Journal of Security and Sustainability Issues

CONTENTS VOLUME 9 NUMBER 4 JUNE 2020 ISSN 2029-7017 PRINT Pál Michelberger, Pál Fehér-Polgár. BYOD SECURITY STRATEGY (ASPECTS OF A MANAGERIAL DECISION) 1135 ISSN 2029-7025 ONLINE Krzysztof Michalski, Marcin Jurgilewicz, Mariusz Kubiak, Anna Grądzka. THE IMPLEMENTATION OF SELECTIVE PASSENGER SCREENING SYSTEMS BASED ON DATA ANALYSIS AND BEHAVIORAL PROFILING IN THE SMART AVIATION SECURITY MANAGEMENT – CONDITIONS, CONSEQUENCES AND CONTROVERSIES 1145 https://doi.org/10.9770ssi.2020.9.4 Iman Harymawan, Nadia Klarita Rahayu, Dyah Ayu Larasati, Abdul Ghofar, Dian Agustia. INSIGHTS INTO RESEARCH ON CARBON DISCLOSURE 1157 Kaisar Serikuly Alpysbayev, Yеlena Evgenevna Gridneva, Gulnar Shaimardanovna Kaliakparova, Abdizhapar Djumanovich Saparbayev, Sara Sarsebekovna Assanova. ECONOMIC SECURITY MANAGEMENT AT INDUSTRIAL ENTERPRISES: A CASE STUDY 1165 My-Linh Thi Nguyen, Dinh Tran Ngoc Huy, Nga Phan Thi Hang, Toan Ngoc Bui, Hang Xuan Tran. INTERRELATION OF TAX STRUCTURE AND ECONOMIC GROWTH: A CASE STUDY 1177 Borash Smailovich Myrzaliyev, Maira Baltabayevna Onbayeva, Gulmira Zharylhasynovna Azretbergenova, Lesbek Tuzelbekovich Taizhanov, Ulmeken Rahmatullaevna Makhanbetova. 1189 IMPORT SUBSTITUTION AS A FACTOR OF FOOD SECURITY Putu Nidia Midiantari, Dian Agustia. Journal of Security IMPACT OF INTELLECTUAL CAPITAL ON FIRM VALUE THROUGH CORPORATE REPUTATION AS A MEDIATING VARIABLE 1203 Muryani, Desti Ratna Widyaningrum. THE EFFECT OF FDI, LABOR AND WAGE ON REGIONAL ECONOMIC DEVELOPMENT: A CASE STUDY 1215 Sagituly Gaziz, Almagul Oteshova, Natalia Prodanova, Natalia Savina, Dmitry O. Bokov. DIGITAL ECONOMY AND ITS ROLE IN THE PROCESS OF ECONOMICS DEVELOPMENT 1225 Roy Setiawan, Anis Eliyana, Tatik Suryani. GREEN CAMPUS COMPETITIVENESS: IMPLEMENTATION OF SERVANT LEADERSHIP 1237 and Sustainability Indrė Dailydytė, Ieva Bužienė. BLACK FRIDAY AND OTHER EFFECTS - ARE THEY STILL SUSTAINABLE IN FINANCIAL MARKETS? 1243 Bayu Arie Fianto, Uci Wulansari, Irine Ardiyanti, Meryem Tlili. THE GADE CLEAN AND THE GOLD WASTE BANK: SOCIETY’S ECONOMIC EMPOWERMENT BASED ON ENVIRONMENTAL HYGIENE 1257 Novia Wijaya, Kashan Pirzada, Chelsea Fanady. DETERMINANTS OF EARNINGS MANAGEMENT: AN EMPIRICAL ANALYSIS 1265 Issues Vladas Tumalavičius, Alina Danilevica, Irena Kokina. ISSUES OF PECULIARITIES OF MILITARY EDUCATION ON DIFFERENT LEVELS: THE MODERN NOTION OF LEGAL PREPARATION FOR CADETS 1275 Nguyen Thi Phuong Hong, Dinh Tran Ngoc Huy, Nguyen Thi Thuong. EXPECTATION GAP IN AUDITOR RESPONSIBILITIES: A CASE STUDY 1283 Thanaporn Sriyakul, Sudarat Rodboonsong, Kittisak Jermsittiparsert. IMPROVING QUALITY OF EDUCATION: ROLE OF HUMAN DEVELOPMENT, PUBLIC SPENDING ON EDUCATION AND TRAINED TEACHERS’ AVAILABILITY 1297 Tran Hung Nguyen, Thu Hien Do Thi, Thuy Hang Vu Thi, Huyen Trang Tran Thi, Duy Hai Le, Minh Duc Nguyen. A STUDY ON FACTORS AFFECTING DECISION TO USE 4G SERVICES: A CASE STUDY 1309 Firda Nosita, Kashan Pirzada, Tina Lestari, Rosadiro Cahyono. 9 (4) 2020 IMPACT OF DEMOGRAPHIC FACTORS ON RISK TOLERANCE 1327 Marlena Lorek, Teresa Piecuch, Jolanta Itrich-Drabarek, Mirosław Minkina. MANAGEMENT OF THE POLICE OFFICERS TRAINING SYSTEM AND THE EFFECTIVENESS OF INTERNAL SECURITY 1337 Boonthai Keawkunti, Chaithanaskorn Phawitpiriyakliti, Chompoo Saisama, Watcharin Sangma. THE RELATIONSHIP BETWEEN SUPPLY CHAIN MANAGEMENT AND ORGANIZATION PERFORMANCE: A CASE STUDY 1349 Somdech Rungsrisawat, Thitinan Chankoson. UNDERSTANDING SOCIAL MEDIA EFFECTS ACROSS DIFFERENT PARTIES’ INTERACTIONS 1363 Somdech Rungsrisawat, Thitinan Chankoson. ENGAGEMENT WITH ONLINE MEDIA 1379 Aina Caplinska, Manuela Tvaronavičienė. TOWARDS SUSTAINABILITY OF FINANCIAL SYSTEM VIA COMPLEX ASSESSMENT OF BORROWER’S CREDITWORTHINESS 1393 Nikolai Gelashvili, Tatiana Pritvorova, Elena Petrenko, Begarshyn Zhumanova, Azhar Kizimbaeva. SUSTAINABLE DEVELOPMENT OF ECONOMY VIA SOCIALY ORIENTED ACTIVITIES 1405 Lidiia Karpenko, Oksana Zhylinska, Hennadii Dmytrenko, Nataliia V. Poprozman, Viktoriia Koltun. SYNERGETIC MANAGEMENT TOOLS FOR ENTERPRISE ECONOMIC SECURITY 1421 Michal Krajčovič, Jozef Čentéš, Michal Mrva. FRAUDULENT CONDUCT IN THE MANAGEMENT OF APARTMENT BUILDINGS: A CASE STUDY 1431 Nodar Chinchaladze. THE IMPACT OF VARIOUS CURRENCY REGIMES ON ECONOMIC DEVELOPMENT FACETS: CASE OF GEORGIA 1445 Natalya V. Osokina, Mariana Petrova, Natalia V. Kudrevatykh, Evgeny E. Zhernov. CHINA: INSIGHTS INTO PECULIARITIES OF DEVELOPMENT 1459 Oleg Reznik, Oleksandr Muzychuk, Oleksandr Yunin, Svetlana Kaliuzhna, Oleksandr Dubenko. MIGRATION RISK MANAGEMENT AS A FACTOR OF NATIONAL SECURITY 1469 Oleksandr Sydorov, Serhii Tarasov, Nelli Tsybulnyk, Tetiana Tsybulnyk, Anatolii Rusetskyi. FINANCIAL SECURITY MANAGEMENT OF ENTERPRISES OPERATING IN THE DEFENSE INDUSTRY 1481 Dmytro Zhuravlov, Ivan Lytvyn, Oleksandr Ilchenko, Ivan Yaromii, Yuliia Lepekh. ENSURING ECONOMIC SECURITY OF UKRAINE IN THE SPHERE OF FOREIGN ECONOMIC ACTIVITY 1495 Miguel Аngel Poquioma Tulumba, Liudmila Kashirskaya, Malvina Karabasheva, Liudmila Khoruzhy, Ekaterina Marmilova, Elena Perepechkina. DIAGNOSTICS OF CORPORATE FRAUD AND COUNTERACTION MEASURES 1511

ISSN 2029-7017 print ISSN 2029-7025 online

Volume 9 Number 4 June 2020

JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES

International Entrepreneurial Perspectives and Innovative Outcomes

2020 9(4)

Editors-in-Chief Prof. Dr. Manuela Tvaronavičienė Assoc. Prof. Dr. Valdas Rakutis The Journal of Security and Sustainability Issues is a peer-reviewed journal which publishes original research papers. It is the international journal published by General Jonas Žemaitis Military Academy of Lithuania cooperating with the institutions indicated on the cover of the journal. It is published quarterly.

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Editors-in-Chief Prof. Dr. Manuela Tvaronavičienė, Vilnius Gediminas Technical University, General Jonas Žemaitis Military Academy of Lithuania Assoc. Prof. Dr. Valdas Rakutis, General Jonas Žemaitis Military Academy of Lithuania

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Editors Prof. Abel Femi Adekola, Wilkes University, USA Prof. John Saee, EBS Business School Reutlingen University, Editor-in-Chief, Journal of Management Systems, USA Prof. Brian Maruffi, Yeshiva University, Fordham University, USA Dr. Evelyn Wamboye, Pennsylvania State University, USA Dr. Hideyuki Doi, Institute for Sustainable Sciences and Development, Hiroshima University, Japan Prof. Aidas Vasilis Vasiliauskas, General Jonas Žemaitis Military Academy of Lithuania Prof. Mantas Bileišis, General Jonas Žemaitis Military Academy of Lithuania Prof. Edmundas Kazimieras Zavadskas, Vilnius Gediminas Technical University, Lithuania Prof. Birutė Galinienė, Vilnius University, Faculty of Economics, Lithuania Dr. Ulku Yuksel, The University of Sydney, Australia Prof. Mathew J. Manimala, Indian Institute of Management Bangalore, India Prof. Christian Friedrich, University of Applied Sciences, Giessen, Germany Prof. Walter Ruda, Kaiserslautern University of Applied Sciences, Germany Prof. em. Hanns Pichler, Vienna University of Economics and Business, Austria Dr. Christopher J. Rees, University of Manchester, United Kingdom Dr. Richard Haigh, University of Salford, United Kingdom Prof. Sharda Nandram, HAN University of Applied Sciences and Nyenrode Business University, the Netherlands Dr. Vladas Tumalavičius, General Jonas Žemaitis Military Academy of Lithuania Prof. Filippo Reganati, Sapienza Univesita Di Roma, Institute of Economics and finance, Italy Prof. Massimo Colombo, Politecnico di Milano, Italy Dr. Rafael José De Espona y Rodríguez, Honorary Consul of the Republic of Lithuania, Spain Dr. Sibylle Heilbrunn, Kinneret College on the Sea of Galilee, Izrael Prof. Inga Žalėnienė, Mykolas Romeris University, Lithuania Prof. Ona Gražina Rakauskienė, Mykolas Romeris University, Lithuania Prof. Irina Sennikova, Riga International College of Economics and Business Administration, Latvia Prof. Natalja Lace, Riga Technical University, Latvia Prof. Dr. Vitolds Zahars, Daugavpils University, Latvia Prof. Mirjana Radović Marković, Institute of Economic Sciences, Belgrade, Serbia Prof. Ingrīda Veikša, Turiba University, Latvia Prof. Vlado Dimovski, University of Ljubljana, Slovenia Prof. Ing. Zuzana Dvorakova, University of Economics, Prague, Czech Republic Dr. Yuriy Bilan, University of Szczecin, faculty of Economics Science and Management, Poland Prof. Jerzy Stańczyk, Military University of Technology, Poland Prof. Alvydas Šakočius, General Jonas Žemaitis Military Academy of Lithuania Prof. Ani Matei, National School of Political Studies and Public Administration, Romania Prof. Gediminas Dubauskas, General Jonas Žemaitis Military Academy of Lithuania Prof. Mehmet Huseyin Bilgin, Istanbul Medeniyet University, Turkey Prof. Marina Sheresheva, Lomonosov Moscow State University, Faculty of Economics, Russian Federation KOKYBĖ SCHEMŲ UŽKLIUVO

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JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 https://doi.org/10.9770/jssi.2020.9.4(1)

BYOD SECURITY STRATEGY (ASPECTS OF A MANAGERIAL DECISION)

Pál Michelberger 1, Pál Fehér-Polgár 2

1Institute of Mechanical Engineering and Security Sciences, Donát Bánki Faculty of Mechanical and Safety Engineering Institutions, Óbuda University, H-1081, Népszínház street 8, Budapest, Hungary 2Institute of Management and Organization, Károly Keleti Faculty of Business and Management, Óbuda University, H- 1084, Tavaszmező street 15-17, Budapest, Hungary

E-mail s: [email protected]; [email protected]

Received 15 November 2019; accepted 20 March 2020; published 30 June 2020

Abstract. A lot of employees use their personal mobile devices, especially smart phones, for work duties as well as private purposes, and often without any limitations in terms of locality or time. Though involving risks to both businesses and employees, this practice is often not subject to any formal corporate policies. Moreover, most companies have not even come to a strategic decision whether to ban, tolerate or encourage BYOD yet. This paper enumerates and classifies such risks in an attempt to help employers make their decision and create a corporate BYOD policy and procedures framework of their own. In addition, risk level assessment and options for risk reduction are covered. The classical PDCA cycle is adaptable at development and maintenance of BYOD security framework.

Keywords: PDCA; Risk Management; Mobile Device Management; Security Framework

Reference to this paper should be made as follows: Michelberger, P., Fehér-Polgár, P. 2020. BYOD security strategy (aspects of a managerial decision). Journal of Security and Sustainability Issues, 9(4), 1135-1143. https://doi.org/10.9770/jssi.2020.9.4(1)

JEL Classifications: M15

1. Introduction

The acronym ’BYOD’ (Bring Your Own Device) is used to describe the practice of using one’s personal mobile device(s) for business purposes. Though not considered to be a computer in the strict sense of the word, these portable IT devices (such as tablets or smart phones) are often used by employees for gaining access to corporate mailing systems or applications processing sensitive business data (Olalere et al. 2016). Driven by their need for convenience and freedom from temporal barriers, employees expect their personal mobile devices to offer just the same range of services (incl. intranet, ERP system, mailing programs) as their stationary computer (or client machine) does at work. The increasing need for availability and diversity of applications lead to a decline in the level of security (Bailette – Barlette, 2018).

While being increasingly cheaper, mobile devices feature increasingly higher capacities, better capabilities, and improved ergonomics. In addition, continuous increase is seen in mobile communications web performance, bandwidths, and coverage. Consequently, the use of mobile devices for business purposes is inevitable. There is, however, a limited offer of information security means available. High-level encryption or authentication does not necessarily go hand in hand with a higher level of protection. While communicating, mobile devices transmit numerous kinds of data (e.g. geographical co-ordinates, environmental parameters, information regarding velocity and acceleration, access details of network partners, etc). Mobile communications and tapping thereof are almost beyond control (think of Bluetooth, Wifi, NFC, etc). Even phone conversations (voice communications) are counted as data these days. JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online

Protection of confidential business information requires that organizations have new kinds of security policy in place. While it is essential that the use of mobile devices for business purposes is separated from private usage, employees cannot be expected to give up private use of a smart phone or other mobile device on them on a 24/7 basis, especially if such devices are owned and/or relevant mobile services partly or fully paid by themselves (Weeger et al. 2015).

For these reasons, the security effort should run in two directions. On the one hand, a procedures framework, written and followable, needs to be defined to control organizational operations and communications of confidential business information. On the other hand, the organization should select and adopt one of products offered by providers of info-communication technologies and IT security solutions (such as MDM or Mobile Device Management) (Kadena – Kovács, 2017). The latter may be rather difficult at organizations with heterogeneous information technologies (Byol et al. 2014).

2. Benefits of BYOD

Evidently, the use of personal mobile devices for business purposes has its benefits for both the employer and its employees (Zahadat et al. 2015). Anything, anywhere, anytime… (Disterer – Kleiner 2013). Theoretically, employees can do their jobs around the clock every day of the week. With the device purchased, and subscription paid partly or fully, by the user / employee, the employer can save costs. Employee satisfaction may increase as people prefer using devices of their own choice. Working is likely to become more efficient and employees are likely to find it more convenient. Their personal mobile devices will become the only tools they need to bring on them to work. IT infrastructure may become easier for the employer to configure and run in a lot of respects. Management of business processes may improve in terms of expeditiousness and efficiency. Making use of these benefits may, however, involve considerable security and business risks.

3. Employee and employer attitude

There are employers requiring their employees to stand in 24/7 readiness, sometimes even far away from the company location or at home. For the employer it is essential that communications are maintained at as low costs as possible. On the other hand, employees want a multi-purpose mobile device offering a familiar user interface that meets their preferences (e.g. free choice of an operating system). In an extreme case, each employee may insist on a specific mobile device model (Hassan 2017; Toperesu – Van Belle 2017). If need be, the employer can exercise full control over mobile devices in corporate ownership, with its ITC department providing servicing for them. It may specify for their employees for what purpose and when they are authorized to use such mobile devices, but cannot really control such uses because user awareness and discipline will work differently at and off the workplace. A complete ban on private use may lead to employee protests (or even quitting) or encourage change-over to alternative IT solutions (Johnson 2013).

While the employer usually benefits from its employees’ use of their personal mobile devices for business purposes in terms of cost savings, simultaneous use for private purposes will surely be unavoidable under these circumstances. Mixed ownership of devices may make the situation even more complicated (Byol et al. 2014; Das – Khan 2016). Normally, employees prefer enjoying ’convenience’ at work (Lord, 2018), having a dislike for long passwords and the requirement to change them regularly. Hardware security keys do not make use of IT devices easier either. User identification based on some biometrics (such as fingerprints, DNA or iris) may raise legal issues or call forth employee protests (Olalere et al. 2016; Wójtowicz – Joachimiak 2016).

The practice of using personal belongings at work is not unprecedented in the past either. Wearing one’s own working clothes at work or driving one’s own car on business are typical examples. Such matters as insurance, reimbursement of expenses or taxation in connection with such usage have long been managed within the framework of established procedures. For BYOD device management, employers follow various different practices: a. some employers explicitly ban the use of personal mobile devices for business purposes;

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b. the majority of employers simply ’tolerate’ personal mobile devices, while not adopting any relevant policy (Leclercq-Vandelannoitte 2015); c. BYOD may be subject to verbal managerial permission on a case by case basis, with some technical restrictions added sometimes; d. there may be a formal written policy in place, also covering information security issues (with available protocols for access to the corporate intranet defined, lists of approved devices and applications given, an acceptable operating system and mandatory security software tools identified, permissible data processing operations via a mobile device listed [e.g. data queries and new data entries permitted, while deletion not], mandatory procedures for logging and separation of personal data from corporate data described) (Olalere et al. 2016; Baillette – Barlette 2018); e. employers may definitely encourage the use of personal mobile devices for business purposes (Enter- prise Management 360º).

With a BYOD attitude prevailing, private life may come into conflict with employee efficiency required by the employer at work. If so, a proportional restriction on, though not total exclusion of, private matters is an option. (In Hungary, employers shall not exercise control over the private life of its employees, but may require them to behave in a manner worthy of their job responsibilities off work as well).

While written security policies are in place at the majority of employers, they do not always make a distinction between privately owned mobile devices and those in corporate ownership.

4. Risks arising from BYOD

Risks arising from BYOD can be classified in various ways. The classification proposed hereunder is based on research of relevant literature (Bailette et al. 2018; Ford 2014; Kadena – Kovács 2017): R1 Unauthorized alteration of device software or hardware R2 Listening to or leakage of voice communications R3 Malicious software, including viruses, ransomware, Trojan horses, spyware, etc R4 Overload attacks and denial of service, especially where a device is overloaded or has its communications rendered impossible R5 Software risks associated with devices (arising from firmware, operating systems, and any programs installed). Failure to install security upgrades regularly, installation of software from unreliable locations, and other software risks unrecognized yet R6 Data transmission risks, such as device tapping via data transmission channels or man-in-the-middle attacks R7 Negligence of users and their lack of security awareness, examples including careless data processing, leaving a device unattended, loss or theft of a device, attacks utilizing the human behaviour (social engineering techniques), lack of separation of business from privacy R8 Risks arising in connection with the alienation of a device, including, but not limited to, incomplete deletion of data or inadequate cancellation of access authorizations R9 Heterogeneous / uncontrollable end-point ICT infrastructure (a diversity of devices and operating systems) or inadequate IT support

5. Legal issues

Allowing business data entries into an employee’s mobile device in an uncontrolled manner is a practice to be avoided. It is likely to constitute a breach of data protection obligations by both employer and employee, and business secrets may also be impaired. No employer shall require its employees to use their personal mobile devices for corporate purposes.

An uncontrolled BYOD practice may lead to intermingling of employee personal data with corporate data

1137 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online processed in connection with one’s job. In lack of a relevant policy accepted and signed by both parties, full recovery of corporate data may turn out to be a tiresome (if not hopeless) effort, while the employer may come to acquire personal data, upon termination of one’s employment contract. Does protection of business secrets override compliance with privacy requirements designed to protect the employee (Bailette et al. 2018)?

With a non-regulated, but tolerated, BYOD practice prevailing, it will be difficult for the employer to keep a check on its employees’ uses of their personal mobile devices at work.

On account of potential legal issues and infeasibility of a total ban on BYOD, it is essential that a BYOD strategy is developed and written policies, accepted by both parties, are implemented and reviewed regularly. These jobs will, however, require an IT professional as well as a legal counsel conversant with both data protection regulations and labour law.

6. Basics of BYOD a policy

To make the first step towards a BYOD strategy and policy, the employer must make a strategic decision. Depending on the prevailing corporate attitude, organization management must come to a strategic decision whether to ban, tolerate or encourage BYOD. A decision like that can best be supported by a prior assessment of BYOD-related risks discussed above.

Information security as status has three basic attributes (in accordance with ISO/IEC 27001): l confidentiality (information shall only be accessible to authorized persons), l integrity (completeness, accuracy, and original format of information shall be safeguarded), and l availability (authorized users shall gain access to information wherever and whenever they need).

In the information security context, risks mean vulnerabilities. A risk is acceptable as long as it is of low level, otherwise (with high likelihood of a security incident with considerable or critical consequences) it is deemed manageable (ISO 31000, risk treatment) through: l reducing the likelihood of damage and mitigating potential damage proactively, l transferring the risk (e.g. through an ICT provider), l sharing the risk (e.g. through an insurance policy).

Where a strategic decision alternative (ban, tolerate or encourage) is found to involve an intolerably or unman- ageably high level of any of the risks, it must be rejected (in the example in Table 3, encouraged BYOD involves an intolerable and unmanageable risk). This process serves as pre-screening prior to strategic decision-making.

Each risk can be assessed after being assigned to one of three classes (defined according to which information security attribute may be threatened).

The employer can make its choice when all risks are weighted and assessed (classified) using Combinex, a recognized multi-criterion comparison method (Maynard 1971). Risk weight figures will add up to 100% or 1.00. Classification can be made on an ordinal scale of 0 to 100, but deviations form that are permissible (e.g. use of a scale of 1 to 5). For a transparent decision-making model, all risks should be assessed on the same scale for each alternative decision.

Where the decision made points towards tolerated or encouraged BYOD, actual development of a BYOD policy and integration thereof into a Mobile Device Management solution can be commenced.

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Table 1. Summary assessment of information security risks in a ’BYOD banned’ scenario (example)

NO BYOD Risk level rating Weighting Weighted rate RISKS Acceptable Manageable (1-5) (estimates) (0-100%) (risk level × weight) R1 No Yes 3 20% 0.60 R2 Yes Unneeded 2 10% 0.20 R3 No Yes 3 20% 0.60 R4 No Yes 2 12% 0.24 R5 Yes Unneeded 1 5% 0.05 R6 No Yes 2 10% 0.20 R7 Yes Unneeded 1 12% 0.12 R8 Yes Unneeded 1 6% 0.06 R9 Yes Unneeded 1 5% 0.05 Aggregate: 100% 2.12

Table 2. Summary assessment of information security risks in a ’BYOD tolerated’ scenario (example)

PARTIAL BYOD Risk level rating Weighting Weighted rate RISKS Acceptable Manageable (1-5) (estimates) (0-100%) (risk level × weight) R1 No Yes 4 18% 0.72 R2 No Yes 4 11% 0.44 R3 No Yes 3 20% 0.60 R4 No Yes 3 10% 0.30 R5 No Yes 3 6% 0.18 R6 No Yes 3 9% 0.27 R7 No Yes 2 12% 0.24 R8 No Yes 3 8% 0.24 R9 No Yes 3 6% 0.18 Aggregate: 100% 3.17

Table 3. Summary assessment of information security risks in a ’BYOD encouraged’ scenario (example; with R8 found to be unmanageable, organization management will abandon the idea of encouraging BYOD)

FULL BYOD (an alternative disqualified) Risk level rating (1-5) Weighting Weighted rate RISKS Acceptable Manageable (estimates) (0-100%) (risk level × weight) R1 No Yes 4 18% 0.72 R2 No Yes 5 11% 0.55 R3 No Yes 3 16% 0.48 R4 No Yes 4 11% 0.44 R5 No Yes 3 7% 0.21 R6 No Yes 4 9% 0.36 R7 No Yes 2 12% 0.24 R8 No No!!! 5 9% 0.45 R9 No Yes 4 7% 0.28 Aggregate: 100% 3.73

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Assessment of the three strategic BYOD alternatives does not entirely identical with a classic multi-criterion comparison. Practically, this is a risk level assessment performed to support a managerial decision-making process (Table 1, Table 2, Table 3). That is why an ordinal scale is solely used here. In the author’s opinion, the three strategic alternatives may be associated with different weight figure patterns owing to differences in IT infrastructure and user awareness. With the assessment, the ultimate goal is to determine an aggregated risk level, the lower the better. The three illustrative assessments below are subjective. In the example for FULL BYOD (Table 3), this strategic decision alternative has been disqualified from the competition on account of an unacceptable risk. Every employer / organization is unique and so is its ways of process management. Nor- mally, the outcome of a risk assessment will also be dependent upon some additional factors like local features or professional skills of the assessment team.

7. BYOD and Mobile Device Management (MDM)

Common use of mobile devices and their availability for business purposes have given rise to a need for central- ized mobile device management. In literature, software solutions developed to meet this need are called Mobile Device Management (MDM) systems (Braunstein 2012).

Primarily, they are designed to control corporate use of mobile devices, allowing use of mobile devices for work duties, while serving to maintain an appropriate level of corporate information security. Functions covered by an MDM system include: l Identification / authentication of users and devices; l Compliance with corporate security policies and controlled procedures in place; l Keeping the corporate software environment, including both user applications and security software tools, up to date, and ensuring their readiness for use; l Supporting software programs and processes for smooth delivery of user duties; l Tracking device uses, including user habits and status and geographical location of devices; l Protection and separate management of corporate and personal data on devices; l Remote interventions on mobile devices in response to security events, like removal of corporate data and access authorizations from the mobile device of an employee who is about to quit, or detection or prevention of targeted attacks.

As evident from the list above, MDM systems are expected to perform a wide range of duties, while allowing for diversity of device fleets and differences in user needs. So it is easy to see that an employer could make implementation of an MDM system easier by either identifying a set of approved device models or itself providing devices to its employees. Doing so, however, it would prevent its employees from using their personal mobile devices.

An MDM system is implemented to achieve, or go as close as possible to, an optimum solution via granting users freedom (however limited) for using their personal mobile devices, while making an appropriate set of software programs available, and ensuring an expected level of security, all at acceptable costs and expenditures.

8. Security procedures framework for BYOD

Corporate management of BYOD and risks arising from it requires a complex framework of procedures. Risk management rests on three pillars (Zahadat et al. 2015): l conscious users and employees (people), l a well-chosen approved technology (Information & Communication Technology), and l a policy which, if complied with, will (or may) lower risk levels.

A functional procedures framework may be configured to follow the PDCA cycle (Figure 1.) a tool that has seen several applications in various disciplines of management since its introduction with quality assurance (Ishikawa 1985).

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8.1. Plan

In the first phase, a BYOD security program should be developed that fits in with the business environment, employee skills and security requirements, to be followed by configuration and implementation of an MDM system [8]. A set of approved mobile devices and procedures for their access to the corporate network should be identified. User roles and responsibilities should be defined (who and when will have access to what). Do we require a 24h uptime or determine a limited ’window of service time’? Where to and how should users save data? Should connection of storage media to particular mobile devices be allowed?

Employees should be informed in advance about possible consequences of improper user behaviours or user errors and misconducts.

