@baskent.edu.tr
Abstract
Turkey introduced an exchange-rate-based stabilization (ERBS) program in January 2000. The daily
values of the foreign exchange basket for the next 12 months were announced to the public. Until June 2001, the
rate of crawl would be set to be consistent with the targeted inflation rate. After then, the exchange rate policy
would be based on a pre-announced widening band around a central parity. The program seemed to be on track
until the economy was hit by a sudden attack on the Turkish currency in the second half of November 2000. After
a few months of muddling through, a second attack hit the currency in late February. As a result of rapid capital
flight, overnight interest rates jumped to over 4000 percent in uncompounded terms on 21 February 2001 and
Turkey declared that it was going to implement a floating exchange rate regime from that date onwards. This
was not the first time experience with the ERBS however. In fact, since 1980 authorities have been using
exchange rate in order to stabilize the economy even if such an announcement has been avoided most of the
time. This article analyzes macroeconomic developments in Turkey in the period of 1980-2001 with particular
emphasis given on the exchange rate policy, and provides a rationale for why policymakers need to support their
exchange rate arrangement with other economic policies that the arrangement requires. Although, a properly
valued exchange rate is critical for sound economic management and sustained growth, it’s the adoption of
appropriate monetary and fiscal policies that ultimately will ensure macroeconomic stability, regardless of the
exchange rate arrangement. Since 1980, exchange rate has been used as the main stabilization instrument in
Turkey. But it has never been supplemented with the necessary macroeconomic policies to ensure its success.
Keywords: Inflation stabilization; Fiscal deficit
Jel Classification Codes: E31, F4
275
Exchange-Rate-Based Stabilizations: A Literature Review
Ozlem Aytac
Baskent University, Department of Economics
Eskisehir Yolu 20. Km, Baglica Kampusu, 06810 Etimesgut, Ankara, Turkey
oaytac@baskent.edu.tr
Abstract
The experience from stabilization programs undertaken in chronic inflation countries generated a
controversial literature regarding the real effects of them and unique stylized facts for each type of stabilization
strategy have been identified. Accordingly, exchange-rate-based stabilizations (ERBS) are associated with a
boom-bust cycle in economic activity whereas; money-based stabilizations (MBS) display exactly the opposite.
Although, the debate over whether ERBS is superior to MBS or the other way around for a successful and long
lasting disinflation still has not reached an agreement. In practice, most stabilization plans in chronic inflation
countries have preferred the exchange rate as the nominal anchor by pegging it to a low inflation currency,
predominantly the US dollar. The empirical regularities observed in ERBS programs, namely a boom-bust cycle
in consumption and economic activity, substantial real exchange rate appreciation and related deterioration in
external accounts which often leads to full-blown balance of payments crisis with costly devaluations and large
losses of international reserves; generated an extensive literature in development macroeconomics. Various
optimizing models have been advanced in order to replicate these dynamics and find an explanation to them.
This paper surveys the empirical and the theoretical aspects of the ERBS programs in a comprehensive manner.
Qualitative and quantitative comparison of the existing theories indicates that durables incorporated weak
credibility cum sticky price model proves to be the most compatible one with data. In the cases of successful
stabilization programs however, one can argue that there is no reason why public should have been pessimistic
about sustainability if sound macroeconomic reforms have been in place. But evidence show that even well-
designed, credible ERBS plans; have displayed the same dynamics that failed programs displayed. And weak
credibility cannot provide any explanation for those episodes since perfectly credible, permanent reduction in
the rate of devaluation does not cause any real effects. Thus, why both credible and non-credible ERBS
programs have generated similar dynamics and ended in full-blown currency crises still remains as a puzzle to
be solved in the literature.
KEYWORDS Inflation stabilization, Consumption booms; Credibility
JEL CLASSIFICATION CODES E31, F41
276
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ICODECON, 2-4.10.2015, Kalamata, Greece.

Conference proceedings, ISBN 978-618-82146-1-3

1st International Conference of Development and Economy (ICODECON)

Conference Theme: The advantages and disadvantages of Economic Crises

Editors: D. Petropoulos & G. Kyriazopoulos ,

Technological Educational Institute (TEI) of Peloponnese,

Antikalamos, 24100, Kalamata, Greece

1st International Conference of Development and Economy (ICODECON)

Elite City Resort, Kalamata, Greece.

Conference site: www.icodecon.com

Under the auspices of:

University of national and World economy,

Alexandru ioan Cuza University, Technological Educational Institute of Western

MAJOR SPONSOR OF THE CONFERENCE

The Conference Scientific Committee:

Dr. Filos Ioannis, Assoc. Prof. Panteion University - Greece

Dr. Zait Adriana , Prof. University Alexandru Ioan Cuza - Romania

The Conference Organizing Committee:

Germpana Eirini, TEI of Peloponnese - Greece

The TEI of Peloponnese - a regional institution of higher education in Greece, in the

I would like to express my congratulations to the Organizing Committee and

I wish you every success in your work.

Prof. Dimitris Velissariou

The I.CO.D.ECON (International Conference of Development and Economy) is a

The ICODECON is implemented in a period of prolonged global economic crisis,

Dr. Dimitrios P. Petropoulos

President of the Organizing and Scientific Committee of the Conference

Exchange-Rate-Based Stabilizations: A Literature Review ................................................... 276

KEYWORDS: FDI, unemployment rate, source countries, ‘advanced economies’.

DATA AND SAMPLE

Table 1: Descriptive Statistics for the Variables of Interest, 1960-2011

Min Max Mean Med Mode Var SD Obs

Figure 1: The univariate distribution for FDI outflows, 1960-2011

The first hypothesis is tested in Tables 2, 3, and 4. Determining the relationship

Unemployment Rate for Unemployment Rate for

Unemployment Rate Unemployment Rate

Unemployment Rate for Unemployment Rate for

Unemployment Rate Unemployment Rate

Unemployment Rate Unemployment Rate

The World Bank, FDI Outflows, accessed April 3, 2013, URL:

Keywords: economic governance, institutional reforms, Eurozone

1.1 Economic governance in the EU

1.2 Was the Eurozone prepared to deal with the crisis?

2. The EU takes one step forward – Establishment of the European support

3. The conservative ECB and the change of tack

4. The road towards the European Banking Union

5. The fiscal governance and the democratic legitimacy

8. Appendix: Charts - Tables

Chart 1: GDP at current prices

Chart 2: Growth rate

Chart 3: Unemployment rate

Chart 4: Interest rate spreads for Eurozone member states

Chart 5: EFSF loans

Chart 6: ESM loans

Chart 7: EFSM loans

Chart 9: Interest rates of Spain and UK government bonds

Chart 10: Spain and UK government debts

Chart 11: Austerity measures and spread levels

Chart 12: Austerity measures and growth rate

Table 1: GDP at current prices

GDP $ USA Euroarea EU China Russia

Table 2: Growth rate

Growth China Euroarea EU Russia USA