A BYOD security lifecycle (Zahadat et al. 2015), consisting of the following steps, should be developed: 1. Register personal mobile devices and their users in MDM application (registration). 2. Configure personal mobile devices for business uses and upload verified applications (provision). 3. Give users / employees continuous support to ensure their proper use of their personal mobile devices for business purposes (operation). 4. Delete organizational data, applications, and settings from a personal mobile device immediately when there is no reason for its use any longer (e.g. its owner is about to quit). Block any further access to corporate resources (deprovision).

8.2. Do = Protect

Protection activity covers identification / authentication of any mobile device as may attempt to access the corporate network and control of wireless communications and mobile device configurations. On the human side, there is an additional important requirement to maintain a proper level of awareness and skills (via periodic training and testing). Mobile location services may be utilized for user monitoring (in compliance with legal restrictions). Solutions and tools available for separation of corporate data from private data should be identified (e.g. containerization) (Downer – Bhattachharya 2015). Arrangements should be made that mobile operating systems and applications are updated regularly.

8.3. Check = Detect + Respond

Such processes as regular checks of user behaviour and device usage, vulnerability assessments, screening for malware, security incident warnings, search for mobile devices lost, and prevention of data loss are all opera- tive constituents of the procedures framework.

Problem handling marks the beginning of a feedback phase in the PDCA control cycle. This is where any vulnerabilities will be eliminated, malware removed, security incidents logged, mobile devices in unauthorized hands disabled, and necessary deletions of data performed (after creating backups).

8.4. Act = Recover + Asses & Monitor

Making a correct distinction between personal data and corporate data as a user may process in accordance with information security requirements, and saving them apart, are functions of utmost importance in mobile device management. Now corporate tracking and lawful logging of BYOD practices (employee monitoring) will serve to improve the overall functioning of the procedures framework.

In addition, processes should be in place to ensure that the whole BYOD program / strategy is reviewed and evaluated regularly, any internal threats uncovered, intrusion controls tested, and lists of approved BYOD devices and applications kept up to date. Deletion of devices no longer needed in the MDM application (on account of device replacement or quitting employees) will also come under this heading (see Figure 1).

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PLAN (+ identify) Identification the list of approved BYOD Introducing of MDM system Development of BYOD security lifecycle Analysis of security risks

ACT (recover + assess & monitor) DO (protect)

Separating of private and business data Business information protection Verifying of BYOD policy Training for employee Updating of allowed BYOD list Regular upgrade of mobil application Risk treatment and device de-provisioning Authentication of mobile devices & users

CHECK (detect & respond)

Vulnerability assesment & elimination Warning and documenting of security event Data loss prevention Controlled wipe of sensitive data

Fig. 1. PDCA model for a BYOD security procedures framework

Source: Author’s own work

Conclusions

As clear from the overview of literature and considerations with relevance to a BYOD strategy outlined above, people and business organizations should deal with the security of data on their mobile devices. In particular, they should make deliberate plans about what sorts of data they will let find access to their devices and via what channels. Similarly, they should carefully engineer their device selection, protection, and usage processes. They should pick mobile devices from the offer of manufacturers that provide regular software security updates throughout the lifecycle of their products. They should install any available security solutions and a reliable anti-virus software on their mobile devices once selected. Setting them up, they should give priority to data security considerations. Unless otherwise dictated by circumstances, they should only download verified applications of reliable origin, and restrict access to these applications, granting just access rights necessary for their use. Using their devices, they should be aware of what categories of data they may receive, process or forward and via what applications. In business environments, IT and information security governance professionals should seek to profile any device as may log in the corporate network in addition to obtaining user profiles. Each user should be granted a different access right for logging in a corporate networked workstation from what he/she may need to use his/her personal mobile device in public. In addition to IT issues proper, business organizations should greatly take their employees’ security awareness into account. Whether wilfully or out of negligence, employees may leak sensitive business information via their mobile devices.

A state of 100% security cannot be achieved even with controls in place. However, a considerable increase in the level of security can be attained at low or even no costs.

References

Al Hassan, M.K.: BYOD technological: Next generation business development programs for future accelerations, innovations and employee happiness. International Journal of Computer Applications, 165(10), 2017. http://dx.doi.org/10.5120/ijca2017913929

Bailette, P.; Barlette, Y.; Leclercq-Vandelannoitte, A.: Bring Your Own Device in Organizations: Extending the Reversed IT Adoption Logic to Security Paradoxes for CEOs and End Users. International Journal of Information Management 43, 76-84, 2018

Baillette, P.; Barlette, Y.: BYOD-related innovations and organizational change for entrepreneurs and their employees in SMEs: the identification of a twofold security paradox. Journal of Organizational Change Management, 31, 2018

Braunstein, C.J.: Mobile device management, 2012. Research Paper https://apps.dtic.mil/dtic/tr/fulltext/u2/a564964.pdf

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Byol, K.E.; Joohyung, O; Chaete I.: A Study on Security Threats and Dynamic Access Control Technology for BYOD, Smart-work Environment. Lecture Notes in Engineering and Computer Science, 2210, 2014. https://pdfs.semanticscholar.org/6a92/6e31903ee0f7fb684852c37dfeff27a76c44.pdf

Das, A; Khan, H. U.: Security behaviors of smartphone users. Information and Computer Security, 24(1), 116-34, 2016.

Disterer, G.; Kleiner, C.: BYOD Bring Your Own Device. Procedia Technology 9, 43-53, 2013

Downer, K.; M. Bhattachharya, M.: BYOD Security: A New Business Challenge. 2015 IEEE International Conference on Smart City, Chengdu, China, p 6, 2015

Fisher, W. ; C. Allen, C.: Road warriors and information systems security: risks and recommendations. Journal of Management Informa- tion and Decision Sciences, 18(1), 84-96, 2015

Ford, G.: BYOD. 2014. Demand and Information Security. Research Paper https://cybersecurity-hq.blogspot.com/2014/02/byod-consumer-demand-and-information.html

Ishikawa, K.: What is Total Quality Control? The Japanese Way, Prentice Hall, 56-61, 1985

Johnson, S.; Bringing IT out of the shadows. Network security, 2013 (12), pp 5-6, 2013

Kadena, E.; Kovács, T: The NEED for BYOD Security Strategy. Hadmérnök, 12(4), 138-145, 2017

Leclercq-Vandelannoitte, A.: Managing BYOD: how do organizations incorporate userdriven IT innovations? Information Technology & People, 28(1), 2-33, 2015

Lord, N.: The ultimate guide to BYOD security: overcoming challenges, creating effective policies, and mitigating risks to maximize benefits. 2018, Research Paper https://digitalguardian.com/blog/ultimate-guide-byod-security-overcoming-challenges-creating-effective-policies-and-mitigating

Maynard, H. B. 1971. (ed.): Industrial Engineering Handbook. McGraw-Hill Book Company, New York (3rd edition)

Olalere, M.; Abdullah, M. T.; Mahmod, R.; Abdullah, A. 2016. Bring Your Own Device: Security Challenges and A theoretical Frame- work for Two-Factor Authentication. International Journal of Computer Networks and Communications Security, 4(1), 21-32.

Toperesu, B.; Van Belle, J.P. 2017. Organisational capabilities required for enabling employee mobility through bring-your-own-device concept. Business Systems Research, 8(1), 17-29, 2017 http://dx.doi.org/10.1515/bsrj-2017-0002

Weeger, A.; Wang, X.; Gewald, H. 2015. IT consumerization: byod-program acceptance and its impact on employer attractiveness. The Journal of Computer Information Systems, 56(1), 1-10. https://search.proquest.com/docview/1729274646?accountid=134728

Wójtowicz, A.; Joachimiak, K. 2016. Model for adaptable context-based biometric authentication for mobile devices. Personal and Ubiquitous Computing, 20(2), 195-207.

Zahadat, N.; Blessner, P.; Blackburn, T.; Olson, B.A. 2015. BYOD Security Engineering: A Framework and its Analysis. Computers & Security 55, 81-99.

Enterprise Management 360°: Top 10 companies supporting bring-your-own-device culture. www.em360tech.com/tech-news/top-ten/ top-10-companies-supporting-bring-device-culture/

ISO/IEC 27001:2013: Information technology – Security techniques – Information security management systems – Requirements

ISO 31000:2018: Risk management – Guidelines

Pál MICHELBERGER ORCHID ID: http://orcid.org/0000-0001-5752-0224

Pál FEHÉR-POLGÁR ORCHID ID: https://orcid.org/0000-0002-4650-5253

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1144 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 https://doi.org/10.9770/jssi.2020.9.4(2)

THE IMPLEMENTATION OF SELECTIVE PASSENGER SCREENING SYSTEMS BASED ON DATA ANALYSIS AND BEHAVIORAL PROFILING IN THE SMART AVIATION SECURITY MANAGEMENT – CONDITIONS, CONSEQUENCES AND CONTROVERSIES

Krzysztof Michalski1, Marcin Jurgilewicz2, Mariusz Kubiak3, Anna Grądzka4

1,2Rzeszów University of Technology, Aleja Powstańców Warszawy 12, 35-959 Rzeszów, Poland 3University of Natural Sciences and Humanities in Siedlce, Stanisława Konarskiego 2, 08-110 Siedlce, Poland 4Johns Hopkins University, MD 21218 Baltimore, USA

E-mails: [email protected], [email protected], [email protected], [email protected]

Received 18 November 2019; accepted 18 April 2020; published 30 June 2020

Abstract Since September 11, 2001, airport security control procedures have expanded in the face of the increased threat of terrorist attacks on aircrafts and airports. Obligatory and meticulous checks are carried out on all passengers although the overwhelming majority of passengers do not pose any risk. Current airport control procedures are expensive and inefficient; they extend the time spent by passengers at the airport and contribute to increased crowding; they inhibit the development of interconnected transport systems and significantly reduce the comfort of passengers who pose no threat. As the security needs of air transport morph, security experts are considering replacing the existing across-the-board procedures with personalized and more selective control processes based on data and behavioral analysis to reduce the duration of airport check-in procedures and improve the effectiveness of security controls. Such solutions have been successfully tested over the past decades at Israeli airports and check-in terminals by the Israeli state carrier El Al, which has the reputation of being the best-protected airline in the world. The FLYSEC system, developed and tested in 2015-2018 at Luxembourg Airport in cooperation with the local university, operates on similar principles although its implementation is less invasive. Modern computer tools for analyzing travel history data and data from current bookings as well as algorithmic methods of behavioral analysis based on advanced detection, identification, crowdsourcing and tracking systems all feed into such smart, selective and personalized security controls. Smart, selective control systems are based on the basic assumption that passengers can be accurately and effectively sorted into different risk groups (e.g. low-risk/trusted passengers, normal passengers, high-risk passengers), long before they arrive at the airport and create a real threat. There are many effective techniques for profiling and identifying perpetrators already used in criminology, criminalistics and computer forensics that are also suitable for use in smart security systems to better meet the current and future needs of civil air transport. The article presents the idea and general characteristics of smart, selective and personalized security control systems, followed by structuring of the analytical field and problem analysis in terms of their implementation conditions, opportunities, threats, conflict-forming potentials and controversies, as well as the needs for more detailed research and their suggested directions.

Keywords: behavioral analysis; profiling and typing of high-risk travelers; security science; technology assessment; aviation security

Reference to this paper should be made as follows: Michalski, K., Jurgilewicz, M., Kubiak, M., Grądzka, A. 2020. The implementation of selective passenger screening systems based on data analysis and behavioral profiling in the smart aviation security management – conditions, consequences and controversies. Journal of Security and Sustainability Issues, 9(4), 1145-1155. https://doi.org/10.9770/jssi.2020.9.4(2)

JEL Classifications: 032

1. Problem area

Civil air transport has many structural and functional peculiarities that give security problems a special rank while stoking specific fields and analytical perspectives for security research unknown in other social systems. For many reasons that are beyond the scope of this article, terrorist threats have been promoted to among the highest priorities in security policy in recent years, pushing aside the organizational and technical aspects of JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online flight safety and device reliability; natural and environmental conditions of air traffic safety and continuity; economic and financial aspects; as well as other dimensions of safety related to individual travelers, including physical, mental, and occupational safety and health; crime (e.g. the smuggling of drugs, means of payment and illegal goods) and broader social issues such as staff strikes, conflicts with local communities, panic outbreaks, humanitarian disasters and crisis situations. Scientific and technical progress has ensured greater independence of air traffic from natural factors (e.g. atmospheric conditions) and increased the reliability of aircraft and airport infrastructure. From a security perspective, natural and technical threats are decreasing in likelihood and, accordingly, in priority. At the same time, threats caused by the human factor, not only inadvertent human errors but terrorist and criminological threats, are gaining in importance (Grzywna et al. 2018, 185).

Airports are a preferred target of terrorist operations for many reasons. Effective, tailored control and response measures are limited because of the increased congestion and the human flow at airports. Far from the days when air travel was still the privilege of the rich, air transport is increasingly accessible. Accordingly, terror attacks in airports target victims indiscriminately, and such attacks are socially perceived as an attack on the whole society, an event affecting everyone. These events arouse fear of leaving home, force people to change their behavior and undermines trust and confidence in the social order, which is, after all, the mission of terrorism. An additional factor that increases terrorist interest in civil passenger air transport is the uniquely spec- tacular, traumatic and symbolic nature of airplane disasters and dangerous incidents at airports. In addition, as air travel has become more accessible, it has achieved heightened strategic, economic and social importance and now plays a key role in societal infrastructures. Air transport systems are also inherently vulnerable to destruction or destabilization. All these circumstances make passenger air transport at once an attractive target for terrorist operations and an extremely difficult system to protect (Chorzępa 2019). No wonder that the era of terrorism coincided with the rapid development of passenger air transport in the second half of the twentieth century, and attacks on passenger planes or attempts to abduct them and attacks on airports, representing nearly 2.5% of total terrorist incidents, are now the second most common form of terrorist operations against transport systems after attacks on rail and metro systems (Nowacki et al. 2015, 8065). Unprecedented attacks on September 11, 2001 in the US, as well as a bombing at Moscow Domodedovo airport on January 24, 2011, the shooting down MH17 of Malaysia Airlines over Donbass on July 17, 2014 and bombings carried out by ISIS in the morning of March 22, 2016 at Zaventem Airport in Brussels have made societies painfully aware of the increasing vulnerability of air transport to serious terrorist threats and the need to continually strengthen and improve protections against such threats. There are many concerns about impact of terrorism on various life areas (Kordík, Kurilovská, 2017; Plėta et al., 2020; Masood et al. 2020; Chehabeddine, Tvaronavičienė 2020).

Therefore, concern regarding safety in civilian passenger aviation has grown and has rightly been promoted to the priority of international and national security policies, particularly as because passenger flows are increasing rapidly all over the world. Currently, air transport annually has over 3 billion passengers served (PAX) worldwide, of which nearly 700 million are EU citizens. These numbers are constantly growing due to various factors, including: - Political, economic and cultural internationalization and globalization, the breakdown migration barriers (e.g. visas) and increasing human mobility; - Demographic development, global population growth; - Economic development and the growing prosperity of populations all over the world; - Increasing accessibility of air travel, both price accessibility -- resulting from the increasing competition due to the expansion of LCC carriers -- as well as accessibility related to the progressive thickening of the airport networks, the connection network and the development of new concepts of complementary, inter- and multimodal transport, which integrates multiple means of transport into one harmonized system; - The growing competitiveness of air transport compared to other modes of travel (rail transport, road transport) not only in terms of comfort and duration of travel, but also in terms of price - not only over traditionally long haul flights between time zones, but also short haul and domestic connections (cruises between cities, such as Warsaw and Rzeszów).

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Air transport market analysts have identified a correlation between air traffic growth rate, measured in revenue passenger kilometer, and a country’s GDP. The first indicator is usually higher by 2 percentage points (Ruciński, Madej 2016, 28). This coincides with the forecasts for the development of the passenger air transport market in Poland, whose growth dynamics for the number of passengers handled (PAX) by 2030 is expected to be above 5% per year (Ruciński, Madej 2016, 28).

The increasing complexity of threats as well as the increasingly sophisticated methods and measures used by the organizers of terrorist attacks make it necessary to constantly strengthen and improve airport security management and security systems so that these systems can meet new challenges. These challenges have engendered the implementation of more and more time-consuming and expensive security methods and measures, which are for most passengers completely inadequate and disproportionate. They are increasingly invasive, violating the privacy of travelers, significantly reducing travel comfort and causing travelers stress and dissatisfaction while straining security officers. However, simulation tests show that currently widely practiced non-selective security control procedures, despite their restrictiveness, are not very effective, and in combination with the growing flow of passengers at airports, they create overly long security lines, extending the duration of and wait time for check-in and security check. As a consequence, these non-selective protocols increase congestion at airports, which in turn cause additional security problems.

The problem of low efficacy of security controls, despite their widespread and mandated use, has recently been publicized in the media after leaks of secret reliability test reports that the Transportation Security Adminis- tration (TSA) -- the service responsible in the USA for transport safety, airport security and airport controls -- had carried out for fifteen years after the attacks on September 11, 2001 at several US international airports, including in Minneapolis-St. Paul International Airport. The test consisted of a “red team” of secret TSA agents acting as ordinary passengers who tried to smuggle 18 different prohibited items through security including dummy weapons, explosives, drugs, and other dangerous goods and materials. The leaked reports illustrated that in most cases items that should have been easily detected and confiscated as part of security checks were not detected or seized, and the test was finally terminated when the failure rate reached 95%. The TSA declined to comment on the leaks, condemning the disclosure of any information that could threaten the security of the American nation (Blake 2017). The US Department of Homeland Security referred to the case with a specially issued statement confirming that recent secret reliability tests conducted at many security checkpoints at US airports showed that controllers, devices and equipment or procedures had failed in more than half of the cases, and inspectors identified some gaps in the security control system. As a result, eight recommendations regarding sealing the system and improving its reliability were given to the TSA. The recommendations were classified as top secret in the interest of national security (Kerley, Cook 2017). Two years earlier, the American media had released additional secret reports concerning worryingly low effectiveness of airport security controls. The reporting also included the TSA’s remediation program ordered by then-Secretary of Homeland Security J. Johnson. The agency launched a special training program for transport security officers and changed many procedures, including the reduction of long security lines. In the aftermath of the media storm, members of the US House of Representatives Homeland Security Committee demanded the immediate implementation of a recovery program, including replacing scanning equipment used at airport security control points with three- dimensional technologies and biometric scanners, as well as investment in security staff. According to Ameri- can commentators, equipment changes have only been implemented at two airport checkpoints, and wider implementation has been inhibited due to budgetary constraints as President Trump’s administration prioritizes the wall construction project along the Mexican border as a domestic security issue view (Kerley, Cook 2017).

Due to the unreliability and inefficacy of current airport security control procedures, according to aviation stat- isticians, by 2036 the number of check-in at airports will increase to 8 billion passengers per year (Nabożny 2019, 17), making it difficult to regard the current security control model as forward-looking and sustainable. Therefore, it is necessary to look for solutions that intelligently reconcile partially conflicting priorities: security requirements; economic interests related to cost-benefit optimization and adequate allocation of security resources based on realistic risk analysis; the need for a radical increase in the capacity of airport security checkpoints; ensuring smooth flow of airport traffic; shortening the security line and wait for check-in and security

1147 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online check; the need to make control procedures more flexible and to increase their adaptation not only to the actual risk level, but also to the traffic volume (Skorupski, Uchroński 2016), as well as requirements for personal data security, traveler’s privacy protection and the convenience and satisfaction of passengers (Thomopoulos et al. 2018). The new forward-looking model of smart, modular, selective and multimodal security control must be primarily based on: - Individualized and personalized procedures, including classifying travelers into various risk groups and utilizing accompanying control procedures; - Early recognition, early warning and early response, including a procedure to check passenger credibility and begin the risk assessment at the moment tickets are purchased; - Current scientific knowledge and innovative, technologically advanced tools and equipment solutions, including the latest achievements of psychology and cognitive science, security studies, criminology and criminalistics, computer forensics and artificial intelligence and autonomous systems, sensor engineering and detection technologies, crowdsourcing, identification and tracking of persons, intelligent remote image processing, computer image analysis, machine (algorithmic) behavior analysis, BigData and client mobile applications; - Partial self-service, in accordance with the security model as a customer service, offering convenient, simplified and non-time-consuming forms of check-in and security check instead of requiring passengers to allow inspection of their personal information in order to travel.

2. Conditions for implementing the new model of smart airport security control

Historically, the visions and concepts of safety and security in passenger air transport and the changing standards of airport controls over time reflect a continuous learning process based on the “wisdom through damage” model. The intensification passenger hijacking for political reasons, which plagued Europe and the Middle East in the 1960s and 1970s, prompted the gradual tightening of airport security checks. As a result, since 1980 global regulations have required that all passengers are screened and subjected to highly invasive search procedures as part of personal checks, including detailed baggage checks up to the proverbial “last dirty sock.” These checks widely criticized initially because of massive abuse, however, over time these security control standards also proved to be less and less useful as passenger aviation became subject to bombings carried out by the special services of hostile countries with excellent training, advanced technologies, large budgets and international networks of organizational cells. After the aircraft bombing at Lockerbie in 1988 (case Pan Am Flight 103), the regulations governing baggage checks were tightened and random scanning and searching of luggage for explosives was introduced. After the September 11 attacks, these checks became mandatory for all luggage without exception. Since 1992, in the USA, under the pressure of lobbying for low-cost air carriers seeking to reduce airport charges, security audits can legally be outsourced. As a result, since 1995 airports have turned to the cheapest, low-budget private security companies, which employ poorly qualified, underpaid workers to conduct airport security checks. It is widely believed that this had a significant impact on the selection of tactics for the September 11 terrorist attack against the US (Nabożny 2019). After the attacks of September 11, 2001, the Transportation Security Administration (TSA), an agency of the federal Department of Homeland Security of USA (also created after the September 11 attacks), was entrusted with responsibility for aviation safety and airport security.

In the European Union, the September 11 attacks led to the introduction of EU Directive 2320/2002, which aimed to counteract threats related to the abduction of passenger aircraft. Under the directive, airports established different security zones to which access is strictly controlled and requires certain permissions. The directive also introduced stricter standards for checking passengers and baggage as well as minimum requirements for items that travelers can take with them on board. It also imposed an obligation on Member States and airport operators to install their own technically advanced safety and security management systems and subject them to appropriate official supervision. Safety Management Systems (SMS) are a key element in ensuring air traffic safety and protecting airports, aircraft and port infrastructures (communication, logistics, service, etc.). The global civil aviation regulator -- the International Civil Aviation Organization (ICAO) -- requires operators of certified airports to implement a system based on a proactive formula of management focused on early recognition, prevention and early response to threats, including on the preparation of adequate action scenarios in the

1148 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online event of adverse events, emergencies or disasters (ICAO 2014, 6f.).

Such management requires the collection and processing of huge amounts of data and information relevant to security from as many sources as possible. What data and information can be relevant to security is determined by intelligence, imagination and experience. Materiality criteria relating to such information can be formulated only to a limited extent. The collected information must then be subjected to complex analyzes (preferably in real time), and the results obtained should be used for ongoing verification and, if necessary, to review and update the procedures for identifying and assessing threats and the ability to respond to accepted levels of tolerated and acceptable risk. The results can then be used to define the demand for specific resources necessary to ensure the desired level of security and protection (human resources, knowledge and competencies, equipment, financial, as well as authority) in addition to preventive, corrective, preparatory, documentary and other measures. The ICAO recommends the widest possible use of innovative solutions in the Safety Manage- ment System in the field of IT -- including electronic systems and devices -- to support the activities of airport services responsible for the implementation of comprehensive tasks in the field of security and safety. The basic infrastructure for the safety and security management system is a computer network that integrates and synchronizes the functioning of such system components as people identification systems and access control to restricted areas, anti-theft and alarm systems, exit blocks, video surveillance systems and CCTV, systems for protecting objects, devices and aircraft at parking spaces, airport fence protection systems and entrance gates, luggage transporting and control systems, body scanners, document and electronic signature readers, technical vehicle monitoring systems, time recording systems, motion sensors installed in lighting systems and parking management systems (ticket machines, gateways, signaling systems etc.) (Nowacki et al. 2015, 8069). In the case of airports, safety and security tasks can be assigned to two general objectives: 1) Those related to the ongoing service of aircraft traffic and the maintenance and development of necessary technical infrastructures. They include operations such as maintaining communication with aircraft located in the area managed by a given air traffic control service, providing aircraft crew with the necessary signals, information and instructions, securing landing (emergency if necessary), rescue operations, and ground operations including handling aircraft, parking, maintenance, and upkeep. 2) Those related to passenger and freight traffic. They include operations such as ticketing, baggage checks, passport and customs clearance, security controls for travelers, luggage and parcels, loading the aircraft and providing travelers with safe shelter in the event of delays or cancellations (Nowacki et al. 2015, 8069). This division of tasks and competences is often reflected in the organizational structure of airport safety & security services.

It is difficult to consider the world-dominant current model of safety & security management in passenger air transport and airport security smart, as airport operators use ineffective and mostly single-function, often technologically advanced infrastructures, despite the obvious benefits of synergies that would arise as a result of system integration. This article only allows for an overview of the growing problem of congestion at airports and the multidimensional importance of this problem for safety and security. In normal situations, the increase in congestion can be attributed to the ever-increasing flow of travelers; the progressive massifica- tion of air transport; the increasing needs of mobility; the intensification of migration processes; the increase in the price, spatial and reservation availability of air transport and their increasing compatibility with other transport systems; centralization processes related to the rapid development of large transit ports; the progressive thickening of the connection network and the enrichment global flight offerings with new, more distant travel available; the development of sustainable, integrated, intermedia and multimodal transport systems and the associated change in the function of airports and increased numbers of people not using air connections, dictated by price competition considerations; the continuous increase in transport volumes by exchanging the fleet for broad-body aircraft with higher payloads; as well as the pricing policy of carriers encouraging the use of cheap connections with long transfer times, among others. The problem of congestion is also intensified by the current, mandatory and detailed security checks required for all passengers carried out in the block system, the capacity of which is not flexibly adjusted to the level of danger or present traffic conditions. There is also an increase in congestion in emergencies, caused by flight delays or cancellations, serious incidents, weather conditions, staff strikes, technical failures or aviation accidents. Congestion has many negative and often even

1149 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online fatal consequences, ranging from objective problems with crowd management, monitoring of threats, ensuring order, protection of persons, property, important functions and infrastructures, detection and prosecution of crimes, typing potentially dangerous persons, conducting rescue operations , exploration and evacuation, as well as matching adequate security forces and measures, to subjective effects on passengers, which may increase the level of danger. For instance, congestion negatively affects the sense of security, and failure to meet territorial needs can act as a stressor for many people, leading to undesirable changes in behavior described by Calhoun as the “behavioral swamp.” Under this phenomenon, congestion can lead to increased aggression, a sense of alienation, antisocial attitudes and behavior, a tendency toward anarchy, a refusal to comply, lack of solidarity, loss of interest in the fate of others and loss of readiness to help others, a decrease in the sense of responsibility, and satisfaction with other people’s failures. Despite the obvious negative impact of crowding on airport security, most airports do not use any systems to monitor the number of people in the airport, which is problematic in terms of proper matching of forces and security measures. In practice, data on the number of people currently staying at the airport are not collected and analyzed (in real time). Airport facilities can in fact easily be equipped with electronic control systems to register the number of people entering and leaving; such systems are commonly used, for example, in other commercial facilities. Motion detectors, such as those that open automatic doors or turn on lights can be converted into person-tracking systems at almost no cost. Without knowing how many people are staying in a given facility at the moment, it is difficult to plan, let alone execute an adequate response in the event of an emergency or other undesirable situation. If it is necessary to evacuate people, it is difficult to determine with sufficient certainty whether after the evacuation operations whether people remain in the danger area, and if there are, how best to evacuate them. The constant availability of reliable data on the number of people in the airport at any given time allows for ongoing planning of preventive and protective measures as well as crisis response activities, in particular for estimating the current demand for resources (forces, resources, information, time), mobilization of reserves, launching procedures, planning breaks at work, as well as analyzing trends, early problem recognition and early response, forecasting future needs (e.g. personnel, equipment, procedural, etc.) and planning future tasks.

If the technical infrastructure existing at most airports were to be combined with technologies and network services commonly used by operators selling airline tickets, current security and security systems could be transformed into more smart systems based on personalized, selective, multi-module, partly autonomous (un- manned) and, to an extent, self-service security control procedures that could improve the reliability of these procedures and better ensure the security of passenger air traffic while increasing check-in capacity, reducing costs, shortening the waiting time for check-in and checking and the passenger’s stay within the airport. These factors would combine to reduce congestion at airports, itself a security threat, while increasing convenience and making the passenger’s airport experience overall more pleasant.. Such solutions have been successfully tested over recent decades at Israeli airports and check-in terminals at the Israeli state carrier El Al, which enjoys the reputation of being the best-protected airline in the world. The FLYSEC system operates on similar principles, although executed in a less invasive manner, developed and tested from 2015-2018 at the airport in Luxembourg in cooperation with the university as part of a pilot research and development project financed from the EU Horizon 2020 grant program. Additionally, smart, personalized security control systems can take advantage of modern computerized data analysis tools for travel history data and data from current bookings as well as algorithmic methods of behavioral analysis based on advanced detection, identification, crowdsourcing and tracking systems.

There are many visions for the meaningful use of artificial intelligence in behavioral analysis and assessment of individual’s risk at different levels of the airport control system. Algorithms that recognize behaviors indicating stress, affective states and emotional arousal could revolutionize not only security controls carried out in terms of possible threats to public security (e.g. counteracting terrorist attacks), but also improve the detection of customs and fiscal crime, including smuggling Prohibited Goods (e.g. drugs, weapons, foreign exchange, counterfeit goods, prohibited articles under the CITES Convention) and illegal migration of persons (contin- gent upon forged documents).

These types of solutions can not only significantly increase the level of security in passenger air transport,

1150 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online but also would substantially improve the overall passenger experience by increasing comfort and satisfaction, minimizing time loss, reducing the stress of interacting with security agents or often-armed police officers, and reduce staff workload as well as the liability for errors or oversights.

3. Smart Airport Security Control Systems in Practice

Case El Al Israeli state airline El Al, widely regarded as the best protected airlines in the world (Kohn 2002), is considered as a global pioneer in the implementation of intelligent, selective, prospective, personalized airport security control procedures (Kohn 2002), although this distinction does not mean the airline is the safest. Israeli airports and El Al check-in terminals employ some of the most restrictive control procedures in the world because of the complexity of the political situation facing this Middle Eastern country, tensions in relations with neighboring countries and a legacy of experiences with terrorism. Under the influence of bloody attacks and fear of danger, El Al was the first in the world to introduce legally and ethically controversial practices of racial profiling of travelers, the procedure of checking data recorded during the purchase of a ticket against data provided by leading intelligence services around the world and special crew training programs in the recognition and incapacitation of potentially dangerous persons. Passengers traveling on El Al flights must arrive to check in at least three hours before the scheduled departure and undergo an extremely meticulous security check. The check includes searching for passenger data in the FBI, INTERPOL, Canadian CSIS, British Scotland Yard and Israeli Shin Bet databases, a personalized interview conducted by security agents trained by special services aimed at detecting signals of insincerity or nervousness activating the “red lights” and control of luggage in a decompression chamber which simulate flight conditions in order to cause detonation of any explosives hidden in luggage. These security measures are implemented even though every passenger who goes to the airport has already been meticulously checked for security with the help of personalized electronic databases and the most advanced surveillance technologies. Each passenger is then re-checked when entering the airport in Tel Aviv. The airport infrastructure is specially designed so that even toll gate and release thresholds are part of the security system. Someone who drives too fast or too slow is immediately registered and qualified for additional control. Suspicious cars or people are searched by armed guards in the parking lot before they can even approach the terminal building. It is also common practice to thoroughly search the contents of luggage in the event that a scanner detects suspicious items. Terminals and planes of this line are equipped with a system of detectors specifically for explosives both on travelers and in luggage, and are also equipped with technologically advanced monitoring systems. Since the 1960s, El Al flights are the only ones in the world to employ specially trained and armed ‘sky marshals’, who travel incognito on every flight to ensure passenger security and react to any suspicious behavior of travelers. The sky marshals serve as the last layer of security in the whole system. Any security agent intervention means that the security system failed.

The signal that evokes the greatest mobilization of services is haste. If the Turkish proverb “The devil takes a hand in what is done in haste” holds true, it is most prominently on display at Ben Gurion airport in Tel Aviv. People who hurry to the plane are more likely to be interviewed for hours than to board. Finally, it is worth men- tioning an important detail that differentiates security at Israeli airports from airport security in other countries: despite the fact that almost half of the staff at the airport are involved in security, security is almost invisible. Security agents dressed in civilian clothes hide automatic weapons under sweaters and it is usually difficult to spot people in uniforms, while in the US, the European Union or Russia there are conspicuous uniformed officers throughout airports, although their visibility has not prevented attacks or incidents in recent years. At an Israeli airport, only an attentive observer would realize that from time to time the same people dressed civilian clothing check the bins and look behind the vending machines in search of explosives. It is most likely that a traveler’s first encounter with security will be a discussion with a young woman, appearing to be a student and dressed in a t-shirt and jeans, a few questions to check if the answers match the secret profiles of people suspected of terrorism (Kohn 2002).

Thanks to extraordinary control and security procedures, there has been no attack on Israeli air routes or passenger aircraft in recent years. Potential perpetrators are aware of the low chance for such operations to succeed.

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FLYSEC The Interdisciplinary Center for Security, Reliability and Trust (SNT) of the University of Luxembourg together with the Luxembourg Airport and ten other partners carried out a research and implementation project FLY- SEC founded by the Horizon 2020 Framework Program of the European Union for Research and Innovation (www.fly-sec.eu) from 2015 to 2018. As part of the project, an innovative, integrated, technologically advanced, comprehensive airport security system was developed and tested. The system aimed to achieve all three priorities of the IATA / ACI Smart Security program: strengthened security, increased operational efficiency and improved passenger experience. The FLYSEC system was designed in accordance with the security management paradigm based on risk assessment and customer service, and is centered around discreet, personalized security controls able to conduct individual risk assessments for each passenger and while incorporating self-service elements. The goal of the project was to increase airport output and to eliminate long check-in queues while improving security by increasing the efficiency of passenger checks, replacing random personal checks with targeted procedures while improving passenger comfort and satisfaction at the same time. The individualized risk assessment is based on data on travel history, results of previous security checks and passenger booking profiles. As part of the initial security check, passenger data is analyzed to classify and select passengers into three risk categories: trusted passenger, normal passenger and high-risk passenger. Depending on the results of the initial check, passengers in different risk groups are assigned to different restrictive control procedures after arriving at the airport (so-called virtual secure tunnels). From the moment the passenger arrives at the airport, the FLYSEC system builds upon the initial risk assessment with data collected through a special mobile application assisting passengers during check-in, security checks and moving around the airport. These data allow passive monitoring and intelligent analysis of passenger behavior from the moment the traveler enters the airport hall up to the moment of he or she boards the plane, using traffic patterns to identify unusual or suspicious behavior early and direct travelers for additional, more thorough control procedures if necessary. Passenger risk analysis is continuous, security management is agile and flexible, and the passenger can be suddenly redirected to another secure tunnel if needed. In terms of technology, the FLYSEC system integrates modern solutions in the field of artificial intelligence, sensory engineering, video monitoring and video surveillance, computer vision analytics, intelligent remote image processing, biometrics, big data analysis, crowdsourcing, RFID, mobile application technologies with the latest scientific achievements, primarily all in the area of behavioral analysis, neuroscience and cognitive science and machine learning algorithms (Kyriazanos et al. 2016). The system also has a built-in methodology to check the correctness of operations, allowing the algorithms to self- improve continuously.

During the Luxembourg International Airport pilot field test in 2018 in a real operational environment with active security personnel, a group of 100 volunteers had the role of passengers and recreated various scenarios including adverse and hazardous events. The test results have demonstrated a high level of technological readiness of the FLYSEC system and have shown that improving the level of security, improving the efficiency of airport operations and improving traveler experience do not have to be mutually exclusive.

4. Controversies

Despite the indisputable advantages of an intelligent, selective, personalized airport security control model compared to the standard control procedures, mandatory for all without exception, the execution of such innovative solutions is always met with social skepticism, as well as legal and ethical controversies due to fear of unauthorized invigilation and misuse by security services, discrimination, data theft or leakage and the potential for dreadful consequences of machine errors in addition to countless cyber threads. Those controversies are not altogether new, most of them are well-known from social debates concerning the ethical and legal considerations around citizen invigilation by online activity tracking tools or video monitoring in public spaces. However, the current control procedures used at most airports are also not entirely free of ethical and social controversies or objections. It bears remembering that the primary objective of new security procedures is the broad understanding of the rationalization for security management and protective procedures Admittedly, the pillars of the current security management system in civil aviation are important principles on which European legal order is based: universality, equality, security and data protection as well as respect for privacy. However,

1152 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online it is clear that such an egalitarian understanding of security requires subjecting to the same restrictive, embar- rassing and ultimately unnecessary control procedures hundreds of millions of people who pose no threat to air traffic. Therefore, it seems that apart from certain cultural stereotypes and prejudices, there are no obstacles to profile and categorize people in terms of safety, and to select high-risk passengers and qualify them to additional control procedures.

The assessment of the social acceptability of a new, intelligent model of selective, personalized security control based on risk analysis and advanced technologies depends on the context, which encompasses level of awareness, political situation, possessed experience, value systems and safety & security culture among other factors. However, it seems that despite sincere sympathy for such values as equal treatment, privacy and informational self-determination, profiling, sorting people based on risk cannot be abandoned entirely in the present day as far as safety and security in civil aviation go, primarily because terrorist organizations are growing in strength, possessing great capital and are using increasingly sophisticated actions (Kohn 2002). Finding a bomb has become increasingly difficult, as explosives no longer feature the characteristic protruding fuse, but rather can resemble any object, have any shape and be made of many types of materials. It is much easier to identify a terrorist, even in a dense crowd, but this requires profiling and typing passengers that match specific profiles and behavioral patterns. Initial profiling based on data stored in electronic systems and observation and analysis of behavior does make it much more difficult to identify naive people unaware that they are used by terrorists. Kohn recalls the example of a pregnant Irishwoman, Anne Marie Murphy, who in 1986 took a trip on an El Al flight from London to Tel Aviv to meet the parents of her fiancé, a Palestinian. She was unaware that the wedding was in fact false, and that her fiancé hid a bomb, made of plastic with a chemical detonator invisible even to 3D luggage scanners, in her luggage. Thanks to an interview with the Irish woman during the check-in, Israeli security agents happened to learn of her fiancé and, having grown suspicious, decided to check the contents of her luggage in detail, likely saving the lives of more than a hundred people.

Invasive profiling practices, a complete lack of understanding of the need for privacy and confidentiality are the price to pay for fragile security guarantees in Israel. Ongoing tensions mean that the authorities cannot af- ford any oversight. However, since no human-made system is perfect, mistakes also happen there. The writer Rosemary Mahoney from Rhode Island experienced it on a one-way El Al flight from Mumbai to Tel Aviv. Without any evil intentions or connections to terrorist organizations, Rosemary Mahoney was selected as a high-risk passenger on the basis of profiling, namely, that she had traveled to Egypt several times, had a Syrian visa and had purchased a one-way ticket. After several hours of interrogation and a thorough search of luggage up to the “last dirty sock” Rosemary Mahoney was finally allowed to board another plane (Kohn 2002). After the September 11 attacks, Rosemary Mahoney voiced support for El Al’s conduct and advised Americans to follow Israeli practices.

The combination of discrete, machine, partially autonomous and remote, non-interactive analytical control procedures with security functions operated by the passenger himself with the help of mobile applications gives rise to a certain other psychosocial problem. Security checks are not only intended to detect and eliminate threats, but also give passengers a sense of security -- in this sense they also have a symbolic, ceremonial function. It can therefore be assumed that intelligent, selective control procedures will counterproductively affect the collective sense of security, which may result in additional problems. Certainly, for many different reasons, automated personal control procedures would be desirable. These systems come with their own pitfalls, however, including the “madness” of collecting useless data (which can compromise effective security), data abuse, lack of full anonymity and difficulty evaluating the materiality of flagged risks, but above all with the aforementioned impossibility to ensure an adequate level of privacy protection. Undoubtedly, the most serious obstacle to implementing intelligent, selective airport control procedures will be overregulation in the field of personal data security and privacy protection in Europe.

The interests of collective security and individual protection and the invasive techniques of preventive surveillance, profiling and selection of passengers associated with them certainly conflict with the legal and ethical standards of protection of individual fundamental rights, including the right to privacy, confidentiality

1153 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online and anonymity, the right to informational self-determination and the right to equal treatment. However, the fundamental conflict between the interests related to the protection of privacy and the interests related to the protection of the individual and the community against the unpleasant consequences of protecting the privacy of dangerous persons is not to be overlooked. Therefore, such solutions should not be introduced by force, but should be enacted through consulting with and agreement from governing bodies and their citizens. Ultimately, the problem of assessing the social acceptability of this type of solution boils down to the choice of priorities, which should be carried out on socially fair terms and preceded by social discourse and the process of social learning. In the course of such discussions, it is unlikely that those involved will entirely resolve the conflicting needs across technical (e.g. computing capacity), economic (cost-benefit analysis), legal and ethical (legality of new solutions and possible legislative needs, civil rights and freedoms, data security and privacy protection), the calculation of goods and the distribution of damages (benefits and setting norms), social (acceptance issues, conflict-forming potentials, conflict resolution and consensus building) and cultural (travelers’ preferences, ethno-cultural conditions) considerations. Resolving such issues would require undertaking appropriate scientific research and conducting a comprehensive, comparative technology assessment. A rational, ethical assessment of the acceptability of a possible breach of passenger privacy and confidentiality could be based on the principle of pragmatic consistency, which justifies exposing other people to certain risks without their knowledge or consent, provided that they do accept comparable or larger risks (Gethmann, Kloepfer 1993, 42- 45). Societies must also consider that the high price paid for improving security through the use of intelligent, selective airport control procedures based on invasive profiling techniques ultimately will not guarantee full protection against terrorist threats or other threats caused by human factors. In the case of the writer Rosemary Mahoney, the alarm activated in the system turned out to be false, while in the case of Anne Marie Murphy the system failed and both she and her fellow passengers owed their rescue to the security agent’s questioning. In the current global geopolitical context, however, security strategists are best served by the strategy that Hans Jonas referred to as “heuristics of anxiety” (Jonas 1984): the socially destructive impact of certain traumatic events means that protective measures must include a full mobilization of all available forces and means to counteract such events, and that those responsible for protecting civilians must wake up every day with the unwavering conviction that there will be an attack that morning. With this approach, for a rational society of people interested in protecting themselves and their loved ones, no price for security is too high.

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Nowacki G., Olejnik K, Woźniak G. (2015): Analiza zagrożeń terrorystycznych dla sektora transportu lotniczego [Analysis of Terrorist Threats for Air Transportation Sector], in: „Logistyka”, 4 (CD2), 8063-8071 (in Polish)

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Anna GRĄDZKA is the master at Johns Hopkins University in USA. Research interests: national security with a focus on Eastern Europe. ORCID ID: 0000-0002-7096-947X

This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/

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1156 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 https://doi.org/10.9770/jssi.2020.9.4(3)

INSIGHTS INTO RESEARCH ON CARBON DISCLOSURE

Iman Harymawan1, *, Nadia Klarita Rahayu2, Dyah Ayu Larasati3, Abdul Ghofar4, Dian Agustia5

1,2,3,5Department of Accountancy, Faculty of Economics and Business, Universitas Airlangga, Indonesia 4Department of Accounting, Faculty of Economics and Business, Brawijaya University, Indonesia

E-mails: 1*[email protected] (Corresponding author)

Received 18 November 2019; accepted 30 March 2020; published 30 June 2020

Abstract. Along with the rapid growth of technology, environmental problems have become an unavoidable event. These environmental problems are the main factors that can affect sustainable development. Under the increasingly modern market pressure, many companies are disclosing information about carbon emission. This study tries to provide an overview of research related to carbon emission disclosure. This research was conducted by analyzing the research with the title “carbon emission disclosure” or “carbon disclosure project” on Scopus. 21 studies were found in this search. We found articles with extensive discussion covering the environment, accounting, and law. We also provide control variable may be used by future researchers.

Keywords: carbon disclosure project; carbon disclosure; CDP; carbon emissions

Reference to this paper should be made as follows: Harymawan, I., Rahayu, N.K., Larasati, D.A., Ghofar, A., Agustia, D. 2020. Insights into research on carbon disclosure. Journal of Security and Sustainability Issues, 9(4), 1157-1164. https://doi.org/10.9770/jssi.2020.9.4(3)

JEL Classifications: Q50; Q01

1. Introduction

Carbon emissions are reaching disturbing levels, recommending the need to balance the company’s environmental, social, and economic performance (Oestreich & Tsiakas, 2015; Zamil et al., 2019; Atari et al., Caurkubule et al., 2020; Tvaronavičienė et al., 2020; El Idrissi et al., 2020). Report of the Intergovernmental Panel on Climate Change (IPCC) stated that greenhouse gas emissions between 2000-2010 had reached 2.2% per year, yet it is the highest number in the last three decades. Compared to 1970-2000, greenhouse gas emission is about 1.3% per year (KLH, 2015). Numerous acts have been adopted to mitigate climate change. In 2000, the Carbon Disclosure Project (CDP) was launched in the UK, aiming to collect environment-related data. The data were collected among the company and make it available to the public to support climate or environment-related decisions for the manager and other company’s stakeholders. As a form of their concern for climate change, the United Nations also enacted an international agreement on global warming called the Kyoto protocol. Countries that ratify this protocol are committed to reducing carbon dioxide emissions and other greenhouse gases.

The implications of the Kyoto Protocol have arisen the issue of carbon accounting, which is a way for companies to recognize, measure, record, present, and disclose carbon emissions. The alarming concerns in carbon pollution has prompted companies to conduct carbon emission disclosure as a form of their corporate responsibility. Carbon emission disclosure has become a topic that has often been discussed on several research in the past recent years (Choi et al., 2013; Ben-Amar et al., 2017; Chariri et al., 2018; Fonseca & Gonzales, 2008; Ganda & Ngwakwe 2013; Matsumura et al., 2014; Mayorova, 2019; Hermawan, Gunardi, 2019). JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online

Carbon emission disclosure allows stakeholders to assess the role of their companies in reducing greenhouse gases. Also, carbon emission disclosure is one form of corporate concern for the environment. Andrew and Cortese (2011) state that carbon disclosure is presented as a voluntary form used for internal and external decision making. Voluntary environmental disclosure was found that they worked as a complement to enhance the performance of economic, social, and environment to achieve sustainable development in Bangladeshi corporation (Kumar, 2012). The company’s efforts to reduce carbon emissions with carbon accounting are in line with the concept of Corporate Social Responsibility.

We conducted a search in May 2019 using Scopus database. We have narrowed the scope of our search and provided some initial insight on carbon disclosure practice. We use Scopus-indexed documents such as pro- ceeding and journal articles that relevant to the carbon disclosure issue to be included in our paper discussion. This research aims to discuss the prior finding on Carbon Disclosures, identify trends, the theory, and overall relationships. The initial search found 22 results; one of the results is in the form of a book chapter. Of that initial search, 21 documents were relevant to be included in our paper discussion.

There are 8 studies using more than one country as their samples (Alrazi et al., 2018; Chariri et al., 2018; Green & Zhou, 2013; Hover & Fafatas, 2018; Kim & Lyon, 2011; Ott & Gunther, 2015; Turkova & Donze, 2016). While the rest uses only samples from one country consisting of German, Australia, Canada, Indonesia, China, French, Brazil, and Turkey. Almost all studies use samples from all industries except research conducted by (Hermawan et al., 2019).

2. Frame Condition

The theory used in relation to carbon emission disclosure is Legitimacy theory and Stakeholder theory. There are socialization theory due to topics related to gender but it is not because of the carbon emission disclosure. The concept of the legitimacy theory in the relationship between the company and the environment is important in the analysis process. Legitimacy can be achieved by taking actions that support the company’s social obligations such as corporate social responsibility through environmental concerns. According to the stakeholder theory by Freeman (1984), A stakeholder is a group or individual who can affect or is affected by the achievement of the organization’s objectives. Any voluntary disclosures made in the Company Report aim to address stakeholders’ concerns. The companies will respond to the stakeholder by disclosing information that is perceived by the stakeholders but still consistent with the firm’s activities (Freedman & Jaggi, 2011). Nowa- days, various stakeholders are concerned about environmental things such as climate change, GHG emission, and also carbon emission. For example, Institutional investors, for instance, will focus their attention on the financial impact of carbon management, customers are attentive to the way firms meet their climate change commitments, suppliers are interested in potential production process transformations, public opinion (the collective body or community) is concerned about the effects of GHG emissions on human health, etc (Depoers et al., 2016). Their concern may put pressure on firms to report their environmental-related responsibility.

Table 1. Frame Condition

No Tittle & Author Journal Theory Country 1 Andromidas (2013) Neue Solidaritat Legitimacy German Theory 2 Chariri et al. (2018) International Conference on Energy, Global ((Denmark, Finland, Environmental, and Information System Iceland, Norway, and Sweden) 3 Bae Choi et al. (2013) Pacific Accounting Review Legitimacy Australia Theory 4 Ben-Amar et al. (2017) Journal Business Ethics Socialization Canada Theory 5 Sudibyo (2018) The 4th International Seminar on Indonesia Sustainable Urban Development 6 Yumeng, Yu (2014) 13th International Conference on Service China Systems and Service Management 7 De Faria, Andrade, & Mitigation and Adaptation Strategies for Legitimacy da Silva Gomes (2018) Global Changes Theory

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8 Depoers, Jeanjean, & Journal Business Ethics Stakeholder French Jérôme (2016) Theory 9 Farias & Andrade (2014) International Journal Innovation and Brazil Sustainable Development 10 Ganda (2018) Environment, Development, and Legitimacy South Africa Sustainability Theory 11 Green & Zhou (2013) Australian Accounting Review Global 12 Hoover & Fafatas (2018) Academic Paper Stakeholder Global Theory 13 Alrazi, Bahari, Mat Husin, International Journal of Engineering Global & Khalid (2018) and Technology 14 Kim & Lyon (2011) The B.E Journal Economics Analysis and Global Policy 15 Matisoff, Noonan, & Business Strategy and The Environment Global O’Brien (2013) 16 Ott, Schiemann, & Journal of Accounting and Public Policy Global Günther (2017) 17 Simnettand & Nugent (2013) Forum: Accounting and Australia Auditing Standards Board 18 Kılıç & Kuzey (2019) International Journal of Climate Change Turkey Strategies and Management 19 Nisak & Yuniarti (2018) 2nd International Conference on Energy Legitimacy Indonesia and Environmental Science Theory 20 Turková & Donze (2016) International Journal of Sustainable Global Development and Planning (EU, US, UK) 21 Hermawan, Aisyah, International Journal of Energy Economics Indonesia Gunardi, & Putri (2018) and Policy 8(1), pp. 55-61

3. CDP as Dependent Variable

Table 2. CDP as Dependent Variable

Author Dependent Variable Interested Variable Chariri et al. (2018) Carbon Emission Disclosure 1. Independent Audit Committee 2. Audit Committee expertise 3. Audit Committee meeting Ben-Amar et al. (2017) Disclosure Decisions Board Gender Diversity Alrazi et al. (2018) Carbon Emission Disclosure 1. EMS Certification, Environmental Committee 2. GRI guidelines 3. CDP Survey Ott et al. (2017) 1. Firms Respond to CDP 1. Profit 2. ISO14000 3. Publication 2. Publication 1. Profit 2. ISO14000 3. GHG 4. GHG_SQ 5. Substitutability 6. Market Size Kılıç & Kuzey (2019) 1. CDI 1. Board Size 2. Firms Respond to CDP 2. Board Independence 3. Board Gender Diversity 4. Blau index of gender diversity 5. Blau index of nationality diversity 6. Sustainability committee 7. Blau foreign Nisak & Yuniarti (2018) Carbon Emission Disclosure 1. Regulators 2. Institutional ownership 3. Firm size 4. Profitability

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A total of 6 studies used carbon emission disclosure as a dependent variable. The studies that use CDP as their dependent variable are summarized in Table 2. The study discusses the relationship between corporate governance (Chariri et al., 2018; Kilic & Kuzey, 2019, Ott et al., 2017), firm characteristic (Nisak & Yuniarti, 2018; Ott et al., 2017), and internal control (Al-Razi et al., 2018; Ott et al., 2017) on carbon emission disclosure.

The measurement of carbon emission disclosure variables differs in each study. Chariri et al. (2018) measured carbon emission disclosure using the carbon emissions disclosure scores obtained from the Nordic Carbon Disclosure Project in 2015. Ben-Amar et al. (2017) measured carbon emission disclosure as a dummy variable, that equals one if the firm has responded to the CDP request for public disclosure of climate change strategies and GHG emissions and zero if otherwise. Alrazi et al. (2018) measured carbon emission disclosure according to the disclosure index from the CDP Annual Information request sheets, and they measure the disclosure with dummy variable (1=if disclosed, 0= if not disclosed). Ott et al. (2017) measured carbon emission disclosure using dummy variables in two different measurements. First, he used firm’s respond to CDP, which defined as a dichotomous variable that equals one if a firm responds to the CDP questionnaire in the following year and zero otherwise. Second, he used publication, which defined as a dichotomous variable that equals one if afi rm publishes its response to the CDP questionnaire in the following year and zero otherwise. Kilic and Kuzey (2019) also use two proxies to measure carbon emission disclosure. First is the carbon disclosure index, calculated by dividing the items disclosed to a maximum number of items that a firm could disclose. The second measurement is the same as the measurement taken by Ben-Amar et al. (2017). And the last Nisak and Yuniarti (2018) measure carbon emission disclosure with a dummy variable. If the company’s disclosure in accordance with the specified item will be given a score of 1, whereas if the item determined is not disclosed within the disclosure it will be given a score of 0, then the score 1 overall summed and divided by the maximum number of items that can be expressed and then multiplied by 100%.

Previous research can be classified into two, first concerning the company’s corporate governance, and the second is regarding the corporate characteristics. In the corporate governance issue, the existence of an independent audit committee, audit committee expertise, audit committee meeting, and board gender diversity within the company have a positive effect on carbon emission disclosure (Chariri et al., 2018). Independent audit committees make their members more objective and neutral in supervising management regarding financial reporting practice, including carbon emission disclosure (Chariri et al., 2018). The second classification is based on their concern on firm characteristics, which consists of firm profitability, leverage, and market size. Firm profitability has a positive impact, while leverage has a negative impact on carbon emissions disclosure (Nisak & Yuniarti, 2018). Market size also showed a negative impact on publication decisions (Ott et al., 2017). A study about internal control shows a positive relationship between ISO14000, profitability, and the publication of CSR report within firms in responding to the Carbon Disclosure Project (Ott et al., 2017). Profit, ISO14000, greenhouse gas, squared greenhouse gas, and substitutability are also documented to have a positive impact on a firm’s publication decision (Ott et al., 2017).

Four of the six studies that used carbon emission disclosure as the dependent variable employed firm size as a control variable (Alrazi et al., 2018; Ben-Amar et al., 2017; Kilic & Kuzey, 2019; Ott et al., 2017). The results show a consistent result where firm size positively affects carbon emission disclosure (Ben-Amar et al., 2017; Kilic & Kuzey, 2019; Ott et al., 2017). Ott et al. (2017) find that size seems to be a determinant of both response decisions and publication decisions. Several reasons shaped a positive relationship between firm size and voluntary carbon emission disclosure (Kilic & Kuzey, 2019). Large firms are subject to more intense external monitoring than smaller firms, as this happened such as firm will disclose more environmental information, this argument in line with accountability and visibilities as outlined in legitimacy theory (Cornier et al., 2006). Second, carbon emission reporting is a part of overall carbon mitigation activities involving a substantial investment, a long-term commitment, and the establishment of a carbon management system. Large companies have pressure from stakeholders that causes companies to report carbon emission disclosure properly (Nisak & Yuniarti, 2018). The cost of making a revision in existing infrastructures or establishing a carbon management system will be more affordable for large entities (Kilic & Kuzey, 2019).

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Leverage also becomes one of the control variables that mostly used in research with carbon emission disclosure as the dependent variable (Alrazi et al., 2018; Bae et al., 2013; Kilic & Kuzey,2019; Ott et al., 2017). Only research conducted by Ott et al. (2017) found that leverage has a positive and significant impact on a firm’s publication decisions. Creditors appear to exercise on the firm to publish environmental information, which they need to evaluate the firms’ environmental performance (Ott et al., 2017). Other control variable used the other control variable, they were independence committee, CEO duality, number of board standing committee, high carbon industrial sector, mandatory retirement policy for directors, profitability, price to book, and board size (Ben-Amar et al., 2017), return on asset (Alrazi et al., 2018), GHG, GHG_SQ, CONC, Substitutability, market size, age, capex, CIND, TRAD, SIGNAT, GHGDUM, EXP_RESP, EXP_PUBL (Matsumura et al., 2014), ROA, ROE, Industry, listing (Kilic & Kuzey, 2019).

4. CDP as Independent Variable

Table 3. CDP as Independent Variable

Author Dependent Variable Interested Variable Sudibyo (2018) Firm Value Volume of Carbon Emissions, Disclosure of Carbon Management Practice, and Carbon Management Disclosure Ganda (2018) Firm Performance Carbon Emission Disclosure Rating

Previous research (Table 3) shows that Carbon Disclosure becomes not only dependent variables but also as independent variables Freeman (1984) and Ott at al. (2017). This idea is brought up from the notion that carbon emissions disclosure is a significant green-based practice that promotes sustainable development. On the other side, the company is also required to be resource efficient and cost-effective to enhance profitability. As such, companies should transform their carbon-related environmental capabilities into a competitive advantage, thereby improving their overall economic and financial performance. This perspective explains increased global interest in carbon emissions disclosure, carbon performance, and corporate financial performance Freed- man and Jaggi (2011).

Ganda (2018) shows that the carbon disclosure rating generates a positive relationship with ROA. As accounting- based indicators, ROA usually shows historical and short-run financial performance. Company and stakeholders are also interested in past and short-term carbon reporting in order to manage green-linked risks associated with fast-growing green stakeholders, as carbon disclosure also showing a short-term report, it is viable that carbon disclosure is associated with higher ROA. Content analysis was employed to collect the firm’s Carbon Disclo- sure rating scores on the other side using developing countries as the research sample, Sudibyo (2018) found that carbon emission was not related to firm value. This finding remains different from similar research done in developed countries, Saka and Oshika (2014) find that carbon disclosure has a positive effect on firm value. Carbon emission disclosure is measured by the scoring model using the checklist that constructed based on the factors identified in the information request sheet by the CDP (Bae-Choi et al., 2013; Sudibyo 2018).

5. Conclusions

Construction companies in Indonesia demonstrate the accountability of their companies by participating in reporting information relating to environmental issues in their sustainability report. This research that involves 152 sustainability reports of companies in the building and non-building construction sectors listed on the In- donesia Stock Exchange in 2010-2018, was analyzed using sentiment analysis.

The results of the sentiment analysis showed that many companies in the building and non-building construction sectors had used a choice of words that contained positive sentiment compared to negative sentiment. In firm distribution analysis, non-building construction sectors use words with positive sentiments, compared to building one.

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From these results, sentiment analysis in construction companies is expected to contribute in helping stakeholders to analyse and assist stakeholders in making decisions related to economic, social and environmental issues while at the same time being an evaluation material for companies to make disclosures in order to increase corporate accountability, as well as paying attention to economic, social and environmental issues.

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Acknowledgements

The authors would like to thank the editor and anonymous reviewers for their supportive comments and suggestions. The authors have received funding for this research from Universitas Airlangga, Indonesia under Research Group scheme 2020.

Iman HARYMAWAN is an Assistant Professor in the Department of Accounting, Faculty of Economics and Business, Universitas Airlangga, Indonesia. He obtained his PhD degree (2016) in accounting from City University of Hong Kong in Hong Kong, MBA degree (2009) from National Cheng Kung University in Taiwan, and his B.A. degree (2006) in accounting from Universitas Airlangga in Indonesia. His current research focuses include: corporate governance issues, the accounting impact of political and military connections in business, and financial reporting quality. He currently teaches financial reporting analysis, managerial accounting, and advanced accounting. Research interest: board connection; corporate governance, management accounting. ORCID ID: orcid.org/0000-0001-7621-6252

Nadia Klarita RAHAYU is master student in accounting from Universitas Airlangga in Indonesi. She currently works as reseach assistant in Center of Politic, Economic, and Business Research (CPEBR), a researcher grup that operates under Faculty of Economics and Business, Universitas Airlangga, Indonesia. Research interest: Financial Accounting and Auditing. ORCID ID: orcid.org/0000-0002-8757-4407

Dyah Ayu LARASATI is bachelor student in accounting from Universitas Airlangga in Indonesi. She currently works as reseach assistant in Center of Politic, Economic, and Business Research (CPEBR), a researcher grup that operates under Faculty of Economics and Business, Universitas Airlangga, Indonesia. Research interest: Corporate Governance, Financial Accounting, and Auditing. ORCID ID: orcid.org/0000-0003-2055-5065

Abdul GHOFAR is a lecturer of Brawijaya University, Indonesia. His current research focuses include corporate governance issues, financial accounting, auditing, and financial reporting. ORCID ID: orcid.org/0000-0002-0690-433X

Dian AGUSTIA is a Professor of Accounting in Universitas Airlangga, Indonesia. Her current research interests are sustainability accounting and management accounting. ORCID ID: orcid.org/0000-0003-4669-7344

This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/

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ECONOMIC SECURITY MANAGEMENT AT INDUSTRIAL ENTERPRISES: A CASE STUDY

Kaisar Serikuly Alpysbayev¹, Yеlena Evgenevna Gridneva2, Gulnar Shaimardanovna Kaliakparova3, Abdizhapar Djumanovich Saparbayev4, Sara Sarsebekovna Assanova5

1,2,3,4,5Kainar Academy, Satbayeva Street, 7a, Almaty, 050013, Kazakhstan

E-mail: [email protected]; [email protected]; [email protected]; [email protected]; [email protected]

Received 17 September 2019; accepted 22 March 2020; published 30 June 2020

Abstract. The article aims to identify destabilizing factors of economic security and to elaborate recommendations aimed to improve the efficiency of the development of Kazakh enterprises. The authors have used methods of theoretical research, analysis and synthesis, as well as methods of concretization and analogy and an expert survey conducted with their direct participation.Results of the conducted research show that there is a relatively favorable economic environment in industrial production in the Republic of Kazakhstan. However, according to the expert survey, business activity, liquidity and profitability have been falling at many industrial concerns. Among destabilization factors restricting the operation of industrial enterprises, the following dominate: insufficient demand for manufactured products, deficit of own financial resources, tougher market competition and macroeconomic uncertainty. Even though this study mainly covers a range of issues related to Kazakhstan, its conclusions are of interest for the development of an economic strategy at enterprises that operate in other emerging economies.

Keywords: productive indicators; cost efficiency; threats, risks; financial stability; economic security;ganizations or

Reference to this paper should be made as follows: Alpysbayev, K.S., Gridneva, Y.E., Kaliakparova, G.S., Saparbayev, A.D., Sarsebekovna, S. 2020. Economic security management at industrial enterprises: a case study. Journal of Security and Sustainability Issues, 9(4), 1165-1176. http://doi.org/10.9770/jssi.2020.9.4(4)

JEL Classifications: L1

1. Introduction

After the economic recession until 2018, the global economy has grown at a stable pace. However, real GDP growth slowed from 4.3% in 2011 to 3.6% in 2018 (International Monetary Fund, 2019). From 2011 to 2018, global trade growth decreased by nearly a factor of two – from 7% to 3.6%. According to the latest estimates for the first quartal of 2019, with global manufacturing and trade in decline, market value added (MVA) grew 2.2% compared with the same period last year (4.2%) (UNIDO, 2019). The slowdown of global economic growth gives rise to a number of short- and long-term risks that can do substantial harm to the economy and considerably worsen the prospects and complicate the attainment of sustainable growth goals. Countries, seeing import substitution rising, suffering from high external debt and experiencing a heavy and long-term national budget deficit, are especially vulnerable when adverse risk events occur (Baltgailis, 2019; Chehabeddine & Tvaronavičienė, 2020; Vigliarolo, 2020)

The Republic of Kazakhstan is a country with a developing market economy. The Kazakh economy is, however, sensitive to fluctuations in the conditions in global commodity markets, above all, energy markets. Due to the Kazakh economy’s openness and integration into the global financial market, shocks related to external demand substantially impact the country’s economic development. Economic instability and tough competition, resulting from global financial crises, weakened the national currency against the USD, pushed up foreign JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online debt and dampened a net inflow of direct foreign investment in Kazakhstan. Against a backdrop of the Federal Reserve’s rate hikes and overall growth of economic and political risks worldwide, the real effective exchange rate of the Kazakh tenge dropped 2.1% vs. 2017 (the official website of the National Bank of Kazakhstan, 2019). A net inflow of direct foreign investment declined from USD 13.7 billion in 2016 to USD 4.9 billion in 2018 (National Bank of Kazakhstan, 2018). As of January 1, 2019, the country’s net foreign debt amounted to USD 47.2 billion, up 3% vs. 2017.

During the first six months of 2019, Kazakhstan’s real international reserves decreased by USD 2.7 billion, or 8.7%. Kazakhstan’s manufacturing index dropped from 107.7% in 2017 to 104.4% in 2018 (Nomad, 2019). The operation of Kazakh enterprises is marked by high uncertainty (Kossymbayeva, Nukesheva, Кirbassova & Saubetova, 2019; Kubayev, Baisholanova, Seitova, Tarasova & Mishchenko, 2018; Lukhmanova, Baisholano- va, Baibulekova, Primzharova & Kassymbekova, 2018). This is due to a number of internal and external factors that pose economic threats to the security of enterprises. Main risks faced by Kazakh enterprises are associated with weakening consumer demand, deficit of financial resources, tougher competition, external uncertainty driven by exchange rate fluctuations, escalation in inflationary factors, etc.

An enterprise’s constant interest in improving the management of operations and financial performance prompts it to look for new management methods (Golovetsky, Ivanova, Galiy, Vypryazhkina & Lebedeva, 2019; Ku- rochkina, Voronkova, Lukina & Bikezina, 2019). The study of factors relating to an enterprise’s economic security can be a productive step in improving corporate management (Gagarina, Sorokina, Chainikova, Sizova & Nadyrov, 2019). An enterprise’s economic security stipulates its ability to develop, increase its competitiveness and that of its products and hold positions in competitive markets. It characterizes the strength and economic potential of enterprises to counteract an adverse impact of the domestic and external environment. This study is topical because it is essential to introduce advanced methods and models for the management of economic security at the micro level.

2. Literature Review

At present, there are diverse approaches to the understanding of the system of an enterprise’s economic security due to the lack of a single consolidated opinion about the definition of the main notion “economic security of an enterprise”. The study of various approaches towards to the construction of the term “economic security of an enterprise” (Ianioglo & Polajeva, 2017; Atamanov, 2011; Samatov, 2018; Balyasny, 2008; Bezuglerodny, 2010; Blakyta & Ganushchak, 2018) allows us to give an original definition of this term. Economic security is a comprehensive category reflecting the ability of the productive system to counteract the destabilizing impact of the micro and macro environment for the more efficient use of resources (capital, personnel, technologies, information, etc.), existing market opportunities (competitiveness) and the accomplishment of other objectives set out in its charter during the current and future periods.

There is also such a term in literature as “a comprehensive system designed to ensure an enterprise’s economic security” including a certain aggregate of interrelated components (organizational, economic and legal measures), which, if an enterprise attains the main business goals, ensures its security against real or potential threats that can lead to material losses (Dykha, Liubokhynets, Tanasiienko, Moroz & Poplavska, 2019). The essence of an enterprise’s economic security is to ensure its progressive economic development in order to manufacture necessary goods and to provide services that meet the enterprise’s needs and those of the society (Gurinovich, Vrazhnova & Anastasov, 2019). The enterprise’s economic security shows itself in the assurance of stable operations and the prevention of any information from leaking (Tsvetkov, Gurinovich & Afanasiev, 2019).

In a joint study, K.S. Pylypenko and I.V. Babiy define key components of the economic security system at enterprises that are the most sensitive to internal and external factors (Pylypenko et al., 2019).

A lot of articles have been written about the study of methods applied to assess economic security of enterprises considering their sectorial features (Altukhov, Predeus & Predeus, 2019; Cherchyk, Shershun, Khumarova,

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Mykytyn & Cherchyk, 2019; Nikitina, Pobirchenko, Shutaieva & Karlova, 2018; Shtangret, Melnyk, Shev- chuk, Sydoruk & Shyra, 2019; Gurinovich et al., 2019).

For the development of a system designed to ensure economic security, many authors consider within the unified context such interrelated and interdependent categories as “danger” “risk”, “threat” and “challenge” (Prus, 2014; Adedigba, Khan & Yang, 2018; Khan, Wang & Yang, 2016; Karanina, Ryazanova & Timin, 2018).

In his article, Bogomolov classified threats to enterprises’ internal and external security (Bogomolov, 2009). He concludes that threats to economic security or any form of damage usually result in material and financial losses, thus producing a negative impact on the balance of payments.

A group of authors including V. Finaev, I. Kobersy, D. Beloglazov, I. Shapovalov, E. Kosenko and V. Soloviev, studied interrelations between threats to economic security and long-term risk factors when thresholds charac- terizing risk factors are exceeded (Finaev, Kobersy & Beloglazov, 2015).

A study conducted by K. Pylypenko, I.V. Babiy, N.V. Volkova, L.K. Feofanov and N.B. Kashchena (2019) defines key components of an enterprise’s economic security system that are the most sensitive to internal and external factors and proposes a structural model to assure comprehensive strategic economic security.

Notwithstanding the theoretical and practical importance of the category “threat to economic security”, the analysis of scientific literature shows that a single approach to the definition of this term has not yet been developed. Most often, authors do not propose any definition but limit themselves to specifying negative consequences that, as they think, pose a threat to economic security (Mamychev, Sulimova, Yakovenko, Savvidi, Molchan & Dianova, 2016).

Due to limited resources and financial possibilities that are typical for many Kazakh enterprises (Mukhametzh- anova, Daurenbekova, Zhanibekova, Syzdykova & Kaliakparova, 2019), one of the most important principles of economic security is the principle of economic feasibility and substantiation (Gabunia & Korelin, 2015; Bondarenko et al., 2019).

An important component of an enterprise’s security system is a mechanism of its management that assures the attainment of goals and objectives of security assurance (Zasko, Dontsova, Osokina, Bazhaev & Komarova, 2019). The mechanism in an enterprise’s economic security system should be understood as a certain regulated sequence of conditions and processes assuring the enterprise’s economic security (Berdnikova & Vokina, 2015). The main goal of the economic security management mechanism is to increase the level of the occurrence of potential if an external environment changes, which is achieved by the maximum utilization of available resources (material, financial and intellectual) when elaborating and pursuing the relevant strategy to assure working capital is sufficient at strategic enterprises (Karanina, Ryazanova & Gritsuk, 2018; Tohirov, 2012).

At the same time, the experience shows that the formation of the economic security system is at the initial stage at many Kazakh enterprises. Little attention is paid to the identification of threats and their modeling; internal and external risks are assessed without any system. This results in poor performance and weaker economic security (D’yakonova, Nikitina, Sukhonos & Zhuravka, 2018).

The analysis of scientific articles related to anti-crisis and strategic management and management of economic security shows that for the efficient and stable operation of an enterprise, it is necessary to improve management mechanisms with a focus on resource planning (Kiseleva, 2017).

The hypothesis of this study is that the proper diagnosis of the current situation and the identification of destabilizing factors and potential threats contribute to solidifying economic security of enterprises.

1167 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online

3. Methods

The information-analytical base of the conducted study consisted of articles published by researchers in professional periodicals and statutory legal acts that form the basis for the operation of industrial enterprises in Kazakhstan.

Major threats and sectors of economic security at Kazakhstan industrial concerns were identified using the expert research method. The method assumes the collection, analysis and assessment of opinions expressed by independent experts that consequently form the basis for managerial decisions.

Expert research is based on the principles of legitimacy, independence of an expert, impartiality, comprehen- siveness and completeness of research conducted using the latest scientific and technical achievements.

To conduct the research, we surveyed 35 independent experts who were senior executives at middle-sized and large industrial enterprises from chemical, machine engineering, power, metal processing, textile and food industries. The survey covered executives from 26 cities and towns in Kazakhstan, including 11 industrial companies from company towns.

All participants of the expert group had professional knowledge about the economic security assurance system and managerial experience of at least 3 years. The survey was conducted in October 2019.

A questionnaire containing the following questions was used as a tool of the expert research: – How have production volumes and inventories changed at your enterprise over the past 12 months – How has your company’s financial standing changed over the past 12 months – What profitability do your operations show as of October 1, 2019? – What is your enterprise’s current liquidity as of October 1, 2019? – How do you assess the economic condition of your enterprise as of October 1, 2019?

Which factors, in your opinion, produce an adverse impact on the economic security of industrial concerns in Kazakhstan?

Results

Taking into account the viewpoints of the experts participating in the research, it can be said that the industrial sector of the Kazakh economy experiences a relatively favorable economic environment.

31% of experts (11 out of the surveyed) pointed to higher output of industrial products in January-September 2019 while 26% of respondents (9 people) answered that production had decreased compared with the previous year. Nearly 43% of the surveyed pointed out that output had remained unchanged against the same period of 2018 (Figure 1).

1168 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online

Source: compiled by authors

Figure 1. Experts’ viewpoint on changes in output at Kazakh enterprises (compiled by the authors on the basis of the expert survey)

According to the expert survey, warehouse inventories at industrial enterprises in Kazakhstan were stable. Over 34% of the respondents pointed to an increase in inventories as of October 1, 2019 and 17 experts thought that inventories remained unchanged compared with the same period of last year (Figure 2).

Source: compiled by authors

Figure 2. Experts’ opinion on inventories (compiled by the authors on the basis of the expert survey).

An overwhelming majority of the experts (83%) said inventories were “normal”, 2 experts (5.7%) noted inventories exceeded the statutory threshold and 4 experts (11.4%) specified that inventories were below normal. Such a breakdown of answers can be read as relatively favorable.

In addition, roughly 37.1% of the surveyed pointed out that the capacity utilization rate at their enterprises exceeded 70%. The experts thought that the rate increased as of October 1, 2019. The breakdown of experts’ viewpoints on the capacity utilization rate is shown in Figure 3.

1169 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online

Source: compiled by authors

Figure 3. Breakdown of the experts’ estimates related to the capacity utilization rate, as % of the surveyed (compiled by the authors on the basis of the expert survey)

The expert survey showed that the situation surrounding the provision with own financial resources did not change at 66% of industrial enterprises. Amid relative stability of asset turnover and the portion of working capital in the assets held by industrial enterprises as of October 1, 2019, experts pointed to a decrease in asset turnover from 53.4% in 2018 to 51.9%.

As the survey’s results showed, accounts receivable and debt under obligations remained marginal. Around 27.7% of the experts noted an increase in receivables overdue at industrial enterprises. Roughly 21.3% of the experts pointed out that as of October 1, 2019 payables overdue did not change substantially compared to the same indicator for 2018.

Nearly half of the surveyed noted that their enterprises are creditors or borrowers at various Kazakh banks. Meanwhile, 4 executives (11.4%) believed that their companies’ provision with credit facilities and loans did not change compared with the previous year. 17 respondents (48.6%) pointed to an increase and 14 respondents (40%) noted a decrease in credits and loans extended.

When asked about changes in profit generated, 17% of the experts said profit had increased as of October 1, 2019. Almost a third of enterprises pointed to lower profit compared with the same period of last year and 48.6% of the respondents thought that profit at their enterprises had remained the same or changed marginally.

The expert estimate shows that the portion of enterprises enjoying strong liquidity dropped in January-Sep- tember 2019 to 33.6%. The average reading of the current liquidity ratio virtually remained unchanged. The difference between average figures of the current liquidity ratio (1.3) and general creditworthiness (1.9) shows that it is easier for enterprises to repay long-term obligations than short-term debt.

The expert survey’s results show that the portion of industrial enterprises that deliver a low return on sales (under 5%) was in decline and stood at 20.7% as of October 1, 2019. At the same time, the portion of highly profitable enterprises increased to 39.6% of the total number of survey participants.

An overwhelming majority of the experts subscribed to the opinion that enterprises’ investment activities slightly improved in January-September 2019, with an increase in the portion of companies that financed their fixed assets and working capital on their own and using bank loans and a decrease in the portion of businesses

1170 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online that did not finance. Most enterprises made use of their own funds to finance fixed assets and working capital (65.3% and 81.1%, respectively).

The survey’s results show an increase in the portion of enterprises, which used bank loans to form fixed assets and replenish their working capital (5.9% and 15.3% of the respondents, respectively).

Around 81% of the experts assessed the economic condition of their enterprises as “good” and “satisfactory”. At the same time, only 7% of the experts did note that nothing posed a threat to the stable development of their enterprises. More than half of the experts believed that there were serious threats to the economic security of their companies.

The expert estimate shows that the following dominates among factors that adversely impact the economic security of industrial enterprises: insufficient demand for items produced, the lack of own financial resources and tough market competition. The operation of 22.9% of enterprises is restrained by deterioration and the lack of equipment.

Results of the expert assessment of factors producing a negative impact on the economic security of industrial enterprises are shown in Figure 4.

Source: compiled by authors

Figure 4. Results of the expert assessment of factors producing a negative impact on the economic security of industrial enterprises in Kazakhstan (compiled by the authors on the basis of the expert survey).

The experts are of the opinion that the main destabilizing factor for the economic development of industrial enterprises is insufficient demand for products manufactured.

Also, 28.6% of the experts believed that the shortage of financial resources was a substantial hurdle for the development of companies. Most experts subscribed to the view that financial problems stem from weak demand for items produced that, in turn, is driven by lower public consumption in Kazakhstan.

The problem related to the high rate of deterioration and obsolescence of fixed assets remains topical for industrial enterprises in Kazakhstan. 25.7% of the experts pointed to the destabilizing effect of this factor.

In addition, 31.4% of the respondents pointed out that the pressure of market competition was a serious prob-

1171 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online lem related to the economic security of an industrial enterprise. Kazakh enterprises’ major rivals were domestic companies and only 22.9% of the surveyed executives named producers from foreign countries and CIS member states as major competitors.

About 48.6% of the experts stated that products manufactured by their enterprises competed with the best international samples. 37.1% of the respondents pointed out that their products slightly lagged behind the best international samples but overall can rival by some characteristics. 11.2% of executives noted that their items were inferior to products of global rivals and were mainly sold in the domestic market. Only 17.1% of the surveyed did note that Kazakh industrial products could hardly meet competition in the domestic and external markets.

The experts’ estimate of uncertainty surrounding prevailing macroeconomic conditions and its impact on the performance of Kazakh industrial enterprises quite adequately reflect socio-economic conditions in the country. Also, 28.6% of the experts pointed to the impact on this factor on an industrial enterprise’s economic security. Most of them are executives employed by companies with long investment and production cycles.

The shortage of qualified workforce can hardly be called a major problem for Kazakh enterprises. Based on the survey’s results, HR problems do not play a serious role and are a secondary problem caused by the shortage of financial resources.

Overall, the results of the expert evaluation show that the strength of the negative impact of most aforementioned factors on the economic security of industrial enterprises has come down.

Discussion

The experts highlighted a set of state support measures in order to strengthen the economic security of industrial enterprises: a) To improve access to funds for small and medium-sized industrial enterprises. Although small and medium- sized entrepreneurship is recognized to be playing a role in the Kazakh economy, limited access to funds remains a hurdle for growth and development of industrial enterprises. Small and medium-sized enterprises have narrower access to funds compared with large companies. The access to funds is decisive because it allows enterprises to use their limited internal funds and provides additional resources to expand their turnover and investment. Apart from bank loans, small and medium-sized enterprises have few options to finance their operation. The market of non-banking financial instruments, such as bonds and shared financing, is not sufficiently developed. At the same time, banks are reluctant to extend loans to small and medium-sized enterprises due to higher potential risks and the lack of collateral to cover these risks. High operating expenses related to a limited group of creditors or limited products that are tailored to meet small and medium-sized enterprises’ needs also negatively impact small and medium-sized enterprise lending. Micro finance and credit unions are among the most popular sources but the market of non-banking financial instruments, such as bonds and shared finance, is not sufficiently developed. As a rule, stock markets dominate among big companies and are beyond the reach of small and medium-sized enterprises owing to the compliance with accounting standards. The Kazakh government currently maintains small and medium-sized enterprises’ access to funds by means of interest rate subsidization, direct loans and tax benefits. However, the experts think these measures target limited sectors of the economy. Helping some enterprises in the short term, these instruments usually distort market competition and for this reason, they should be applied with caution. At the same time, there are some innovations that can provide broader access to funds. They provide creditors with additional inflation about borrowers’ ability to service debt or get risk-minded investors connected with startups that can offer high returns. Introduction of comprehensive credit reporting and open banking operations. Comprehensive credit reporting will provide creditors with more information about credit histories of potential borrowers compared with the current standard when only negative credit information is made publicly available. This will make it possible to reduce the cost of the creditworthiness assessment process, thereby allowing creditors to assess risks more accurately. This might also encourage creditors not to look for additional collateral or personal guarantees

1172 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online to lend small businesses, especially for just established concerns. Specifically, personal guarantees are wider used in Australia than in other countries, such as the UK and the US, in which well-established comprehensive regimes of providing credit reporting are in place. b) Major technology companies can use information about their customers to provide financial services such as term credit facilities and trade finance while competing with banks. Specifically, technology companies can use transaction data of their trading or payment platforms to identify creditworthy borrowers and can lend these enterprises using funds held on their balance sheets. This can provide small innovative businesses that make active use of these online platforms with a new source of funds. However, from the viewpoint of a business borrower the drawback is that if a credit facility is overdue, technology firms will be able to freeze assets or limit access to their platforms. An example can be Amazon and PayPal, which provide funds to some companies that use their platforms, above all in the US. Some major Chinese technology giants, such as Alibaba and Tencent, have also begun to provide financial services over the past few years. Some of them use algorithms to identify companies with a good sales track record and offer them funding only by invitation. According to one provider, loans can total USD 750,000 for a term of up to one year at the rates ranging from 6% to 14%, with interest automatically debited from a borrower’s sales revenue. For online accounting, software providers also offer loans to small businesses on the basis of the status of their accounts. c) Alternative financial platforms. Alternative financial platforms, including market credits and crowdfunding platforms, make use of new technologies to sign fundraisers directly up to funding sources. Their goal is to avoid expenses and delays related to conventional financing via intermediaries. Even though alternative financing platforms expand rapidly, at the current stage, they are still quite a small funding source for enterprises, including in Kazakhstan. Australia is one of the most striking examples of the development of alternative funding mechanisms for enterprises. The Australian government and financial regulators strive to promote innovation in business financing. The Australian Securities and Investments Commission (ASIC) established an innovation center to help provide startups with financial technologies for navigation in the regulation system. The Australian government amended some laws to assist these markets in growing at a sustainable pace, including by allowing small unregistered public companies to draw capital from crowdsourcing platforms. Market-based credit platforms provide debt finance by comparing separate individuals or groups of creditors with borrowers. These platforms, as a rule, target retail borrowers and small businesses with low credit risk, offering much cheaper credit products and more flexible terms than conventional creditors. d) To improve the state procurement system in order to stimulate the growth of industrial production. As big amounts are spent on state procurement programs, the government of every country is a real market participant, sometimes quite large. State procurement policy is a legal tool of stimulating domestic production and consumption. Entering into agreements targeting specific sectors or community groups, the government can promote the policy of redistributing wealth, promoting industrial strategies or assuring sustainable development. We think that it is reasonable for Kazakhstan to study global practices relating to the development of state procurement policies. For example, the UK government intends to increase small and medium-sized business- related budget spending to one-third of the central government’s spending. In 2015, the British government made amendments to the regulations of tenders conducted under state contracts. These amendments include the following: – requirement that all economic operators in the state sector’s supply chain should be paid within 30 days; – procurement in a simpler and faster way, e.g. by cancelling prequalified questionnaires for low-value public sector contracts; – requirement for all corporate clients to publish information about contract possibilities and contract decisions in the national database Contracts Finder; It is necessary for the Kazakh government to explore the possibility of applying special measures to help small and medium-sized businesses get access to public procurement programs, such as: e) A lighter administrative burden. Most experts (87.6%) believe that administrative burden is one of the main obstacles for the participation of small and medium-sized industrial enterprises in public procurement because

1173 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online it is necessary to present a long list of certificates or other documents that are related to exclusion and selection criteria. For this reason, a reduction in the list of documentary evidence required for the participation in procurement procedures is a key change in the directive that is especially advantageous for small and medium- sized business. f) The use of the European Single Procurement Document (ESPD). In order to simplify procurement processes in EU member states, the ESPD was introduced. ESPD is a standard self-declaration form that an economic operator fills in and provides to the corporate client. The corporate client should accept ESPD as preliminary evidence replacing certificates issued by authorities or third parties. ESPD contains an official statement that the economic operator will be able, upon request and with no delay, to provide these confirming documents. The EU has developed a free online service for corporate clients, economic operators and other parties that helps complete the work on ESPD in an electronic form.

Conclusions

Results of the conducted study allowed us to conclude that most Kazakh enterprises operate in an efficient and stable manner. However, around 20% of enterprises are in a hard financial condition. The study allowed us to identify key factors that negatively impact the economic security of businesses. Experts think that main destabilizing factors are insufficient demand for products, shortage of financial resources, toughening competition and economic uncertainty in Kazakhstan. It looks reasonable to improve conditions to stabilize the financial state and operating efficiency of Kazakh enterprises. Experts believe that priority measures designed to strengthen economic security at Kazakh enterprises are those to develop alternative funding sources for small and middle- sized enterprises and to provide them with wider access to state orders.

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1176 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 http://doi.org/10.9770/jssi.2020.9.4(5)

INTERRELATION OF TAX STRUCTURE AND ECONOMIC GROWTH: A CASE STUDY

My-Linh Thi Nguyen1, Dinh Tran Ngoc Huy2, Nga Phan Thi Hang3, Toan Ngoc Bui4, Hang Xuan Tran5

1,5University of Finance – Marketing (UFM), Ho Chi Minh City, 700000, Vietnam 2Banking University of Ho Chi Minh City, Vietnam - International Unievrsity of Japan, Japan 4Industrial University of Ho Chi Minh City (IUH), Ho Chi Minh City 700000, Vietnam

E-mails: [email protected]; [email protected]; [email protected]; [email protected]; [email protected]

Received 16 October 2019; accepted 25 March 2020; published 30 June 2020

Abstract. The paper aims to test the impact of tax structure on economic growth in the localities of Vietnam. In the paper, it is assumed, that tax structure is measured through the annual growth rate of tax revenue of 63 provinces and cities of Vietnam in terms of three groups: consumption tax (CT), income tax (IT), and property tax (PT) during the period of 11 years from 2007 to 2017; the research data was collected from the General Department of Taxation of Vietnam. Economic growth is a dependent variable, represented by the annual growth rate of the gross domestic product of each locality with the data source from the General Statistics Office of Vietnam. With the regression analysis according to the GMM method, the research results showed that consumption tax (CT) and income tax (IT) had a positive impact on economic growth in the localities of Vietnam, and property tax (PT) was not statistically significant. In addition, the study has achieved great success by identifying the consumption tax components that had significantly positive impacts on economic growth (GDP), namely export and import taxes (CT1), value added tax (CT2); meanwhile, excise tax (CT3) had a negative effect on economic growth (GDP). For income tax, personal income tax (IT2) also had a positive effect on economic growth (GDP). The research results are the first empirical evidence in Vietnam on the impact of the tax structure on economic growth in the localities, which is important for the Government of Vietnam to have a basis to manage tax policies in order to stimulate economic growth in a sustainable manner.

Keywords: structure; consumption tax; income tax; property tax; economic growth

Reference to this paper should be made as follows: Nguyen, M.-L.T., Huy, D.T.N, Hang, N.P.T, Bui, T.N., Tran, H.X. 2020. Interrelation of tax structure and economic growth: a case study, Journal of Security and Sustainability Issues, 9(3), 1177-1188. http://doi.org/10.9770/jssi.2020.9.4(5)

JEL Classifications: G00, G30

1. Introduction

Economic growth has always been the most important macroeconomic target of the governments. Todaro & Smith (2015) have stated that economic growth is a stable process by which the productive capacity of the economy increases over time to bring about an increase in national output and income. Despite achieving high economic growth over the past two decades, the majority of the developing countries, including Vietnam, have not caught up with average income levels compared to developed countries. Therefore, in order to accelerate the rates of economic growth and development, the completion of economic and financial policies with a focus on tax policy is always an important task of each nation. The tax policy is set not only to bring revenues for the budget but also to fulfill a higher requirement of contributing to implementing the function of inventorying, controlling, instructing, managing and encouraging production development as well as expanding circulation for all economic sectors under the development orientation of the governments. In most countries around the world, the governments have a desire to both increase tax revenue and upsurge economic growth. In addition, Arnold JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online et al. (2011) have considered that designing tax policies to both achieve the goal of promoting the recovery of the economy in the short term and create momentum for the growth in the long term is a very challenging task. It is because the recovery of the economy in the short term calls for an increase in the total demand while the growth in the long term involves an increase in the total supply of the economy. This requires nations to design appropriate tax policies to improve production and business efficiency, ensure revenue for the State Budget and guarantee safety in the process of economic integration. A good tax policy is a good tax structure to attract enterprises and enhance economic development.

A Brief Desription of taxation system in Vietnam: The tax system in Vietnam consists of the following main taxes: Corporate Income Tax (CIT); Import – Export Duties; Value Added Tax (VAT); Special Sales Tax (excise tax) or (SCT); and Personal Income Tax (PIT).

Explanation of main tax rate structure in Vietnam: A. The standard CIT rate shall be 25%. Preferential CIT rates of 10% and 20% are available for enterprises investing in geographical areas with socio-economic difficulties, economic zones or hi-tech parks or in encouraged investment sectors for a certain period of time B. Personal Income tax: Below is the current progressive tax rate schedule: Unit: VND1,000,000 Level Average yearly Income Average Monthly Income Rate (%) 1 to 60 To 5 5 2 Over 60 to 120 Over 5 to 10 10 3 Over 120 to 216 Over 10 to 18 15 4 Over 216 to 384 Over 18 to 32 20 5 Over 384 to 624 Over 32 to 52 25 6 Over 624 to 960 Over 52 to 80 30 7 Over 960 Over 80 35

C. Export duties Export is encouraged and thus, almost goods and services being exported are exempt from tax. Export duties are only charged on a few items, basically natural resources such as minerals, forest products and scrap metal. Rates range from 0% - 45%. D. Import duties Import tax is regulated to have 3 Levels: preferential tax rates, ordinary tax rates and special preferential tax rates applied in different cases depending on the degree of relationship trade between Vietnam and other countries, facilitating negotiations on taxes and compliance in accordance with the international regulations that our country committed to implement. According to ministry documents trade, Vietnam has now had agreement on preferential treatment of special interest Trade relations with some regional countries such as Brunei, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand.

Overall, the tax policy must achieve the goal of promoting economic growth, ensure the revenue and simultaneously guarantee good international integration. In order to achieve these targets, each nation needs to consider many factors in the policy making process. In Vietnam, the tax policy system has been unified from the central to local levels, and has been continuously reformed. Especially, after the 1990s up to the present, Vietnam’s tax policy has been quite complete, covering many sources of revenue, ensuring an increasing source of revenue for the State budget, strengthening the economic accounting regime and the equality among economic components, as well as implementing social justice. Simultaneously, many international agreements and commitments on taxation have been carried out. Based on the tax bases, Vietnam’s tax system can be divided into 3 groups with the following tax structure: consumption tax including import and export taxes, value added tax, excise tax, and environmental tax; income tax including corporate income tax and personal income tax; and property tax including agricultural land use tax and non-agricultural land use tax. According to Vietnam’s Financial Strategy, the Government expects to develop a synchronous, effective, integrative, and sustainable tax policy in order to

1178 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online ensure the revenue for the State budget. The tax bases are expanded, but the tax fairness and equality among taxpayers have to be ensured. However, in Vietnam, there are many differences in geographic location, natural conditions, population density, and a big difference in the infrastructure of localities. As a result, the economic development in each locality also has its own characteristics. In order to ensure national economic growth, the growth of each locality must be good and sustainable. In order to re-evaluate Vietnam’s tax policy system during the past time to have an orientation towards perfection in the coming time, the researchers chose to study the impact of tax structure on economic growth of each locality in Vietnam and thereby assess the suitability of tax policy as well as adjust tax policy in accordance with both uniformity and specific characteristics of each locality to promote economic growth in the new period.

2. Literature Review

The studies of the impact of taxation on economic growth around the world show that the test results of the impact of taxation on economic growth are mixed and inconsistent, which is due to differences in tax structure. Accordingly, instead of examining the data about general taxes, the studies investigated the impact of tax structure or different types of taxes on economic growth (Arnold et al., 2011; Ormaechea, Yoo, 2012; Xing, 2012). Hinrichs (1966) argued that there is no best tax system for all countries or for a specific country over time. Dur- ing the development process, the tax system in countries has also changed significantly. Therefore, depending on the research objectives, public expenditure components are classified according to different criteria such as taxation methods (direct and indirect taxes); tax bases (income, consumption and property taxes); decentralization of taxation rights (federal, state and local taxes) or the impact of taxes on economic activities (distortionary and non-distortionary taxes).

In the first phase of the studies on this issue, most of the empirical studies examine the impact of fiscal variables such as taxes and public expenditure on economic growth. However, the studies often use only the variable of overall tax revenue. Simultaneously, it is argued that the impact of taxation on economic growth and the issues related to taxes and economic growth is at the core of macroeconomic policies. Some studies by Agell et al. (2006); Easterly and Rebelo (1993) examined the relationship between overall tax revenue (or public expenditure) and economic growth with the data from many countries and different research periods; however, there was no clear consensus about the nature and significance of this relationship. According to Bujang et al. (2013), this was not surprising because the economic impact of taxes created two opposite effects. On the one hand, higher tax rates increased the possibility of distorting the market, thereby negatively affecting economic growth. On the other hand, higher tax rates implied greater public expenditure on the society. In particular, the increased efficiency of some components of public expenditure had positive effects, promoting economic growth (Sasongko et al., 2019; Čizo et al., 2020).

Over time, in order to clarify the impact of taxation on economic growth, a number of studies analyzed the impact of tax structure on economic growth. The discussion on tax structure mainly focused on the difference in the impact of types of taxes on the ability of creating momentum for economic growth (Bujang et al., 2013). However, due to the differences in data size, measurement methods as well as methodologies when researching on this topic, empirical studies have found the conflicting results on the impact of taxation on economic growth. Typically, Skinner (1987), Furceri and Karras (2009), Szarowska (2010), Dahlby and Ferede (2012) have assumed that tax revenue has a negative impact on economic growth. Meanwhile, Tosun and Abizahed (2005), Orcan (2009), Babatundel, Ibukun and Oveyemi (2017) have supposed that this is a positive relationship, stimulating economic growth.

For income tax: Considering the impact of corporate income tax, the study by Dahlby and Ferede (2012) examined the impact of tax rates applied in Canadian provinces on the economic growth of this country during the period 1977-2006. The authors found a negative relationship between corporate income tax and economic growth. High statutory corporate income tax will reduce private investment in the province, thereby leading to slower economic growth. Macek (2014) evaluated the impact of each type of taxes on economic growth by using regression analysis on OECD countries in the period 2000 - 2011. The research results found a negative

1179 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online relationship between corporate income tax, personal income tax and economic growth. The results showed that corporate income tax had a negative impact on technological innovation as well as the attraction of foreign investment; meanwhile, personal income tax affected investment in human resources, including personal expenditures on laborers’ education and work motivation. Similarly, Grdinic (2017) indicated that all types of taxes had a negative effect on economic growth. Personal income tax had the most negative impact on economic growth, followed by corporate income tax and property tax.

For consumption tax: In the studies on this issue, consumption tax components mainly include: export and import taxes, excise tax, value added tax, and the impact of each component of consumption tax on economic growth is taken into consideration. The majority of researchers support the view of levying consumption tax on the group of developing countries. Myles (2009) had many studies on this issue and concluded that the shift from income tax to consumption tax will contribute to economic growth. Stoilova (2017) focused on the impact of tax structure on economic growth in 28 EU member countries during the period 1996-2013. The descriptive analysis emphasized on the differences between countries in total tax burden and tax structure design, and analyzed the impact of taxation on economic growth through regression on aggregate panel data. As a result, tax structure based on selective consumption tax will promote economic growth. Moreover, Szarowska (2010) conducted a study on tax changes and their impact on economic growth in European Union countries. The author used the annual adjusted panel data of 24 European Union countries in the period 1995 - 2008 and the results showed that foreign trade tax, one component of consumption tax, had a negative impact on economic growth.

For property tax: The studies by Barro (1990; 1991), Koester and Kormendi (1989), Plosser (1992), Easterly and Rebelo (1993), Levine and Renelt (1992), Kneller, Bleaney and Gemmell (1999) concluded that property tax had a positive impact on economic growth. Xing (2011) conducted a study to determine whether tax structure affected economic growth by empirical research from OECD countries. This study estimated the impact of changes in tax revenue structure on per capita income in the long term by using data from 17 OECD countries in the period 1970-2004. This paper found no evidence for the impact of different types of taxes on economic growth except for the fact that the impact of changes in tax revenue on property tax resulted in higher per capita income in the long term. This study used physical capital, human capital, population, tax revenue (GDP), personal income tax, corporate income tax, consumption tax and property tax as variables in the model. Based on the findings, the study demonstrated that changes in total tax revenue from property tax might be related to the higher per capita income of the countries in the sample.

Moreover, Gashi et al. (2018) provided results showing that most of the taxes have a positive impact on GDP growth; it is also shown that not all taxes have the same impact on economic growth. Next, Kate and Milionis (2019) found that capital taxation and growth rates tend to be positively related for developed countries, but for developing countries the relationship is in most cases statistically insignificant. Then, Lapatinas et al. (2019) showed that the negative impact of capital taxes on economic sophistication becomes stronger for countries that are more developed. Tanchev and Todorov (2019) showed that the buoyancies of aggregate tax revenue, personal income tax and social security contributions significantly differ from one another in the long-run. The buoyancies of the value-added tax and the corporate tax are above one in the long run. In the short-run the buoyancy of the aggregate tax revenues, the corporate tax, the income tax and the social security contributions are different from one. The short-run buoyancy of VAT exceeds one, hence dynamics of VAT revenues is sustainable.

Last but not least, Hieu (2019) generated results of statistical tests showing that tax has a positive impact on Vietnam’s economic growth. However, the effects of direct tax and indirect tax are different. The indirect tax has a positive influence and promote Vietnam’s economic growth, while the impact of the direct tax is invisible. Overall, most studies on the impact of tax structure on economic growth suggest that income tax has a negative impact on economic growth, while consumption and property taxes have a positive impact on economic growth.

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3. Data and Methodology

3.1. Data Collection

The research data was collected from 63 localities in Vietnam during the period 2007-2017. Among 63 localities, there are 58 provinces and 5 centrally controlled municipalities including Ho Chi Minh City, Can Tho, Da Nang, Hai Phong and Hanoi. The economic growth data of localities was collected from the General Statistics Office of Vietnam (GSO). The tax structure data of localities was collected from the Vietnam General Depart- ment of Taxation (GDT).

3.2. Methodology

With the panel data as presented above, the study conducted regression analysis by the Generalized Method of Moment (GMM). The GMM method has great advantages when controlling the autocorrelation between errors and heteroscedasticity (Blundell & Bond, 1998). Simultaneously, this method also solves the potential endogenous phenomenon in the research model (Doytch & Uctum, 2011). The GMM method is also used by some previous studies, such as Bania et al. (2007), Reed (2008). Based on the empirical studies in section 2 and especially the studies by Arnold et al. (2011) and Xing (2012), the multiple regression models on panel data were used to analyze the impact of tax structure on economic growth in the localities of Vietnam. Specifically, the dependent variable is economic growth (GDP) by locality and the independent variable is tax structure by locality, including consumption tax (CT), income tax (IT) and property tax (PT). In particular, consumption tax (CT) includes export and import taxes (CT1), value added tax (CT2), excise tax (CT3), and environmental tax (CT4). Income tax (IT) includes: corporate income tax (IT1) and personal income tax (IT2). Property tax (PT) includes: agricultural land use tax (PT1) and non-agricultural land use tax (PT2). Table 1 shows variables in the model and Table 2 shows descriptive statistics.

GDPit = f (CTit, ITit, PTit) (Model 1)

Table 1. Variables in the Research Model

Variable name Code Measurement Previous studies Dependent variable Xing (2011), Macek, R. (2014), Economic growth GDP Annual growth rate of gross domestic product by locality Stoilova (2017), Grdinic (2017) Independent variable Consumption tax CT Annual growth rate of cconsumption tax revenue Stoilova (2017), Grdinic (2017) Income tax IT Annual growth rate of income tax revenue Stoilova (2017), Grdinic (2017) Property tax PT Annual growth rate of property tax revenue Stoilova (2017), Grdinic (2017)

4.1. Descriptive Statistics

Table 2. Descriptive Statistics of Variables

Standard Deviation Variable Obs Minimum Mean Maximum (Std. Dev.) GDP (%) 693 -18.5 15.256 46.99 8.800 CT (%) 693 -61.725 23.938 757.817 50.899 IT (%) 693 -88.760 26.007 1834.885 77.576 PT (%) 693 -91.462 4.801 629.404 38.073

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4.2. Empirical Results

The results of correlation analysis show that the variables of consumption tax (CT), income tax (IT) and property tax (PT) are positively correlated with economic growth (GDP) in 63 localities of Vietnam. The VIF test, White’s test, and Wooldridge test show that the research model has no autocorrelation phenomenon between errors, and the multicollinearity phenomenon is considered not serious because the VIF is small. However, White’s test shows that the research model has heteroscedasticity at the 1% significance level. Therefore, the paper uses the GMM method to analyze the impact of tax structure on economic growth in the localities of Vietnam because the GMM method can control heteroscedasticity (Blundell and Bond, 1998) and the potential endogenous phenomenon in the research model (Doytch and Uctum, 2011). The analysis result of the research model according to GMM method is as follows (see table 3):

Table 3. The Result of the Research Model (Model 1)

Variable Coefficient P>|z| CT 0.197 0.000*** IT 0.003 0.002*** PT -0.061 0.194 Constant 9.871 0.000*** Wald chi2(2) = 33.41 Significance level Prob > chi2 = 0.000*** Number of instruments 17 Number of groups 63 Arellano-Bond AR(2) test Pr > z = 0.786 Sargan test Prob > chi2 = 0.302

Note: *** indicates significance at the 1% level.

After using the GMM method to control the potential endogenous problem and the heteroscedasticity, the research results (Table 3) are as follows:

The research model is statistically significant at the 1% significance level. The Arellano-Bond AR (2) test gave the result of 0.786 (greater than 10%), so the results of the research model were quite good because there was no autocorrelation between errors. The Sargan test gave the result of 0.302 (greater than 10%), which suggests that the instruments are used appropriately.

Overall, consumption tax (CT) and income tax (IT) have a positive impact on economic growth (GDP) at the 1% significance level.

GDPit = 9.871 + 0.197 CTit + 0.003 ITit + εit

In other words, consumption tax (CT) and income tax (IT) have the effect of stimulating economic growth in the localities of Vietnam. In particular, economic growth is more affected by consumption tax (CT) than income tax (IT).

Next, the research paper will analyze the impact of consumption tax components and income tax components on economic growth. Thereby, it is possible to identify the impact of each tax component on economic growth in the localities of Vietnam.

The impact of consumption tax components on economic growth: The research model of the impact of consumption tax components on economic growth in the localities of Vietnam is as follows:

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GDPit = f (CT1it, CT2it, CT3it, CT4it) (Model 2)

The results of correlation analysis show that export and import taxes (CT1), and value added taxes (CT2) are positively correlated with economic growth (GDP). Meanwhile, excise taxes (CT3) and environmental taxes (CT4) are negatively correlated with economic growth (GDP). Through the VIF test, White’s test, and Wooldridge test, Model 2 has no heteroscedasticity and the multicollinearity phenomenon is considered not serious because the VIF is small. However, Model 2 has autocorrelation between errors at the 1% significance level. The researchers used the GMM method to control the potential endogenous problem and the autocorrelation phenomenon between errors, the result of Model 2 is in table 4 as follows:

Table 4. The Result of the Research Model (Model 2)

Variable Coefficient P>|z| CT1 0.005 0.000*** CT2 0.081 0.007*** CT3 -0.001 0.035** CT4 -0.019 0.369 Constant 12.719 0.000*** Wald chi2(3) = 26.20 Significance level Prob > chi2 = 0.000*** Number of instruments 45 Number of groups 63 Arellano-Bond AR(2) test Pr > z = 0.259 Sargan test Prob > chi2 = 0.998

Note: *** and ** indicate significance at the 1% and 5% level, respectively.

Model 2 is statistically significant at the 1% significance level. The Arellano-Bond AR (2) test gave the result of 0.259 (greater than 10%), so the results of Model 2 are quite good because there is no autocorrelation between errors. The Sargan test gave the result of 0.998 (greater than 10%), which shows that the instruments are used appropriately.

GDPit = 12.719 + 0.005 CT1it + 0.081 CT2it - 0.001 CT3it + uit

In view of that, import and export taxes (CT1) and value added taxes (CT2) have a positive impact on economic growth (GDP) at the 1% significance level. Meanwhile, excise tax (CT3) has a negative impact on economic growth (GDP) at the 5% significance level.

The impact of income tax components on economic growth: The research model of the impact of income tax components on economic growth in the localities of Vietnam is as follows:

GDPit = f (IT1it, IT2it) (Model 3)

The results of correlation analysis show that corporate income tax (IT1), and personal income tax (CT2) are positively correlated with economic growth (GDP). Through the VIF test, White’s test, and Wooldridge test, Model 3 shows that the multicollinearity phenomenon is considered not serious because the VIF is small. However, Model 3 has heteroscedasticity and autocorrelation between errors at the 1% significance level. The researchers used the GMM method to control the potential endogenous problem, the heteroscedasticity and the autocorrelation phenomenon between errors, the result of Model 3 is in table 5 as follows:

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Table 5. The Result of the Research Model (Model 3)

Variable Coefficient P>|z| IT1 0.018 0.826 IT2 0.575 0.000*** Constant -3.263 0.525 Wald chi2(1) = 13.28 Significance level Prob > chi2 = 0.001*** Number of instruments 13 Number of groups 63 Arellano-Bond AR(2) test Pr > z = 0.983 Sargan test Prob > chi2 = 0.989

Note: *** indicates significance at the 1% level.

Model 3 is statistically significant at the 1% significance level. The Arellano-Bond AR (2) test gave the result of 0.983 (greater than 10%), so the results of Model 3 are quite good because there is no autocorrelation between errors. The Sargan test gave the result of 0.989 (greater than 10%), which shows that the instruments are used appropriately.

GDPit = 0.575 IT2it + vit

Therefore, personal income tax (IT2) has a positive impact on economic growth (GDP) in the localities of Vi- etnam. In summary, consumption tax (CT) and income tax (IT) have a positive impact on economic growth in the localities of Vietnam. In particular, economic growth is more affected by consumption tax (CT) than income tax (IT). For consumption tax components, he export and import taxes (CT1) and value added taxes (CT2) play an important role in stimulating economic growth (GDP). Meanwhile, excise tax (CT3) has a negative impact on economic growth (GDP). For income tax, personal income tax (IT2) plays an important role in stimulating economic growth (GDP).

4.3. Discussion

To analyze the impact of tax structure on economic growth in the localities of Vietnam, the study used the GMM method. The research results show that consumption tax (CT) has a positive impact on economic growth; accordingly, consumption tax components including export and import taxes, and value added tax, contribute to stimulating economic growth. Nevertheless, excise tax has a negative effect on economic growth. This is consistent with the study by Myles (2009), Stoilova, D. (2017) on the group of developing countries. Consump- tion tax is quite easy to obtain statistics and arises when there is the consumption of goods or a service. This revenue depends on the scale of production and consumption of the society, so the tax bases are often large, stable and constantly increasing. In fact, in Vietnam, during the period of 2007 - 2017, consumption tax is one of the taxes that contribute greatly to the state budget, along with a steady average growth rate of about 30-34% per annum. Therefore, consumption tax is a large and sustainable source of revenue for the state budget, helping the Government to have a stable income, proactively implementing investment and development activities, providing additional public services, and creating conditions for boosting economic growth. Income tax includes personal income tax and corporate income tax, and the research results show that income tax has a positive impact on economic growth. However, in terms of each component of income tax, personal income tax has a positive impact on economic growth, whereas corporate income tax is not statistically significant. These results are consistent with the studies by Ormaechea, Yoo (2012), Furceri and Karras (2009). Although most previous studies, for example, the studies by Skinner (1987), Szarowska (2010), conclude that there is a positive relationship between income tax and economic growth, this is an interesting point that the researchers have discovered. Overall, taxes on the income of individuals as well as legal entities in Vietnam tend to decrease, so people are motivated to work more and contribute more to the budget revenue. The Government has conditions to carry out its spending activities, thereby promoting economic growth. Particularly, personal income tax has a

1184 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online direct effect on each individual’s income, savings and consumption. Low tax rates will lead to more spending, which in turn spurs production. Tax cuts will make consumers feel that they have more money and spend more, which in turn leads to economic growth. Finally, the research results have not found a statistically significant impact of property tax on economic growth. These results are supported by the views of Furceri and Karras (2009). This is quite consistent with the reality of Vietnam in recent years, because the contribution of property tax to the total tax revenue has been too low, only with 0.25% of the total tax revenue for the whole research period. The revenue over the years has not a lot of changes because Vietnam has been implementing the policy on tax exemption and reduction for agricultural land use. In addition, low tax rates may be because the taxable price is not close to the market price, not all taxpayers are covered, and the tax bases are not suitable with actual conditions. As a result, in Vietnam, the influence of property tax on economic growth is insignificant.

5. Conclusions and Implications

This paper analyses the data collected from 63 localities in Vietnam in the period 2007-2017. With the regression analysis according to the GMM method, the research results show that consumption tax (CT) and income tax (IT) have a positive impact on economic growth in the localities of Vietnam. In particular, economic growth is affected by consumption tax (CT) more than income tax (IT), which is a new finding compared to previous studies. Simultaneously, the study achieved great success by identifying the significant impact of consumption tax components, including: export and import taxes (CT1), value added tax (CT2), and excise tax (CT3), on economic growth (GDP). In addition, in terms of income tax, personal income tax (IT2) has a positive impact on economic growth (GDP). In view of that, tax structure plays an important role in promoting economic growth in the localities of Vietnam. These research results are the first empirical evidence in Vietnam on the impact of tax structure on economic growth. Therefore, these new findings are of practical value and great significance, especially for local governments and tax authorities in Vietnam in operating tax policies in order to stimulate economic growth. The research results show that Vietnam’s tax policy has a positive impact on economic growth. Accordingly, it can be said that the tax policy is quite appropriate in the current period. However, as the authors mentioned above, in Vietnam, the tax structure is too dependent on the revenue from consumption tax. Therefore, the researchers recommend policy orientation in the coming time as follows:

Firstly, change the tax structure towards increasing the proportion of income tax and property tax. Specifically, increase personal income tax, review policies on corporate income tax incentives, and avoid spreading incentives. The consumption tax revenue of about 60% of the total tax revenue in recent years shows that the tax policy is too dependent on consumption tax, because it is quite easy to collect indirect taxes. Consumption tax is a large and stable source of revenue for the state budget, but this is an unfair tax for the poor because the poor are subject to a higher ratio of consumption tax to income than the rich. Thus, direct taxes on the income and properties of taxpayers will be fairer than indirect taxes on consumption because high-income earners and wealthy people will pay more taxes than poor people with low income and few properties. Therefore, the orientation in the coming time is not to reduce revenue for consumption tax, but to increase revenue for income tax and property tax, especially to increase revenue for property tax in order to change the revenue structure.

Secondly, broaden tax bases. In addition to the improvement in tax laws to cover revenues, the tax authorities need to pay more attention to tax administration to avoid losses. For example, the current personal income tax does not cover all sources of income from business individuals and freelancers; personal income tax on real estate is lost; land tax is too low compared to the profitability of the property, only about 0.2% of the total tax revenue; properties of very high value, such as houses, have not been included in the taxable items; and so on.

Thirdly, develop sustainable revenues. Currently, land revenues such as land use fees and land rental still account for a high proportion of the total state budget revenue, about 17% in 2017. These revenues are unsustain- able because the State has no land fund for hand-over or for lease. As a result, land revenues will gradually disappear in the near future. Therefore, it is necessary to develop sustainable revenues from production and business. Improving the tax policy in accordance with the socio-economic conditions and the payment ability of taxpayers in each period is considered essential.

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Fourthly, up to now, the researchers have not found the statistically significant impact of property tax on Viet- nam’s economic growth because the current revenue is too low, only taking up 0.25% of the total tax revenue. Accordingly, the researchers propose to form the types of property tax, specifically as follows: including houses in taxable items, taxable prices based on property market values, and setting up a market value system according to the roadmap for tax bases.

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My Linh NGUYEN THI ORCID: https://orcid.org/0000-0001-7475-2502

Dinh Tran Ngoc HUY ORCID: https://orcid.org/0000-0002-2358-0699

Nga PHAN THI HANG ORCID: https://orcid.org/0000-0003-1143-2741

Toan Ngoc BUI ORCID: https://orcid.org/0000-0002-0595-3172

Hang Xuan TRAN ORCID: https://orcid.org/0000-0002-3226-5797

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This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/

1188 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 http://doi.org/10.9770/jssi.2020.9.4(6)

IMPORT SUBSTITUTION AS A FACTOR OF FOOD SECURITY

Borash Smailovich Myrzaliyev¹, Maira Baltabayevna Onbayeva2, Gulmira Zharylhasynovna Azretbergenova3, Lesbek Tuzelbekovich Taizhanov4, Ulmeken Rahmetullaevna Makhanbetova5

1,2,3,4,5,6Khoja Akhmet Yassawi International Kazakh-Turkish University, Turkistan, Kazakhstan

Received 18 October 2019; accepted 18 March 2020; published 30 June 2020

Abstract. The paper addresses one of the most important elements of the government’s social functions, namely, food policies in the context of agricultural import substitution. The authors analyse the state of food security in modern Kazakhstan. National interests in the food sector are analysed, as well as the main threats and risks in ensuring food security. Having analysed the state of food security in modern Kazakhstan, the authors draw a conclusion regarding a number of issues existing today in the analysed sphere, which call for solutions.

Keywords: food security; import substitution; national diet, agricultural products; food products; households

Reference to this paper should be made as follows: Myrzaliyev, B.S., Onbayeva, M.B., Azretbergenova, G.Zh., Taizhanov, L.T., Makhanbetova, U.R. (2020). Import Substitution as a Factor of Food Security. Journal of Security and Sustainability Issues, 9(4), 1189-1201. http://doi.org/10.9770/jssi.2020.9.4(6)

JEL Classifications: Q01, Q17; Q18

1. Introduction

The role of food security reflects the fact that food is a fundamental requirement in human life. Thus, the national nutrition levels characterise the overall economic development profile of a country, as food production remains the first requirement of producers and all production, and food supply adequacy is viewed as a most important factor determining social standards and the viability of the national economic structure and the political mechanism of any country.

Food security is integral to the national security of any country (Tireuov, Mizanbekova, Kalykova, & Nurman- bekova, 2018; Trubilin, Gaydukm, Kondrashova, Paremuzova, & Gorokhova, 2020; Melnikov, Mikhailushkin, Poltarykhin, & Dibrova, 2019; Faridi & Sulphey, 2019). Food security is closely related to issues of water security and energy security (Monni, Iorio & Realini, 2018; Cardoso, Swan & Mendes, 2018; Moumen, El Idrissi, Tvaronavičienė & Lahrach, 2019; Tyo, Jazykbayeva, Ten, Kogay & Spanova, 2019; Dudin, Frolova, Protopopova, Mamedov & Odintsov, 2019; Tvaronavičienė, Baublys, Raudeliūnienė & Jatautaitė, 2020)

Improving food supply is a major socioeconomic problem for any CIS country. Ensuring food security is a primary focus of international cooperation, as it spans across a wide range of national, social, demographic and environmental factors.

According to the report of the Food and Agriculture Organization of the United Nations (FAO) on global food security, hunger may affect a quarter of the global population as early as in 2020 (Reshetnikova, 2019). In the next 40 years, the problem of food deficit will take the top spot, global experts warn. Many experts point at the JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online passing of the oil era giving way to the era when food will be the major driver of global politics.

The strengthening globalisation processes and the integration of Kazakhstan in the Eurasian Economic Union have exacerbated the nation’s food security issues. Currently, the problem of food security has grown to become a global issue as a factor of national health (Kuzmina, & Tonysheva, 2018).

The purpose of this paper is to discuss the current state of food security in the Republic of Kazakhstan and to determine potential solutions to the existing problems.

2. Literature Review

The requirements of economic and food security imply that each country should produce key food supply items on its own. However, geographic diversity creates uneven conditions between countries, and no country could live off the natural economy. However, economic laws and political reasons dictate that any country would try to replace imports by own produce (Nassir, 2019; Sedova, Ananiev, & Ananieva, 2018).

The economic rationale behind import substitution concerns the potential of domestic production to create jobs and regain value added. The political logic reflects security interests: national budgets often cover subsidies (or other forms of support) for strategically important resources subsisting national security. This primarily applies to food products.

According to the definition of the FAO, food security involves physical and economic access to sufficient quality food to support the whole population (Food and Agriculture Organization of the United Nations (FAO), 2019).

Thus, support of agriculture in the EU takes up to a third of the all-European budget, approximately 50 billion euros on average. If national co-financing is included, the total amount of support equals approximately 100 billion euros. For 2014-2020, the EU budget earmarks approximately 373 billion euros to support agriculture. In the USA, the FCA program (Farm Service Agency, Farm Act PL110-246) operates to provide direct transfers to farms engaged in grain and oil farming, and the amount of payments is based on cultivated areas in the preceding year and rates on each crop variety (Eurasian Commission, 2017).

Kazakh laws define food security as “protection of the economy and specifically the agricultural complex, where the government is capable to ensure physical and economic access to safe and quality food products sufficient to meet physiological consumption rates and demographic growth”.

As to food security in the context of agricultural import substitution in a post-socialist economy, there is some dedicated research focused on the economic essence of import substitution and the primary strategic objective of a national agricultural complex (Altukhov, Drokin, & Zhuravlyov, 2015), food market and consumer outlook (Annunziata & Vecchio, 2013), food market expansion (Cardozo, Barreiro, & Huenchuñir, 2008), bread and grain products in the Eurasian belt (Langrell et al., 2015), industrualisation of import substitution (Primo Braga, 2006), agricultural risks of import substitution (Zobov, et al., 2017).

Import substitution here provides a mechanism for restoring degraded food security and is one of the most probable government strategies. A key feature of import substitution is economic industrialisation through restriction and discrimination of imports (Bunchikov, et al., 2018; Soboleva, et al., 2018). In other words, the choice of import substitution strategy means the establishment of certain stimuli (trade and currency-related) to promote specific industries of national production and agriculture to improve their competitive profile in the domestic market.

Import substitution is a relatively new concept for Kazakhstan, primarily an attribute of the regulation process of the market economy (Lukhmanova, et al., 2018). Gradual import substitution means the creation of new

1190 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online jobs and technology, as well as demand for agricultural output. Import substitution centres on quality standard improvement in the Kazakhstan agricultural industrial complex.

The development of local production and rational combination of its output with imports depends largely on external trade relations.

In addressing import substitution in the context of food security, one should keep in mind that it is not well- researched yet and no definition fully describes the notion. Based on the conducted research and comparison of different views, there are two major approaches to studying the economic category of import substitution.

The first approach addresses import substitution as an ungoverned and generally positive process for the country which is often time-bound resulting in the gradual substitution of foreign products by national substitutes.

The second one is a broad functional approach to import substitution as a specific type of strategy and government policies aimed at substituting imports in demand in local markets with national output. This involves high import duties and tax reliefs for local producers. An infrastructure development program is charted and implemented. Import substitution strategies are usually implemented at the import substitution stage of industrialisation (Kuznetsov, et al., 2018; Bryzhko, Semenovskikh, & Shkrebko, 2018).

An import substitution strategy in the agroindustrial complex is understood as a government strategy of industry development to rationalise imports through stimulation and support of agricultural producers, establish new production, with or without foreign capital, and ensure the production of items previously imported. Various control methods can be used by the government to bring down food imports.

Research hypothesis: The primary objective of food security efforts is establishing the negative factors threatening to undermine food security and mitigating these by means of import substitution.

3. Methods

The research was based on the agroindustrial governance sectors with the use of statistics (data provided by the Ministry of National Economy Statistics Committee of the Republic of Kazakhstan) and general and special research methods.

The expert survey method was used with further mathematical processing of the findings to produce rankings in order to: - determine the criteria for profiling food supply availability in Kazakhstan; - establish factors undermining stable agricultural development and affecting it negatively.

The expert survey also addressed the potential of agricultural import substitution.

Each of the experts ranked the criteria and factors from higher to lower preference levels. With that, each of the compared criteria and factors was assigned a rank (number) opposite which appeared in the respective sequence. The aggregate rank was derived as a median of all expert ranks across the expert group.

With the tolerable error of expert appraisal (5%), the required number of experts (N = 0.5•(3/b + 5), where b is the tolerable error of expertise as a percentage/100) equals 33 experts.

The online expert survey engaged 36 employees of various sectors in the administration of the agroindustrial complex, with the term of tenure in the industry of 8 to 15 years.

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4. Results

According to the expert survey, the following criteria are used in Kazakhstan to assess food access levels (Table 1).

Table 1. Assessment criteria for food access levels in Kazakhstan

Criterion Rank 80-85% of the total food supply provided by domestic producers 1 food consumption with optimum calorie intake levels (2,353 kCal per day) 2 balanced nutrition structure and sound diet profile in line with physiological norms 3 quality compliance with technical regulatory requirements 4 maintenance of recoverable insurance food stock at 25% of the annual food consumption level 5 real potential to rely on imports to meet food requirements in products unavailable or under-supplied domestically 6 production of at least 1 tonne of grain per capita 7 Note: based on the expert survey

According to the guidelines of food security monitoring, the respective criteria are as follows: physical access to food products; economic access to food products; safety of food products (Jurist, 2019a).

Physical access to food products largely depends on the development of commercial infrastructure. There are 117 thousand retail shops selling consumer goods, including trading companies. The retail network in urban areas is growing, more supermarkets are selling food products. The biggest food retailers in Kazakhstan are Magnum Cash & Carry (operating, by now, 33 shopping complexes in seven Kazakh cities under brands such as Magnum Cash & Carry and Magnum ATAK), ANVAR (the biggest retail chain in Aktobe, with branches in Astana, Atyrau, Aktau, Uralsk, Karaganda and Kyzylorda), supermarket chains SMALL of the Skif Trade company (more than 25 retail facilities in different Kazakh cities) (Musapirova, 2019).

Product supply to rural populations is maintained by sole traders, meanwhile, major food staples (meat, milk, eggs, etc.) are produced via subsistence farming. Partially, urban populations also resort to the produce of private household gardens and dachas to meet their consumption requirements in potatoes, vegetables, berries and fruits. To evaluate physical access, monitoring of food availability is conducted in the retail network of Kazakh cities (across a list of 65 items of bread, cereal, pasta, milk, fishery, meat and food processing products). The analysis found that the discussed items are generally and fully available.

Meanwhile, according to the Ministry of National Economy of the Republic of Kazakhstan, per capita grain production in Kazakhstan in 2017 showed an increase of 1,141 kg, or 14.1%, above the food security threshold. The per capita production of potatoes was twice the rate of physiological consumption requirements; for vegetables and gourds, the output was 2.2 times higher than the required rate. However, per capita meat and poultry production only met 67.1% of the physiological consumption norm; the figures for milk and eggs were, respectively, 93.8% and 95.9% (The Ministry of National Economy Statistics Committee of the Republic of Kazakhstan, 2018).

Moreover, physical access depends on domestic production, the country’s comparative advantages in producing basic food staples and efficiency of such production (Alieva, 2017; Tonysheva, & Kuzmina, 2017).

However, as can be seen from Table 2, despite the continued growth since 2006 in the total carcass weight meat output and milk and egg production, the level of 1990 has only been attained in milk and eggs, with the figures for 2018 reaching above by 0.1% and 33.2%, respectively.

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Table 2. Production of major food staples

Average per year Years Meat (live weight), Meat (carcass weight), Milk, thousand tonnes Eggs, millions thousand tonnes thousand tonnes 1990 2,633.7 1,559.6 5,641.6 4,185.1 1991-1995 2,167.1 1,257.0 5,262.7 3,080.0 1996-2000 1,259.0 678.9 3,518.3 1,424.2 2001-2005 1,143.0 625.0 4,331.1 2,213.0 2006-2010 1,419.4 776.7 5,176.5 3,034.9 2011-2015 1,564.6 877.0 5,044.8 4,059.9 2016 1,701.6 960.4 5,300.0 4,731.5 2017 1,794.1 1,017.4 5,460.5 5,086.5 2018 1,870.7 1,058.2 5,642.2 5,574.6 Note: compiled and calculated by the authors according to data provided by the Ministry of National Economy Statistics Committee of the Republic of Kazakhstan.

It is often overlooked that currently, food products comprise not only agricultural but also processing industry output. The share of agriculture in the end price of food products is declining in developed countries, with the majority proportion of value created in processing, packaging, storage, transportation and marketing. Even if a country has the capacity to independently produce considerable volumes of agricultural supply, but lacks developed market infrastructure, the physical access to food would still be diminished.

Low production means the consumption of major food products per capita would be below medical requirements.

According to the FAO methodology, an important indicator of food security is the level of food deprivation, i.e., the share of the population with energy intake below the minimum acceptable levels.

A country is deemed to be secure in terms of food supply if the share of people affected by hunger is very low (less than 5%) (Tonysheva, & Kuzmina, 2017; Baiev, et al., 2019). If the level of food deprivation exceeds 35%, there is a hunger problem. According to the international classification of the FAO, nutrition value of 2,150 calories characterises persistent malnutrition, while the normal level is 2,600 calories (Food and Agriculture Organization of the United Nations (FAO), 2019).

Table 3. Annual consumption of main food products per capita according to a survey of households (kg)

Minimum Medical Food items acceptable 1980 1990 1995 2000 2005 2010 2015 2017 2018 requirements levels meat and meat 82 41.9 58 73 52.0 44.4 40.0 53.1 73.6 72.9 77.9 products milk and dairy 405 99.3 314 311 229.0 234.6 189.0 204 233.6 237.7 261.3 products eggs 292 142 239 225 97.0 102.0 108.0 129.9 164.6 168.5 193.3 bread and grain 110 106.5 138 148 185.0 105.3 114.0 122.8 129.8 133.7 138.5 products fish and seafood 18.2 8.4 17.6 10.3 4.8 3.5 7.9 9.2 11.3 10.7 13.2 potatoes 97 95 109 86 70.0 65.7 47.0 41.5 48.5 46.9 48.6 vegetables 146 80 97 76 56.0 85.5 71.0 70.7 90.2 88.5 94.1 Note: compiled and calculated by the authors according to data provided by the Ministry of National Economy Statistics Committee of the Republic of Kazakhstan.

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Table 3 indicates that food consumption in 2018 showed a decline compared to physiological rates and the 1990 levels for most items. However, more recently, steady growth has been observed on the per capita basis. Only bread and grain products show consumption in excess of the medical requirements. Given the existing social prices for bread, people are obviously substituting inaccessible food items with bread and grain products. With that, an important point is that consumption levels for major food products per capita are generally above the minimum requirements applying in subsistence level calculations for main food items for different social groups in the Republic of Kazakhstan.

As to the dietary nutritional values in the Republic of Kazakhstan, the average daily energy intake per individual equals 3,140 kCal, which is 29.7% above the level of 2005 (2,420 kCal in 2005). Between 2005 and 2018, the share of the population with energy intakes below the minimum acceptable levels declined to 3% from 17%. The number of people with energy intake levels below the minimum acceptable levels declined 5.2 times (Ministry of National Economy of the Republic of Kazakhstan, 2019).

A sample survey of households in 2018 found that the level of food deprivation, or the share of the population with energy intake below the minimum acceptable levels, stood at 1.8%. There is considerable differentiation in this indicator between types of localities (Bulkhairova, et al., 2019). For example, in 2018, the share of the population with calorie intakes below the minimum acceptable levels was more than three times higher in urban areas compared to rural areas. The difference between urban and rural localities arises from the relatively improved nutritional profile of food consumption in rural environments. In 2018, the energy value of daily food consumption was 3,169 kCal per capita.

Among the CIS countries, the Republic of Belarus has gained considerable expertise in import substitution program implementation. Import substitution is a statutory priority at the national level (Chernysheva, et al., 2019). The program is subject to strict government control in Belarus, with a clearly set range of projects and developed accountability and reporting forms. The outcomes of import substitution projects include unleashing cash resources channelled to a special fund and redistributed for targeted support within industries, which helps to create new jobs.

A priority dimension, according to the experts, is import substitution in consumer demand. As one of the respondents specifically pointed out, “there are no state programs of agricultural import substitution in Kazakh- stan which would target food import substitution and setting of a stable counterforce to prevent contraction in agriculture”.

The experts note that certain stages in the evolution of new industrial economies of Asia and Latin America have been marked by the pursuit of import substitution and export orientation strategies. The two strategies have their positives and negatives to them, however, they are not mutually exclusive. In all cases when the export orientation strategy was chosen, a dynamic and efficient import substitution would come first as an absolutely logical and necessary stage. Import substitution and export orientation strategies can be balanced, and either may be prioritised in certain periods.

Taking into account the objective of import substitution, i.e., the optimisation of the import-export balance, the key reference for import substitution purposes should be improved levels of capacity utilisation in the agricultural sector, food and processing industries. Moreover, import substitution in its core aims at improvement, i.e., attaining a systemic effect for the society or individual economic subject from the operation of this strategy (Gagarina, et al., 2019).

Turning to the dietary energy value of food consumption, the minimum requirement levels in the Republic of Kazakhstan and the regional differentiation, it is worth noting that the energy profile is above the minimum values in all regions. Consumption is higher in high-income population groups. However, even this level of consumption is supported by imports. The consumption of food products, such as vegetables, gourds and eggs, is below rational norms in all population groups, including those with high disposable incomes.

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The findings with regard to the nutritional value of daily diets show that protein consumption ranges between 12-15%, fats – 30-37%, carbohydrates – 47-57%.

Most experts (89% of the respondents) conferred that there is no hunger problem in Kazakhstan, but the country still shows very low food deprivation levels.

Imports help to maintain physical access where it is not provided by domestic production. The analysis shows that the share of domestic agricultural production and output in the domestic market supply has increased in- crementally, matched with a decline in the share of imports. Meanwhile, the analysis of resource balance and import-export statistics shows that the share of imports remains high and not in line with common norms.

The development program of the agroindustrial complex in the Republic of Kazakhstan for 2013-2020 “Agro- business – 2020” indicates the following figures for the share of imports by individual consumption items: fish and fish products – 76%, milk and condensed cream – 74%, vegetable and fruit preserves – 70%, confectionery – 67%, cheese and curd – 58%, sausage products – 45%, vegetable oils – 48%, butter – 33%, meat and meat products – 19% and even potatoes – 6% (Jurist, 2019b).

However, even with imports, consumption in Kazakhstan falls short of the medical requirements for reasons of economic access, which is the function of income and income distribution. The driver of economic access is the level of real disposable incomes, which are generally rising steadily across the country.

Agricultural supply availability depends on the stable development of the sector, which is a problem to be addressed.

Following the expert survey, the negative factors affecting the development of crop and animal farming were established and ranked. The general factors hindering steady development are laid out in Table 4.

Table 4. Factors hindering the steady development of agriculture

Crop farming Rank Animal farming Rank Diminishing of soil fertility and insufficient supply 1 Small commodity production, low level of specialisation 1 of mineral and organic fertilisers Disregard of scientific crop rotation schemes, Extensive industry development with growing cattle 2 2 weak seed farming practices headcounts but persistently low productivity Insufficient feeding levels, irrational feed structure, Low concentration of production in some industries 3 3 prevalence of purchased feeds Extensive industry operation driven primarily Poor selection and breeding efforts and 4 4 by the expansion of cultivated areas low quality of production Lack of state support mechanism to promote soil fertility, 5 Insufficient state support for minor economic entities 5 yields and product quality with optimum public expenditure Low labour motivation, low incomes, Underdeveloped marketing system 6 6 imperfect marketing and liaison with partners and weak labour incentives Declining effective demand Declining effective demand amid growing consumer prices 7 7 amid growing consumer prices Note: based on the expert survey

Following an analysis of agricultural development in Kazakhstan, the experts identified the following specific negative factors hindering stability in crop farming and animal farming (Table 5).

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Table 5. Specific negative factors hindering stability in crop farming and animal farming

Item Sector Negative factors Rank volatile demand in the external market 1 growing costs amid persistent trends of yield and price volatility 2 1 Grain production significant vulnerability to weather conditions, as grain-producing 3 regions are in a high-risk crop farming zone weak facilities 4 lack of resource-efficient technology 1 2 Sugar production imperfection of productive economic relations in sugar beet production, 2 processing and marketing low concentration of production and high seasonality 1

3 Vegetables and potatoes poor range and quality 2 high imports of early vegetables and lack of modern storage 3 facilities at production and consumption sites high merchantability of milk 1

4 Milk production high imports of dairy products 2 lack of an efficient system of measures to create specialised 3 commodity operations in resource zones of processing enterprises lack of pastures fit for meat cattle farming 5 Meat cattle farming weak adoption of advanced technology weak development of external marketing of the produce inadequate resource supply underdevelopment of the system of preparation, transportation and storage of Food industry commodities lack of working capital for commodity purchases Note: based on the expert survey

The above problems, according to the experts, need to be addressed.

Thus, agricultural supply in the market of Kazakhstan fits into the small commodity profile, which is historically viewed by economists as inefficient in any type of production, as it fails to leverage the advantage of scale helping to bring down costs and improve competitiveness for all products.

Major social and economic indicators showed improved levels in 2018 compared to 1990 and 2000, which, though, does not fully reflect the situation with economic access to food. Real incomes should support the purchases of food products in volumes and ranges sufficient to meet the rational consumption rates at existing prices.

In the analysis of food security at the household level, a notable remark is that spending on food products in the total cash outlays of the analysed households has exceeded 45% in recent years, with an increase of 1.5% in 2018 compared to 2015 (2.1% compared to 2005). The figure is 3.6-7.1 times higher compared to developed countries, where the respective level is 6-12%.

In Kazakhstan, 505 thousand people (3.1%) live in more than 90 thousand households with incomes below subsistence levels; those with incomes less than the minimum food basket price are 3,920 households with 23 thousand individuals (0.11%).

Low incomes are observed in households in rural areas. Consumption of the most valuable food products on average is extremely low in the country, while the relative share of food spending is more than a third of the end-use spending (per household member).

However, an even more negative situation is observed in terms of economic access to food depending on the

1196 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online level of disposable resources. The bottom 10% of the most economically disadvantaged population includes 1,715 thousand individuals. Income spent on consumption in proportion to the subsistence level for the top 10.5% and bottom 10.5% of the most economically advantaged and most economically disadvantaged population equals, respectively, 84.1% and 473.5%.

The share of households that spend up to 20% of their income is 3.4%, with 12% of population spending between 20.2% and 30.0% of their income. 20.8% spend between 30.1% and 40.0%, 28.5% spend more than 40% and the rest 25.6% spend more than 50% on food items. As can be seen, 90% of households spend between 30% and 60% of income (Annunziata & Vecchio, 2013).

The analysis shows that consumption of all food items, such as meat and meat products, fish and seafood, milk and dairy products, eggs, butter and fats, fruits and vegetables declines as the number of household members grows.

Households spending more than 70% on food make up 4.5% of the total, and those with one minor (aged under 18) represent 2.8%. Meanwhile, families with four, five or more children have bigger food spending, and the share rises, respectively, to 7.8% and 13.5%.

An analysis of food security in terms of economic access to food should take into account that consumption largely depends on price levels. The financial crisis pushed food prices up. In 2014, the highest price index levels (September 2017 vs. September 2011) were recorded for rice (119.2%), flour (114.7%), cheese (119.8%) and sugar (121.7%) while other groups of food fell within 114.0%. Declines in the price index were registered for cereals (97.7%) and vegetable oil (96.2%).

The experts stated that economic access to food depends on real incomes, price levels and real income distribution. A country with traditional demographic principles needs targeted social support to provide food to families with many children. Food security analysis shows that the higher the poverty level in a country, the bigger the number of people affected by hunger and malnutrition, which impact the national gene pool.

Growing prices and unemployment drive people to buy a majority of their foods at unregulated markets, ba- zaars and private sellers. Meanwhile, quality, safety, storage and transportation standards are compromised. Focusing on the price and natural origin, people would disregard food safety and quality, and this creates implications for the quality of life, life expectancy and public health.

Correspondingly, the third element of national food security is quality improvement and safety of food products.

Violations of statutory requirements were discovered at 60% of enterprises where inspections were conducted. Following inspections, more than 16.5 thousand lots of various products were withdrawn from the market due to quality concerns, missing certificates or improper labelling.

Food safety inspections by the Republic’s sanitary and epidemiological authorities highlighted and banned 713 tonnes of food products in 2013. The reasons for incompliance were as follows: organoleptic incompliance (568 tonnes); products marketed past expiry date (100 tonnes); lack of safety certificates (34 tonnes); missing labels and production date information (4.7 tonnes); microbiological incompliance (2.2 tonnes), etc.

In 2017, food safety supervision by the epidemiological authorities resulted in withdrawing from the market and destruction of 140 tonnes of food products, including 55 tonnes of dairy products, 35 tonnes of drinks and beverages, 30 tonnes of meat products and 20 tonnes of confectionery.

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5. Discussion

The findings of the research led the experts to confer that the food security outlook in Kazakhstan was mixed.

Food security criteria are not addressed in full, the experts believe. Physical access to food is relatively poor, though, without any indications of hunger or malnutrition in the country. By these measures, Kazakhstan is in a better position that other CIS countries in the Asian region. In terms of economic access to food, there has been steady improvement over the past few years, which means there is the potential for improvement in food security. A key factor for that in the near term is the growth of incomes and per capita output.

The experts mentioned that import substitution implies protectionist policies and brings about improvements in the national balance of payments, the normalisation of domestic demand, employment growth, development of knowledge-intensive industries and research capacities. The rationalisation of food imports implies that two major tasks should be addressed: increasing the share of technology, machinery and equipment in the import structure; creating a competitive environment for imported food products by advancing substitution production in agriculture and the food industry.

With that, the most economically disadvantaged groups should be addressed via targeted support programs with a mechanism in place to identify and subsidise these social strata. The food basket price and subsistence levels should be reviewed; a state support program should be developed to help those in need and to stimulate demand for domestic food products.

Taking into account Kazakhstan’s membership in the Eurasian Economic Union, in order to improve its food supply in view of competition with Russia and Belarus, Kazakhstan needs to create a broad food security system and, in particular, a control system to supervise quality and safety of exported and imported products.

The experts pointed at the following consistent and cardinal measures to be taken to ensure food security: - regulatory framework improvement to systemically approach food security; - systemic improvement of monitoring, forecasting and control of food markets and food security; - monitoring and regulation of export and import volumes in major strategic items of food supply, cutting down the imports that domestic producers could make up for; - building and streamlining production capacities at processing enterprises; - improvement of the system of economic relations in production, purchasing, primary and advanced processing, storage, transportation and marketing of agricultural products; - development of the existing wholesale food markets, optimisation of their operations in line with international best practices, setting up of wholesale markets in rural areas with local producers; - systemic improvement of HR, research, legal and information frameworks of agroindustrial enterprises.

Meanwhile, to address economic access and competitive pricing of domestic food supply both locally and in the global market, the following measures were recommended: flexible taxation of agricultural producers, provision of tax reliefs and other incentives, enhancement of investment appeal of the agroindustrial complex, supervision of financial rehabilitation measures in progress in line with the strategy of development of the agroindustrial complex. Simultaneously, the problem of food quality and safety and the objective of protecting people from hazardous products requires enhanced standardisation and certification efforts and their har- monisation with international standards, as well as adoption of advanced technology and quality management systems, modernisation and technical overhaul of agroindustrial operations in the sequence of “production – processing – marketing”.

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Conclusion

National food security efforts should target the negative factors threatening food security, diminishing food supply, degrading or eliminating nutritional or energy value of major food products.

Such factors include: significant overreach in terms of threshold saturation levels for imports in the market; low levels of efficient demand for food products; price distortions in the agricultural, fishery, commodity and food markets; destabilisation of financial and credit system; underdevelopment of infrastructure in the domestic market; moral and physical wear and tear of facilities in the agroindustrial and fishery complexes; lagging innovation; diminishing of national gene resources; potential expansion of biofuel production from agricultural products and commodities; shortage of skilled talent.

Thus, the research hypothesis holds, i.e., the primary objective of food security efforts is establishing the negative factors threatening to undermine food security and mitigating these by means of import substitution.

Further research might involve in-depth analyses of measures to ensure food security in Kazakstan.

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Borash Smailovich MYRZALIYEV ORCID ID: orcid.org/0000-0002-3561-7196

Maira Baltabayevna ONBAYEVA ORCID ID: orcid.org/0000-0002-5193-3578

Gulmira Zharylhasynovna AZRETBERGENOVA ORCID ID: orcid.org/0000-0002-9070-7055

Lesbek Tuzelbekovich TAIZHANOV ORCID ID: orcid.org/0000-0002-5067-6530

Ulmeken Rahmatullaevna MAKHANBETOVA ORCID ID: orcid.org/0000-0003-3100-6870

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1202 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 https://doi.org/10.9770/jssi.2020.9.4(7)

IMPACT OF INTELLECTUAL CAPITAL ON FIRM VALUE THROUGH CORPORATE REPUTATION AS A MEDIATING VARIABLE

Putu Nidia Midiantari1, Dian Agustia2*

1Department of Accounting, Faculty of Economics and Business, Universitas Airlangga, Indonesia

E-mail: 2*[email protected] (Corresponding author)

Received 18 October 2019; accepted 30 March 2020; published 30 June 2020

Abstract. This study aims to examine the effect of intellectual capital on firm value through corporate reputation as a mediating variable. Intellectual capital is proxied by human capital, structural capital, and customer capital. Using the resource-based theory and signaling theory, this paper analyzes how the corporate reputation will be mediating intellectual capital to firm value. This study used 340 observations of companies that received an excellent category on the Indonesian Corporate Image Award (IMAC) which was listed on the Indonesia Stock Exchange in 2013 to 2017 with Partial Least Square (PLS) test processed with warpPLS version 5.0 software. This study shows that the first human capital, structural capital, customer capital, and corporate reputation have a significant effect on firm value. Second, structural capital has a significant effect on corporate reputation. Third, corporate reputation variables are able to mediate the influence of intellectual capital proxied by human capital, structural capital, and customer capital on firm value. This study is the first empirical investigation on the contribution of Intellectual Capital in generating value for corporate reputation. Furthermore, the study contributes to the literature on the link between Intellectual Capital and firm value by examining a sample of firms no yet explored in prior research and this study also uses the cost-based approach.

Keywords: corporate reputation; firm value; human capital; structural capital

Reference to this paper should be made as follows: Midiantari, P.N., Agustia, D. 2020. Impact of intellectual capital on firm value through corporate reputation as a mediating variable. Journal of Security and Sustainability Issues, 9(4), 1203-1213. https://doi.org/10.9770/jssi.2020.9.4(7)

JEL Classifications: M41, G32, L14.

1. Background

In business competition at this time, the management of intellectual capital has an important role in the objectives of production activities. The purpose of production activities in business competition has begun to shift, previously the main production activities were only focused on the creation of finished goods, but at present the main focus of production activities in the process of creating finished goods in line with knowledge, and then the creation of goods and services (Pulic, 2000; Petrenko et al., 2019).

Guthrine et al. (2000) state that changes in ways of thinking in developing intellectual-based innovations can trigger the emergence of intellectual-based companies. The change in a labor-based business strategy to a knowledge-based business strategy that can later create value in new business processes (Sawarjuwono and Kadir, 2003; Mingaleva et al., 2019). Accordance with Barney (1991) in a knowledge based business which states that if the knowledge held by the company is managed properly, it can be used as a means to increase income which later affects the value of the company.

In Indonesia, businesses are required to be sensitive to intangible capital owned by the company. This is be- JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online cause intangible capital is a supporting factor to win the competition in business and an inseparable part as a driver of the existence of intellectual property rights (IPR) in business competition. However, businessmen in Indonesia are not yet considerate to use of intellectual property rights (IPR). In the 2017 WIPR entitled Intan- gible Capital in Global Value Chains, it was found that the real value generated from asset intangibles reached US $ 5.9 trillion in 2014 (an increase of 75% compared to income in 2000).

Edvinsson et al. (1996); Chen (2005); Tan et al. (2010); Haleblian et al. (2017); and Ginesti et al. (2018) assert that intellectual capital, which is proxied by value added intellectual coefficient (VAICTM), value added capital employed (VACA), value added human capital (VAHU), and structural capital value added (STVA) have a positively significant related effect with financial performance, and indicate that companies that maintain the reputation of companies tend to use intellectual capital efficiently and use it as a tool to predict company value.

This study aims specifically to determine whether corporate reputation variables can mediate the effect of intellectual capital on firm value. The analysis in this study used 340 companies with excellent categories on the Indonesian Corporate Image Award (IMAC) and listed on the Indonesia Stock Exchange for the period 2013- 2017. The analysis model uses Partial Least Square (PLS) with the WarpPLS 5.0 instruments.

The results of this study prove that the first, human capital, structural capital, customer capital, and corporate reputation have a significant effect on firm value. Second, human capital and customer capital have no significant effect on corporate reputation, but structural capital has a significant effect on corporate reputation. Third, corporate reputation is able to mediate part of the effect of intellectual capital that is proxied by human capital, structural capital, and customer capital on firm value.

Furthermore, this study are able to contribute to proving the important key to intellectual capital for companies, in line with resources-based theory and signaling theory and the use of cost-based approaches where appropriate management of resources with expenditures to improve the competence of company employees and con- veying information stakeholders can be used as a means to improve the company’s reputation so that investors are more interested and will ultimately increase the value of the company. The use of the cost-based approach in this research is a new thing.

2. Literature Review and Hypothesis

Intellectual capital is closely related to resource-based theory. Wernerfelt (1984) explains that resource-based theory is that a company will gain a competitive advantage if it is able to manage its assets, either tangible assets or intangible assets. Penrose (1959) in Peteraf (1993) which states that companies can create economic value not only because they have the resources they need, but are able to effectively manage their resources. Another theory related to this research is signaling theory. Corporate reputation and company value variables relate to signaling theory because an action taken by company management can be a guide for stakeholders regarding how management views the company’s prospects (Besley and Brigham, 2008). This signal is in the form of information about what has been done by management to realize the wishes of the owner.

2.1 Effect of Human Capital on Firm Value

Penrose (1956) and Peteraf (1993) asserts that companies can create economic value not only because they have the resources they need, but are able to manage their resources effectively. Human capital is the manager of the resources owned by the company and makes it a critical sector in creating competitive advantage (Bar- ney, 1991). Nimtrakoon (2015); Ozkan et al., (2016); and Ginesti et al. (2018) states that human capital has a significant effect on firm value. Based on the statement described above, the first hypothesis of this study is:

H1: Human capital affects on Firm Value

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2.2 Effect of Structural Capital on Firm Value

Structural capital is the company’s ability to produce organizational performance optimally (Sawarjuwono and Kadir, 2003). Structural capital includes all capital owned by companies other than humans, which includes databases, organizational structures, strategies, and anything that is of value to the company (Kalkan et al., 2014). The optimal company performance will increase the value of the company. Research by Li and Zhao (2017); Osiyevskyy (2017); Kalkan et al., (2014); and Forte et al., (2016) state that structural capital has a significant effect on firm value. Based on the statement described above, the second hypothesis of this study is:

H2: Structural Capital affects on Firm Value

2.3 Effect of Customer Capital on Firm Value

Companies are able to provide signals in the form of information relating to things that have been done by management to realize the wishes of the owner, so that the company is able to overcome asymmetric information using elements of intellectual capital, namely customer capital as a bridge with external parties. If the actual value of the company can be conveyed to the external party of the company, the market view of the company will rise, which results in the company’s market value can increase (Penrose, 1956 in Peteraf, 1993; Barney, 1991). Berzkalne (2014); Osiyevskyy (2017); and Li and Zhao (2017) which state that customer capital has a significant effect and is positively related to firm value. Based on the statement described above, the third hypothesis of this study is:

H3: Customer Capital affects on Firm Value

2.4 Effect of Human Capital on Corporate Reputation

Based on resources-based theory which states that companies will gain a competitive advantage if they are able to manage their assets both tangible assets and intangible assets (Wernerfelt, 1984). Appropriate use of human resources can be related to company performance (Abeysekera, 2018), so that employees are considered as a vital component to be able to improve the company’s reputation. Ginesti et al. (2018) which states that good corporate values will always maintain their reputation and tend to use elements of intellectual capital namely human capital efficiently. Based on the statement described above, the fourth hypothesis of this study is:

H4: Human capital affects on Firm Value

2.5 Effect of Structural Capital on Corporate Reputation

Structural capital is the company’s ability to fulfill the company’s routine process and its structure that supports employee performance. Companies that have a high commitment to the routine process and company structure to support employee performance will be appreciated by the community, so that it will enhance the company’s reputation. Research by Kalkan et al., (2014); Forte et al., (2016); and Ginesti et al. (2018) states that structural capital that is used efficiently is closely related to company value and shows that the company can maintain the reputation of its company. Based on the statement described above, the fifth hypothesis of this study is:

H5: Structural capital affects on corporate reputation

2.6 Effect of Customer Capital on Corporate Reputation

If the signal given by the company has been able to realize the wishes of the owner, then the real value of the company can be conveyed to the external parties of the company, so that it can trigger an increase in reputation for the company (Ginesti et al., 2018). Research by Raithel et al. (2015); Mandariaga and Rivera (2017); and Ginesti et al. (2018) which states that customer capital has a significant and positively related effect on firm value and shows that companies that maintain the reputation of their companies tend to use intellectual capital

1205 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online assets efficiently. Based on the statement described above, the sixth hypothesis of this study is:

H6: Customer capital affects on corporate reputation

2.7 Effect of Corporate Reputation on Firm Value

Osiyevskyy (2017) which states that management that can achieve company prospects well is a signal that the company has a good-future, so that it can convince investors or potential investors towards the company. Weng (2016) and Saeidi et al., (2015) stated that companies that have a good reputation provide a positive signal to investors. Based on the statement described above, the seventh hypothesis of this study is:

H7: Corporate reputation affects on Firm Value

2.8 The Effect of Human Capital on Firm Valueswith Corporate Reputation as a mediating variable

Resources-based theory explains that a company can create a competitive advantage that is superior to its competitors, if the company is able to manage its owned resources effectively (Wernerfelt, 1984). Ozkan et al., (2016) and Ginesti et al. (2018) states that the use of intellectual capital elements, namely human capital efficiently can reflect good corporate value and always maintain the reputation of the company. Based on the statement described above, the eighth hypothesis of this study is:

H8: Corporate reputation mediates the effect of human capital on firm value

2.9 The Effect of Structural Capital on Firm Values with Corporate Reputation as a mediating variable

Efficient utilization of resources of the company so as to be able to create competitive advantages from competitors, therefore the company’s performance is considered to be optimal and able to improve the company’s reputation while increasing the value of the company. Research by Kalkan et al., (2014); Forte et al., (2016); Li and Zhao (2017); Ginesti et al., (2018) explained that structural capital has a significant positive effect on firm value and shows that companies can maintain their reputation. Based on the statement described above, the ninth hypothesis of this study is:

H9: Corporate reputation mediates the effect of structural capital on firm value

2.10 The Effect of Customer Capital on Firm Value with Corporate Reputation as a mediating variable

Osiyevskyy (2017); Mandariaga and Rivera (2017); and Ginesti et al. (2018) states that customer capital has a significant effect on company value because the satisfaction obtained by the customer can improve the company’s reputation, so that when the reputation of the company increases, the value of the company will also increase simultaneously. This is in line with signaling theory where the signal given by the company is related to the accountability of management activities to the owner of the company, so that good relations between stakeholders can be maintained. Based on the statement described above, the tenth hypothesis of this study is:

H10: Corporate reputation mediates the effect of customer capital on Firm Value

3. Researh Method

This study uses quantitative data sourced from the company’s annual report that received an excellent category for the Indonesian Corporate Image Award (IMAC) and was listed on the Indonesia Stock Exchange (IDX) for the period 2013-2017. The total sample of the study was 340 companies that were selected using the purposive sampling method.

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3.1 Dependent Variable

The dependent variable used in this study is firm value which is proxied using Tobin’s Q through the equation:

Market Value + Liabilities Tobin’s Q = Book Value+Liabilities 3.2 Independent Variable

The independent variable used in this study is intellectual capital, which is proxied into three as follows human capital (VAHU), structural capital (STVA), and customer capital (VACA) obtained through equations. VA = OUT – IN (1) VA VAHU = (2a) HC ST STVA = (2b) VA VA VACA = (2c) CE 3.3 Mediating Variable

The mediation variable used in this study is corporate reputation. The measurement of mediating variables uses the dummy method, namely giving a score of 1 to companies that get excellent categories in a row during 2013-2017 and a score of 0 for companies that get the excellent category not consecutive during 2013-2017.

3.4 Control Variable

The control variables used in this study are the concentration of share ownership, company size, and leverage.

3.5 Method

The sample in this study was selected using a purposive sampling method. The data analysis technique used in this study is the measurement of outer model, inner model, and direct hypothesis testing (indirect effect) and indirect hypothesis testing (indirect effect).

4. Result and Discussion

The object of research examined in this study is the value of the company. The research population is companies that get an excellent category on the Indonesian Corporate Image Award (IMAC) for the 2013-2017 periods. The sample of this study was determined using a purposive sampling method with the final results of 340 companies.

Table 1. Descriptive Statistic.

Mean Median Minimum Maximum OC 0.926 1.000 0.000 1.000 FIRMSIZE 30.079 30.259 26.161 34.656 LEV 0.522 0.497 0.000 1.470 VAHU 2.581 1.873 -2.020 52.399 STVA 0.421 0.475 -3.385 3.768 VACA 0.398 0.287 -2.567 13.136 FV 1.253 0.749 0.168 12.774 CR 0.706 1.000 0.000 1.000

Source: Processed Data, 2019

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4.1 The Results of Hypothesis Testing

Figure 1. Direct Effect

Based on Figure 1 above, it can be concluded that there is a positive and significant direct relationship between intellectual capital, which is proxied by VAHU, STVA, and VACA before mediating variables are marked with the path coefficient, 0.16, 0.07 and 0 , 66 and the p-value is smaller than the 0.05 significance level of 0.01.

Figure 2. Indirect Effect

Figure 2 shows (1) the significant influence between VAHU and company value after adding mediation variables which can be seen through path coefficient 0.114 and p-value of 0.016 so that H1 is accepted, (2) Signifi- cant influence between STVA and firm value after the addition of mediating variables can be seen through the path coefficient of 0.094 and the p-value is less than the significance level of 0.05 which is equal to 0.04 so H2 is accepted, (3) Significant influence between VACA and firm value after adding mediating variables can be seen through path coefficient 0.673 and p value -value is less than the significance level of 0.05 which is equal to < 0,001 so that H3 is accepted, (4) Nonsignificant effect between VAHU and corporate reputation after adding mediating variables which can be seen through path coefficient 0.025 and p-value greater than significance level 0.05 which is 0.324 so that H4 is rejected, (5) Significant influence between STVA and corporate reputation ion after addition of mediation variables which can be seen through path coefficient -0.088 and p-value value is equal to the significance level of 0.05 which is 0.05 so that H5 is accepted, (6) Nonsignificant effect between VACA and corporate reputation after the addition of mediating variables can be seen through path coefficient 0.05 and p-value greater than the significance level of 0.05 which is 0.175 so that H6 is rejected, (7) Significant influence between corporate reputation and company value after adding mediating variables can be seen through path coefficient 0.091 and p-value value is less than the significance level of 0.05 which is equal to 0.045 so that H7 is accepted.

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Baron and Kenny (1986) state that if the path coefficient value between the independent variable and the dependent variable before and after the mediation variable has decreased the p-value that remains significant between the independent variables and the dependent variable can be stated that mediating variables are able to mediate partially, the effect of independent variables on the dependent variable. Comparison between the path coefficient between Figure 1 and Figure 2 shows that corporate reputation is able to mediate partially the influence of independent variables (human capital, structural capital, and customer capital) on the dependent variable (company value) so that it increases the value of the company. The eighth hypothesis, the ninth hypotheses, and the tenth hypothesis are declared acceptable.

4.2 The Effect of Human Capital on Firm Value

Resource-based theory has stated that companies can create economic value not only because they have the resources they need, but are able to manage resources that are owned effectively (Penrose, 1956 in Peteraf, 1993). One of the resources owned by the company is human capital. Berezinets et al. (2016) state that the main things in human capital are knowledge, skills, work experience, innovation, and creativity. In the end, these innovations will be able to support the value of the company as well. Ozkan et al. (2016); Nimtrakoon (2015); and Ginesti et al. (2018) states that human capital has a positive effect on financial performance and is found as a driver of value in the company, so that added value (value added) on human capital can increase the value of the company.

4.3 The Effect of Structural Capital on Firm Value

Resource-based theory which states that the resources owned by a company must be used efficiently and must be balanced with the existence of procedures and systems within the company. Ashton (2005) explains that structural capital is the ability possessed by a company to be able to manage the routine activities of a company with all the structures in it to support employee performance as a whole and can produce maximum corporate value. If the company does not use structurally owned capital, it can lead to the selection of a company strategy that is not appropriate so as to produce a negative impact on value in the company (Forte et al., 2016). The results of this study are in line with previous studies conducted by Li and Zhao (2017) and Osiyevskyy (2017) which state that structural capital has a significant positive effect on firm value.

4.4 The Effect of Customer Capital on Firm Value

Signaling theory states that a company must be able to establish good relations with external parties through a signal that is given to external parties in the form of financial statements. This is done to avoid the existence of asymmetric information between external parties so that indirectly the good relations that exist between companies and external parties can increase the value of the company. Companies that are able to maintain good relations with external parties are one example of the application of customer capital which is an element of intellectual capital. Berzkalne (2014); Osiyevskyy (2017); and Li and Zhao (2017) which state that customer capital has a significant positive effect on firm value.

4.5 The Effect of Human Capital on Corporate Reputation

According to the resource-based theory, companies will gain a competitive advantage if they are able to manage assets that are owned well (Wernerfelt, 1984). The increase in human capital in this study can cause an increase in corporate reputation but not significantly. This is because there are several factors that are most relevant in influencing the company’s reputation directly including the selection of company strategies or establishing good relationships with external parties (Chen et al., 2005). Muhammad and Ismail (2009) and Li and Zhao (2017) stated that human capital does not have a significant effect on company performance and also the value of the company so that indirectly it does not affect the company’s reputation.

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4.6 The Effect of Structural Capital on Corporate Reputation

In a resource-based theory, it has been stated that the resources owned by the company must be utilized efficiently and must be balanced with the existence of procedures for activities and systems that are appropriate in the company. Companies that are committed to procedures related to routines and good corporate structure to support employee performance will be appreciated by the outside community so that it can improve the company’s reputation. Kalkan et al. (2014); Forte et al. (2016); and Ginesti et al., (2018) stated that companies that are committed to procedures related to routines and good corporate structures to support employee performance, will be appreciated by the outside community so as to enhance the company’s reputation.

4.7 The Effect of Customer Capital on Corporate Reputation

Based on signaling theory which states that giving signals to external parties in the form of financial statements can establish good relations with stakeholders, these results indicate that interested external parties also give higher value to companies that pay attention to intangible assets other than customer capital owned by the company that is like the development of innovation from the company. Andreeva et al. (2016) stated that high customer capital is a common and unavailability of competitive advantages that are unique to the company. Nimtrakoon (2015); Andreeva et al. (2017); Ginesti et al. (2018) which states that customer capital has no significant effect on the company’s reputation.

4.8 The Effect of Corporate Reputation on Firm Value

Signaling theory states that an action taken by the management of a company provides guidance to investors about how management views the company’s prospects as one of which is creating a good corporate reputation (Besley and Brigham, 2001). Brammer & Pavelin (2006); Walsh et al. (2006); Walsh, Mitchell, and Jackson (2009); Saeidi et al. (2015) and Weng (2016) which state that companies that have a good reputation provide a positive signal to investors, especially when the company is in trouble (distress) so that companies that have a good reputation can support the increasing value of the company.

4.9 Corporate Reputation Mediates the Effect ofHuman Capital on Firm Value

Based on the results of the study indicate that corporate reputation is able to mediate the influence of human capital on firm value. This is because the path coefficients before and after entering the corporate reputation result in a value that remains significant with the path coefficient experiencing a slight decrease. Human capital reflects the company’s ability to produce the best solutions based on the valuesthat are embedded in each individual company. In line with resources-based theory which states that utilizing assets owned by a company can provide a competitive advantage for the company (Wernerfelt, 1984). Cravens & Oliver (2006) and Petkova et al. (2008) which states that human capital has a significant effect on corporate reputation because human capital plays an important role in the placement of the company’s reputation.

4.10 Corporate Reputation Mediates the Effect of Structural Capital on Firm Value

Based on the results of testing, it shows that corporate reputation is able to mediate the influence of structural capital on firm value. The results of research conducted through statistical tests with the help of WarpPLS 5.0 software show that corporate reputation qualifies as a mediating variable, namely: path coefficient between the independent variable and the dependent variable is significant, the path coefficient between the independent variable and the mediating variable is significant, and the path coefficient between mediating variables and significant dependent variable. Resource-based theory which states that companies can utilize and manage assets owned by either tangible or intangible assets in order to create a competitive advantage for the company. This advantage will be an added value for the company to be able to compete in the global market chain. The results of this study are in line with Forte et al. (2016) which states that if a company can use structurally owned capital, then it will have an impact on the selection of the right corporate strategy so that it produces a good impact on the value of the company.

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4.11 Corporate Reputation Mediates the Effect of Customer Capital on Firm Value

Based on the results of the study indicate that corporate reputation is able to mediate the influence of customer capital on firm value. This is because corporate reputation variables fulfill the requirements as partially mediating variables. In addition, there is a stronger direct influence between the independent variables (customer capital) on the dependent variable (company value) in line with the indirect influence that is indicated by the presence of mediating variables, namely corporate reputation, resulting in test results that still have a significant effect. Customer capital reflects the company’s ability to always optimize relationships with customers and other external parties in accordance with signaling theory. Osiyevskyy (2017) and Mandariaga and Rivera (2017) which states that customer capital has a significant effect on company value because the satisfaction obtained by the customer can improve the company’s reputation, so that when the company’s reputation increases, the value of the company will increase simultaneously.

5. Conclusions

For companies, with the aim of increasing company value, it takes effort and support from managers and employees to keep paying attention to the quality of work and maximize everything they master in their field, because it represents intellectual capital so that what is owned by the company is exploited to the company’s progress. In addition, decision makers, especially investors, can use this independent variable as additional information to consider in terms of decision making and for subsequent researchers to be encouraged to add a number of variables such as company performance or the company’s financial performance.

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Acknowledgements

The authors would like to thank the editor and anonymous reviewers for their supportive comments and suggestions. The authors received no direct funding for this research.

Putu Nidia MIDIANTARI is a student of Universitas Airlangga, Indonesia. Her current research interest is in management accounting. ORCID ID: orcid.org/0000-0002-8255-5194

This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/

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1214 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 https://doi.org/10.9770/jssi.2020.9.4(8)

THE EFFECT OF FDI, LABOR AND WAGE ON REGIONAL ECONOMIC DEVELOPMENT: A CASE STUDY

Muryani1*, Desti Ratna Widyaningrum2

1,2Department of Economics, Faculty of Economics and Business, Universitas Airlangga, Indonesia

E-mail: 1*[email protected] (Corresponding author)

Received 5 October 2019; accepted 30 March 2020; published 30 June 2020

Abstract. This study aims to look at the effect of the investment amount of labor and the minimum wage to economic growth. This study use PLS, and use time series data from 2010 to 2016. The variables in this research are domestic investment variable physical, minimum wage, and the amount of labor work in Indonesia. The results showed that the physical variables domestic investment, domestic investment in non-physical, minimum wage, and the number of workers who work GRDP of East Java but for variable non- physical investments in the country negatively affect the Gross Regional Domestic Product of East Java.

Keywords: Investment; Employment; Wages; Pooled Least Square

Reference to this paper should be made as follows: Muryani, Widyaningrum, D.R. 2020. The effect of FDI, labor and wage on regional economic development: a case study. Journal of Security and Sustainability Issues, 9(4), 1215-1223. https://doi.org/10.9770/jssi.2020.9.4(8)

JEL Classifications: J01, E24, E22.

1. Introduction

Economic growth is a benchmark to measure the achievement of economic development from one period to the next period. Regional development is an integral part of national development and implemented based on the principle of regional autonomy. The improvement of welfare not only the obligation for the government, but also the entire community. Therefore, the government should be able to empower all components of society, particularly the private sector, to play a bigger role in improving the welfare of the community. Thus, the economic growth that is more just and equitable can be achieved by better and faster. Government decentralization began to be practiced when the enactment of Law No. 22 Year 1999 on Regional Government and officially started on January 1, 2001. The authority of district / city in organizing the regional autonomy began a very important role. Implementation of fiscal decentralization in Indonesia was appointed to create the aspect of independence in the area with the principles of local autonomy. East Java Province is one of the provinces in Indonesia, whose economies are good. It can be seen from the percentage of economic growth in East Java ishigh. Not only that, at this time the level of fossil energy consumption in Indonesia continues to increase which means the vision to become a developed country with high economic growth will soon be achieved.

East Java Growth during the period 2001-2015 grew an average of 5:36%, above the national average growth that only 4.86%. In macroeconomic theory, the terms of expenditure, gross regional income is the sum of many variables including the investment. Investment itself is affected by foreign and domestic investment. Invest- ment from the private sector can come from domestic and overseas (foreign). Investment is one of the variables JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online that can boost the economy of a region. Investments can include capital investment to open a new business, expand a business or add capacity and increase the number of goods and services activities which will absorb a lot of labor and increase the increase in spending and incomes. Investment is one of the variables that can boost the economy of a region. It can include capital investment to open a new business, expand a business or add capacity and increase the number of goods and services activities which will absorb a lot of labor and increase the increase in spending andincomes.

So, the investment will boost per capita income of local residents. Growth in per capita income makes people no longer able to meet the basic daily needs, but the secondary and tertiary needs can be met. This is what will trigger the development of various economic activities in the area. Regional gross domestic growth (GDP), as a measure of the growth of the regional economy can not be separated from the role of government spending in the public service sector. Local government expenditureis measured by the total recurrent and development expenditure allocated in the local budget. The larger the area of productive government spending then the increase rate of the economy in a region. In this case the role of government is essential in regulating the economy. One of the government’s role in regulating the economy is to implement fiscal policy by allocating expenses to build a useful proposition and infrastructure for development. The Government spending is closely related to the budget (local budget) because it will directly affect the revenue and the spending of each regional. So, it will affect the economic growth directly. In the last four years, domestic investment has increased. This can be seen from the recording of the Investment Coordinating Board (BKPM), which noted that the realization of domestic investment during January-September 2010 reached Rp38,5 trillion, up Rp10.3 trillion compared to the same period in 2009. Deputy Head of BKPM Yus’anin Jakarta, Sunday (31/10), said according to BKPM data, domestic investment in food crops and plantations are the largest, covering 76 projects with a total value of Rp 4.5 trillion, followed by investment in transport, storage and telecommunications which consists of 13 projects with a total value of Rp 3.1 trillion , While domestic investment in the food industry sector consists of34 projects with a value of Rp 2.8 trillion; basic chemical industry, chemical and pharmaceutical goods includes 20 projects worth a total of 1.4 trillion; and investments in other services sectors are 33 projects worth a total of Rp1.1 trillion. Location domestic investments are located mainly in Central Kalimantan (Rp 2.8 trillion, with 23 projects); Jakarta (Rp 2.5 trillion, 27 projects); West Java (Rp1.9 trillion, 41 projects); East Kalimantan (1.8 trillion, 20 projects) and East Java (Rp1,8 trilion, 30 projects).

2. Theoretical Basis Endogenous Growth Theory

Endogenous Growth Theory is a theory of the development of the Solow model. Among the endogenous growth theory that attempts to explain that the sources of growth are the increase in the accumulation of capital in the broadest sense. Capital in this case is not only in the physical properties but also non-physical form of science and technology. The development of this technology will develop innovations that increase productivity and lead to an increase in economic growth that could bring new discoveries that improve production efficiency. This efficiency can increase productivity. So, in this case the quality of human resources is factors that affect the economicgrowth.

2.1. Neo Classical Theory of Economic Growth Solow

According to Neo Classical Theory of Economic Growth, economic growth depends on the increase of the supply of production factors (population, labor, and capital accumulation) and the rate of technological progress. Neo-classical theory found modaloutput ratio could change. In other words, to create a number of specific outputs, the amount of capital that can be used vary with the amount of aid workers is different also, as needed (Arsyad, 1997). Neoclassical growth theory calculates output growth as a function of input growth, especially of capital and labor. Long-term growth resulted from improvements in technology. Solow-Swan production function written in the following way (Barro and Martin, 1995):

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Information: Y (t) = the level of production in t K (t) = number of stocks of capital in year t L (t) = the amount of labor in year t A = technology

According to Mankiw (1992), the difference in income per capita of each country can be addressed using the augmented Solow growth model. In this model the output produced from physical capital, human capital and labor. The model called MRW-style neoclassical growth models written as follows:

Information: Y (t) = the level of production in t H (t) = the amount of human capital in year t K (t) = number of stocks of capital in year t

2.2. Invesment

According Suparmoko (1998), stating that investment is everything that is issued and is intended to increase or maintain the stock of capital (capital stock). Capital inventories consist of factories, machines, offices and durable goods used in the production process, including houses and stock of goods that have not been sold or used within the relevant time (inventory). It has been suggested that investment is adding to the stock of capital expenditure. According Sukirno (2008), investments may also be interpreted as an expense or planters shopping capital or companies to purchase capital goods or machines to increase the ability to produce goods and services available in the economy. According to BPS, Gross fixed capital formation or investment is an activity adds to or reduces the assets remain on the unit of production within a specified time. Increases in capital goods include procurement, manufacturing, purchasing, leasing (financial leasing) new capital of the region, as well as capital goods, new or used capital goods from outside the region (including major repairs, transfer and barter capital goods), and asset growth sources biological resources were cultured (Cultivated Biological Resources/ CBR).Invesment can be summed up as everything was issued to increase the supply, purchase or completeness of capital goods in order to increase the production capacity.

2.3. Domestic Investment

Terms of Domestic Investment (DCI) is derived from the English language, namely domestic investment. Domestic Investment (DCI) can be found in Article 2 of Law No. 6 of 1968 concerning Domestic Investment (DCI). Domestic investment is the use rather than fortune as stretcher in Article 1, either directly or indirectly run businesses by or under the provisions of this law. The use of direct wealth is the use of capital employed directly by domestic investors for their business development, while the use of indirectly represents the use of capital used are not made directly to build a business. Implementation of the investment is based on laws and regulations Article 1 of Law No. 25 of 2007 on Investment, Domestic Investment is investing activity to do business in the territory of the Republic of Indonesia by domestic investment using domestic modal. Parties can be domestic investments are: 1. The Individual Indonesian citizens, and or; 2. Enterprises Indonesia, and or; 3. The Indonesian Legal Entity.

2.4. Labor

Based on the Central Bureau of Statistics defines if labor is the entire population of working age or age 15 and older who have the potential of producing goods and services. The Central Bureau of Statistics in dividing the workforce, which is the first full-time employment where workers have a number of hours more than 35 hours a week to work in accordance with certain job descriptions. Both full-time labor is labor working hours less then

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35 hours a week. Third unemployed workers or temporary workers are not having time to work with working hours 0 less than 1 hour per week. Workforce are individuals who are willing to work for themselves and for the family to earn wages in the economic activities to produce goods and services. Traffic measured physical base through productivity-called working-age population.

2.5. Theory of Labor Demand

According to Borjas (2008) Demand for labor is the theory that describes how much a business field will give jobs to workers with different levels of wages in a given period. The additional demand for employers or producers of labor depends on the level of increase in market demand for goods produced.According to Todaro and Smith (2010) The function of the demand for labor is always seen in neoclassical economic theory, where in a market economy it is assumed that the employer or the manufacturer can not influence market prices. to maximizing their profits entrepreneurs or manufacturers are only able to regulate how much the amount of labor that can be given the job.

Figure 1. Labor demand curve

Based on the theory of labor demand, if an entrepreneur or manufacturer before adding labor still would have taken various steps in advance such as by adding working hours of existing workers and increase wages. This will occur when the additional marginal due to the addition of this larger workforce can increase company profits. Demand for labor is related to the amount of labor needed by the company, but the labor demand is affected by changes in wage rates. Then it will change other factors that can affect demand for products. According to the economist Alfred Marshall on labor demand decreases when labor wage rate then increases the demand for labor in the labormarket.

2.6. Minimum Wage

According to Indonesian Law No.13 / Th / 2003 on Manpower, in Chapter I Article 1, paragraph 30, explained that the wages are earned rights of workers / laborers of the companies that provide employment in the form of money over what is done, and will be paid under the agreement or agreements already done, or by legislation. This agreement includes cash benefits paid to workers / laborers for the work that has been done, while the Minimum Wage (UMR) is defined as the minimum wage was allowed to be given to workers by employers, and normative. The amount of the minimum wage based on the determination of the minimum living needs, the magnitude of job opportunities, consumer price index, the continuity of the company, the region’s prevailing wage, and the level of 21 regional and national economic development (Kuncoro and Suhardjono, 2002). The provincial minimum wage is a wage standard set by the provincial government in order to protect the interests of the workers with the aim to improve the welfare of the community. When there is a wage increase then the cost of factors of production companies is increasing, if not offset by an increase worker productivity then the benefits will be reduced investor and investment will decline.

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2.7. Relationships Domestic Capital Formation Against the GDP

Investment is everything that is issued with an objective of achieving returns in the form of profit or revenue. Investment can be in the form of purchasing land, equipment and production machinery as well as merchan- dise. Investments may affect the GDP through employment, with it initially will open up new jobs so that unemployment declined and incomes will be increased so that the GDP and economic growth rose. According to a research conducted by Sulaksono (2015) states that the mining sector investment has positive influence on the Gross Regional Domestic Product of the mining sector excluding oil and gas. Also, Suindyah (2011) and Muryani and Usvishiko (2018) state that investment has a positive effect on economic growth.

2.8. Labor relations with the GDP

The role of labor as a factor of production will affect national income. Labour is the most important factors in terms of quality. If the quality of labor is better, there will be an increase in production. In addition, employee performance can also be improved by competent leaders and in accordance with the culture and work environment in the company (Eliyana and Ma’arif, 2019). The heterogeneous nature of labor both in terms of age, gender, ability to work, health, education, skills and so on, therefore the necessary manpower planning in order to support the national development of Indonesia (manpowerplanning).

2.9. Relations with Labor Productivity Growth

The relationship between labor productivity and economic growth has been carried out. Generally, indicates that the labor productivity boosts economic growth. The increase in productivity during the crisis is a significant driver of the economy after a period of time (Emsina, 2014). Alany (2011) found that the growth of technological advances generate economic growth, while the increase in productivity either capital or labor productivity lead to a decrease in economic growth in the period, because labor productivity growthmay have led workers to enjoy more leisure than work or capital productivity growth could make capital more efficiently and produce more idle capacity.

The Alany’s study explains Gross fixed capital formation became one of the drivers of economic growth, especially investment in the country. Capital investment and labor input into economic growth as measured by the GDP by production or business field. Component inputs in the economy are labor and capital. Investments taken from the researchers is domestic investment in physical and non-physical as well as other input components of labor is the amount of labor bekerj in Indonesia. The independent variable of the data processed by Stata 13 with models Pooled Least Square (PLS) so as to produce simultaneous results are seen from the F test and partially visible from the R-square.

3. Data and Methodology

The study used a quantitative approach to demonstrate gender equality to the regional gross domestic product in the 28 districts of East Java provincial town with the method used is the panel data regression Pooled Least Square (PLS). This quantitative method aims to analyze the relationship dependent and independent variables. Meanwhile, in order to obtain robust results, this study also used two other methods is the method of PLS with standardize analytical tool used is a statistical software program STATA13.

The data used in this research is secondary data which is quantitative data. The quantitative data used is the data panel with two groups of data that is data sexes, male and female gender of data. This study used data samples taken by the Central Bureau of Statistics of East Java and BPJS Health and Labor.The scope of the study is 28 districts in East Java city from year 2000 to 2016. The collected data are annual data on the number of workers, minimum wage, investment in the country and the number of companies with health insurance, to be clearer in Table 1 data source for this study briefly and Rici are presented in Table 1 below:

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Table 1. Types and sources of data.

Variables Information Year Source GRDP East Java GRDP based business field 2000-2016 East Java, Central Statistics Agency The number of workers both male and female Labor 2000-2016 East Java, Central Statistics Agency informal and formal sectors are bekerj in Indonesia Minimum Minimum wage standard East Java, Central 2000-2016 wage urban districts in East Java Statistics Agency Domestic Total investment of both physical and 2000-2016 East Java, Central Statistics Agency Investment non-physical in East Java Province

3.1. Methodology

The model used in this study is the Fixed Effect Modeldan processed using STATA software 13. The dependent variable of this research or paper s Gross Domestic Product (GDP) and the independent variables consist of the workforce, the number of companies which have the guarantee of labor, minimum wage, investing their capital in country. PLS method selected as the analytical method in this research because it also used in the previous research.The Hausman test in advance, so that eventually the model Pooled Least Square is most appropriate to test the panel data in this study.

Pooled Least Squares regression equation as follows:

4. Result and Discussion

After performing estimation using Fixed Effect Models (FEM) and Pooled Least Square (PLS), the next stage is to choose between Fixed Effect Models (FEM) and Pooled Least Square (PLS). The test is performed using the Chow test. The null hypothesis (H0) of Test Chow stated that there was no difference between FEM and PLS estimators, and the alternative hypothesis (H1) for the Chow test states that there are differences in the estima- tor FEM and PLS. Criteria for determining the Chow test is if the p-value <α (0.05), the null hypothesis (H0) will be rejected, which means that there is adifference between FEM and PLS estimators and the right model to be used is PLS (Gujarati, 2003). Chow Test Results in this study showed a p-value of 0.000 and smaller than α (0.05) so that the null hypothesis (H0).

Table 2. PLS estimation results.

PDB constants 1495730 .6277 tng (0.0022) 20252 invfis (0.031) 549.81 UMR (0.080) -39465 invnonfis (0.000) Obs 100 R-square 0.952

In Table 2 shows the estimation results Pooled least Square for a variable amount of labor (tng) has a coefficient 0.6277 which means that each increase in total employment rose 1 unit will increase the GDP amounted to 0.6277. Variable physical investment (INVFIS) has a coefficient value 20 522 which means that every increase

1220 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online in physical investment rose by 1 unit will increase the GDP by 20522. Variable non-physical investments -39 465 has a coefficient value which means each increase in non-physical investments rose by 1 unit will lower the GDP amounted to 39465. variable minimum wage has the coefficient of 549.81, which means any increase in minimum wages rose by 1 unit will increase the GDP amounted to549.81.

Based on Pooled Least Square estimation value obtained Proba> F or F test is worth 0.0000 which means that overall the independent variables which include the development index genderberpengaruh the dependent variable that simultaneously affect economic growth. Based on estimates Pooled Least Square obtained the value t test, to variable gender development index of 0.009 significant effect on economic growth. The variable amount of labor has a significant influence amounted to 0.0022 to the GDP of East Java. Physical investment variables have significant influence amounted to 0,031 to the GDP of East Java. Variables of minimum wages have significant effect 0.080 to GDP in East Java. Non-physical investment variables have significant negative effect of 0.000 to GDP in East Java.

Based on estimates Pooled Least Square show that women’s productivity negatively affects economic growth by a significant 600 700 with 0,000. the result of the analysis is supported by Nayef (2017) research, which shows thatdespite government policy that supports the movement of emancipation of women but does not support in the field of work because, according to research results contributions productivity of female workers are not counted as output but include the output male labor or contribution from amale.

Research conducted by Joshua (2018) shows the level of gender development in Muslim countries in the Middle East is still low due to the lack of government support so that the rank of the empowerment of women in Middle Eastern countries is still low category. Low levels of gender empowerment push down economic growth because in the Middle East countries rely on oil exports so that the majority of women. The results of research by the author in accordance with the study conducted by Joshua (2018) who shows the Gender Empowerment Index of 34 provinces in Indonesia adverse affect on economic growth in Indonesia as seen from Gross Regional DomesticProduct.

Research conducted by Fahimi (2018) showed a positive influence between the Human Development Index in East Asian countries (Japan, South Korea) on the growth of East Asian economies. This research has a consistent result or the same result with research made by Fahimi (2018). Theoretically consumptionstate that there is a relationship between consumption expenditures with a country’s national income. If there is an increasing consumption; it will increase national income that can boost economic growth. The Results of the research shows that the level of household consumption of 34 provinces in Indonesia to positively influence on economic growth as seen from the Gross Domestic Product. Based on consumption theory according to Keynes that there is a relationship between consumption expenditures with a country’s national income; increasing consumption means national income is increasing that can boost economic growth.

Research conducted by Piros and Pinto (2013) showed that in China which is one of the most populous country in the world is proving increasing economic growth in China. Results of the author shows every population growth occurred in 34 provinces in Indonesia affects positively to economic growth in Indonesia as seen from the Gross Domestic Product. The population of Indonesia are categorized into four largest in the world makes the amount of labor required more and more automated in terms of per capita income increase and boost economic growthoutput.

5. Conclusions

Based on the discussion above it can be concluded from that simultaneous regression deal with the R-square, independent variables which include physical investment variables, the number of workers, minimum wage dependent variable or variables affect on the GDP by 60 percent in East Java. Variable non-physical investment decrease the GDP amounted to 34945 units in East Java. So, all independent variables partially significant affect the dependent variable. On the contrary, it is because not too many non-physical investments in Indonesia, especially in East Java, so there is no positive influence between intangible investments and theGDP.

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From the conclusions above, it can be suggested that the result does not correspond with the theory, namely variable non-physical investment that does not affect the GDP.It is necessary to program or government policies that lead to non-physical investments in the form of informal education including skills training of the community.on the other hand, the physical investment in the form of advanced technology machines also offset by technicians who master the technology. It will create a good productivity with maximum output, so it will boost the economy of the GDP.

References

Alany, K.R.J. (2011) Labor Productivity Analysis with Labor Foreign Affairs. Journal of Economics University of Gajah Mada 4356-67

Arsyad. (1997). Impact of Gender Inequality on Economic Growth in the Arab Region. Macrothink in Applied Economics Research Institute 299-117

Barro, R.J, and Martin, X.S. (1995). Economic Growth New York: McGraw –Hill

Borjas. (2004). Labor Organization: Contributions of Labor Women. New York: Mc. Hill

Eliyana, A., and Ma’arif, S. (2019). Job satisfaction and organizational commitment effect in the transformational leadership towards employee performance European Research on Management and Business Economics https://doi.org/10.1016/j.iedeen.2019.05.001

Emsina. (2014). Impact of Government Policy Investors Against Mines in Samarinda. Journal of Ecology University of Gajah Mada12 18-28

Fahimi, A., Akadiri S. S., Seraj, M., Akadiri, A. C. (2018) Testing the role of tourism and human capital development in economic growth A panel causality study of microstates https://doi.org/10.1016/j.tmp.2018.08.004

Gujarati, D. (2003). Basic Econometric. Singapore: McGraw-HillInc

Joshua, E. (2018). Climate Changeand Gender Equality in Developing States. World Development Journal127 289-305 https://doi. org/10.1016/j.worlddev.2018.02.021

Kuncoro, M., and Suhardjono. ( 2002). Manajemen Perbankan. Yogyakarta: BPFE

Mankiw. (1992). Macroeconomics 7th Edition New York: McFill

Muryani, and Usvishiko, D. (2018). Natural Externalities of Economic Growth Stabilization in XXI Century: Geography Seeking Re- venge Advanced Science Letter 24 (6302-6304)

Nayef, A.S. (2017). Impact of Gender Inequality on Economic Growth in the Arab Region. Research in Applied Economics Macroth- inkInstitute 299-117

Piros, C.D., and Pinto, J.E. (2013). Economics for Investment Decision Makers: Micro, Macro, and International Economics. London: John Wiley &Sons

Suindyah, S. (2011). Pengaruh Investasi, Tenaga Kerja dan PengeluaranPemerintah Terhadap Pertumbuhan Ekonomi Di Provinsi Jawa Timur. Ekuitas 15 (4):447-500

Sukirno, S. (2008). Mikro Ekonomi: Teori Pengantar Edisi Ketiga. Jakarta: PT Raja GrafindoPersada

Sulaksono, A., (2015). Pengaruh Investasi Dan Tenaga KerjaTerhadap Pdb Sektor Pertambangan di Indonesia. Jurnal Ekonomi Bisnis 20 No 116-24

Suparmoko. (1998). Analysis of Gender Equality in the ASEAN Region Jakarta: MutiaraJaya

Todaro, M.P., and Smith, S.C. (2010). The eleventh edition of Economic Development. Jakarta: Penerbit Erlangga

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Aknowledgements

The authors would like to thank the editor and anonymous reviewers for their supportive comments and suggestions. The authors received no direct funding for this research.

Short biographical note about the contributors at the end of the article (name, surname, academic title and scientific degree, duties, research interests):

MURYANI is a Doctor and also a lecturer in Faculty of Economics and Business, Universitas Airlangga, Indonesia. Her research mainly focuses on environment issues, gender issues, and economics. ORCID ID https://orcid.org/0000-0001-7832-9760

Desti Ratna WIDYANINGRUM is a student and junior research assistant in Faculty of Economics and Business, Universitas Airlangga, Indonesia. Her current research interest is economics. ORCID ID https://orcid.org/0000-0002-7412-9101

This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/

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1224 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 https://doi.org/10.9770/jssi.2020.9.4(9)

DIGITAL ECONOMY AND ITS ROLE IN THE PROCESS OF ECONOMIC DEVELOPMENT

Sagituly Gaziz1, Almagul Oteshova2, Natalia Prodanova3, Natalia Savina4, Dmitry O. Bokov5

1Shanghai Jiaotong University, 1954 Huashan Road, Xuhui District, Shanghai 200030, P.R.China 2Kazakh-Russian International University of Aktobe, Ayteke-bi street 52, Aktobe, 030000, Kazakhstan Republic 3Plekhanov Russian University of Economics, Stremyanny lane, 36, Moscow, 117997, Russian Federation 4Financial University under the Government of the Russian Federation Leningradsky Prospekt 49, Moscow, 125993 Russian Federation 5Sechenov First Moscow State Medical University, Trubetskaya St. 8, bldg. 2, Moscow, 119991, Russian Federation

E-mails: *[email protected]

Received 19 November 2020; accepted 15 March 2020; published 30 June 2020

Abstract. The article considers the digital economy as the main factor in the development of small and medium-sized businesses. The programs of the digital economy of various foreign countries were explained. Methods of effective development of the digital economy are studied. The importance of the digital economy in modernizing traditional industries and services is emphasized. Mixed financial transactions have organized by continuous penetration of information in technologies and its role in the development of small and medium-sized businesses have described. In Kazakhstan, the problems of introduction and dissemination of the digital economy in the sphere of small and medium-sized innovative entrepreneurship are discussed: the lack of infrastructure to promote domestic developments, underestimation of innovative activity by domestic entrepreneurs. The digital economy characterized as one of the manifestations of scientific and technological development of Kazakhstan. It provides for a significant favorable impact of digitalization on the development of small and medium-sized innovative entrepreneurship in Kazakhstan. In the digital economy, the main attention paid to one of the most important conditions for the effective development of the leading branches of human activity - the formation of an appropriate institutional environment. The main institutions, personnel and conditions for the use of knowledge for the successful development of the digital economy outlined.

Keywords: economic development; digital economy; strategy; information technologies; digitalization; competitiveness; national program; Internet; business; Technopark; entrepreneurship; startup

Reference to this paper should be made as follows: Gaziz, S., Oteshova, A., Prodanova, N, Savina, N., Bokov, D.O. 2020. Digital economy and its role in the process of economic development. Journal of Security and Sustainability Issues, 9(4), 1225-1235. https://doi.org/10.9770/jssi.2020.9.4(9)

JEL Classifications: B23, G17, R11

1. Introduction

Many developed countries, predicting upcoming changes, have begun a systematic movement towards the development of a digital economy (Gerasimov et al., 2019; Vertakova et al., 2019). The first such program was implemented by the United States and China, the countries, which today are leaders in the development of the digital economy. Behind them, the corresponding programs were embraced by England, the countries of the European Union, Australia and others. Currently, the programs supporting the digital transformation of the economy are widely spread across many countries (e.g. Veselovsky et al., 2018; Glotko et al., 2020).

The aim of the work is to study the digital economy and its role in the development of small and medium enterprises in the Republic of Kazakhstan. The purpose of the study is to understand the program of the digital JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online economy, consider it on the example of various foreign countries and study rational methods for the development of the digital economy.

As concerns a case under our consideration, in accordance with the Law of the Republic of Kazakhstan “on local state administration and self-government in the Republic of Kazakhstan” of 23 January 2001 and the Law of the Republic of Kazakhstan “on local state administration and self-government in the Republic of Kazakhstan” of 23 January 2001, the district decided: 1.approve the district budget for 2013-2015 in accordance with ap- pendices 1, 2 and 3, respectively, including for 2013 in the following volumes: All this indicates the relevance of the topic of the dissertation research, which is attached to important political tasks and strategic documents for the Kazakh society.

Digitalization of the economy is on the issue of strategic importance in Kazakhstan. Kazakhstan is developing new information and communication technologies, widely uses them in the political system and society as a whole. In the modern world political practice, this important task is successfully implemented by e-government. The above-mentioned topical issues influenced the choice of this research topic. The topic is very important, it is closely linked to an acute problem that contributes to the improvement of public administration (Popok et al., 2019; Fedulova et al., 2019).

2. Literature review

The state should carefully study issues related to the development of the digital economy. The importance of analyzing and implementing foreign experience in the development of the digital economy is discussed in many tutorials. The authors studied the concepts of developing the region’s human resources and scientific and educational potential in the digital economy, e.g., Volkova, Galynchik (2018), Kurbanov (2018), Okrepilov et al. (2017), Yakutin (2017). The development of the digital economy affects the work of the state in the sphere of small and medium-sized businesses (Andriushchenko et al., 2020). Development of digital economy has a snowball effect since from one side it changes consumer preferences and behaviour (Štefko et al., 2019; Sing- galen et al., 2019; De la Hoz-Rosales et al. 2019), and from another side, affect the qualification of employed human resources (Lincaru et al., 2018). Those interlinked processes lead to more efficient use of strategic resources (e.g. Vlasov et al., 2019; Sarma et al., 2019), and an overall increase of competitiveness of organizations. Quantitative Economics in state regulation the economic sector, forecasting, planning, as well as innovations and achievements of scientific and technological progress are of great importance to the microeconomic significance of small and medium-sized enterprises ‘ achievements in the economy.

3. Materials and Methods

Method of research. The presented foresight research technology includes bibliometric analysis; analysis of cause-and-effect relationships between economic phenomena and factors; methods of grouping and rating evaluation. The research based on the general scientific methodology, which provides for the use of a systematic approach to problem-solving. The main part of this work is the fundamental works of domestic and foreign scientists devoted to the study of the digital economy, its development in Kazakhstan and its impact on the development of small and medium-sized innovative entrepreneurship in Kazakhstan. Macroeconomic, statistical and analytical approaches, the study of priorities in the implementation of the digital economy; second, analysis of the effectiveness of the implementation of the state policy of the digital economy. Implementation of programs in the field of digital economy development. Third, research on the sustainable development of the digital economy in achieving macroeconomic challenges (Derkho et al., 2019).

4. Results

Many programs of the digital economy of different countries (USA, Austria, Australia, England, etc.) pay special attention to such social directions as “digital medicine” and “smart city”. The implementation of these social strategies requires different plans and certain difficulties. The digital economy within the framework of

1226 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online modernization of traditional production industries and services, organization of related financial transactions, end-to-end penetration of information technologies and digitalization of economic processes, the change in the structure of consumption will become the basis for the formation of new markets and new market conditions, as well as new approaches to forecasting and management decisions. The digital economy opens up new opportunities for business. In order to live and develop in the new environment, companies must radically restruc- ture business processes (Dinh, 2019). The process of digitalization today affects all countries of the world. In addition, each country independently determines the priorities of digital development. More than 15 countries are currently implementing national digitalization programs. The leading countries to digitalize the national economy are China, Singapore, New Zealand, South Korea and Denmark. China in its “Internet plus” program integrates digital industries with traditional ones, Canada creates an ICT hub in Toronto, Singapore forms a “Smart Economy”, the driver of which is ICT, South Korea in the “Creative economy” program focuses on the development of human capital, entrepreneurship and dissemination of ICT achievements, and Denmark focuses on the digitalization of the public sector (State program, 2017).

“Big data”, which is formed as the result of economic modernization, will become not only the technology of their analysis but also one of the leading assets of the state, business and civil society. In turn, the digital space opens access to a significant amount of information for many participants of the global economic space. The development and implementation of technologies are strategically important (Shatunova et al., 2019). Condi- tion for preserving sovereignty within the framework of the development of national programs for the development of a new generation of economy, including the analysis and forecasting of data, the introduction of new management approaches, as well as globalization and implementation of digital development programs of other world market participants.

The economy of Kazakhstan ceased to close as a result of the radical transformation that took place in the last decade, and gradually became part of the world economy. The main feature of the future society is the introduction of digital technologies in human life. This is due to the progress in the field of information technology and telecommunications. Issues of innovative, subsequent digital development of the economy conjugated by the activation of small enterprises and the growth of the number and quality of their competence, which is associated with higher education (Zhuravlev et al., 2019).

The reason for the positive impact of small business growth on the “figure” is the growth of competition. Of course, every entrepreneur wants to get more benefits, but for this, it is necessary to interest both consumers and partner organizations.

The state program “Digital Kazakhstan” adopted in Kazakhstan in 2017. This program intended to accelerate the pace of development of the economy of the Republic and improve the quality of life of the population with digital technologies, enhancing the competitiveness of small companies where a tool or method for this increase is the introduction and development of digital technology in small businesses. In this program, an important role played by the support of small businesses by teaching new business models, popularization of the digital economy, financial support, creation of special tax and legal conditions. Small business is characterized by a high degree of centralization, flexibility, rapid response to market changes, high competition (hence, the desire to survive in the competition), rapid decision-making, etc.

It should be noted that today in Kazakhstan there is a tendency of development of small business. As of No- vember 1, 2018, the number of existing SMEs compared to the corresponding date last year increased by 6.3% and amounted to 1,227,242. That is, there are about 15 SMEs per 100 residents of Kazakhstan (Agazarian and Mamina, 2018). Almaty, where more than 174 thousand SMEs are registered, is traditionally a leader. In the second place-Astana-119 052. This is due, among other things, to the large influx of businesspeople to Astana. The share of individual entrepreneurs was 65.6%, legal entities of small business-18.5%, farms-15.7%, legal entities of medium business-0.2%.

Digitalization should play an important role in stimulating the development of SMEs in Kazakhstan, the role

1227 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online of which have been observed, but in the coming years, it will increase without measures to ensure universal access to high-speed Internet (broadband) and the development of information and communication technologies (ICT). This applies to both specific industries and small businesses in General. This year, an Open digital platform started functioning in our country. The advantages of the domestic platform for small and medium-sized businesses aimed at two models of relationships: “state for business” and “business for business”.

Thus, full automation of state support measures will make them more accessible and significantly reduces corruption risks. For example, the term of service” subsidizing the cost of fertilizers (except organic) «is reduced from five days to one day. Only in 2018, the reduction in the terms of obtaining public services will reduce business expenses by 1.6 billion tenge, and by the end of 2022-by 8.4 billion tenge. Thus, full automation of state support measures will make them more accessible and significantly reduces corruption risks. For example, the term of service” subsidizing the cost of fertilizers (except organic) «is reduced from five days to one day. Only in 2018, the reduction in the terms of obtaining public services will reduce business expenses by 1.6 billion tenge, and by the end of 2022-by 8.4 billion tenge (Ministry of digital development, 2019). That is, at the site, entrepreneurs can not only receive services provided by public authorities but also look for solutions that it offers. The world experience of recent years shows that due to the growth of technological progress, the so- called many revolutions, the market daily generates new needs. Meeting such needs is the responsibility of the IT community, which optimizes business processes with its developments (Valentim et al., 2019).

Actual problems of development and increase of competitiveness of small business are unstable development of economy and policy, uneven competition, problems of access to resources, big taxes and unskilled entrepreneur.

According to the press service of the Ministry of digital development, defence and aerospace industry, the total economic effect of digitalization in Kazakhstan amounted to 578 million USD. The official information resource of the Prime Minister of Kazakhstan reported that due to the introduction of digitalization of the economy, annual productivity growth is expected by 2-10%, production growth at fields - by 3%, reduction of production costs-by 10-20%, increase in productivity due to the use of precision agriculture in agriculture — by 25-50%.

In 2018, the first year of implementation of the Digital Kazakhstan program, investments in the field of information and communications showed a significant increase: +40.3% for the year, to 92.5 billion tenge. However, in the first nine months of this year, investments amounted to 46 billion tenge — 10.2% lower than in the same period last year (51.3 billion tenge). The main areas of investment in fixed assets in the third quarter of 2019: replacement of old equipment (15%); expansion of production capacity to increase the number of subscribers (11%); investment in the introduction of new technologies (5%) (Figure 1).

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140,3 84,3 97,4 96,9

104,5 89,8 60,7 89,8

110 107,1 103,8 92,5 63,1 65,9 51,3 46

Figure 1. Investments in fixed assets. Information and communication

Source: Calculations based on data from the statistics committee of the Republic of Kazakhstan. http://stat.gov.kz

According to IDC, direct investment in digital transformation will amount to 7.4 trillion USD between 2020 and 2023. Also, by 2023, the share of digitalization costs will increase to 50% of all investments in ICT (at the moment, the share is 36%). The largest growth is predicted in data analysis and Analytics, as companies create competitive advantages based on information. Total expenditures on information and communication technologies in Kazakhstan in 2018 amounted to 305.2 billion tenge, a decrease of 12.8% for the year.

Figure 2. Indicators of the use of information and communication technologies in the organization. 2018 |%

Source: Calculations based on data from the Statistics Committee of the Republic of Kazakhstan. http://stat.gov.kz

Imports of goods related to information and communication technologies play an important role in the country’s digitalization. Thus, in 2018, the total import of goods related to ICT increased by 11.8% for the year and

1229 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online amounted to 2.3 billion USD. 45.3% of all imports are for telecommunications equipment, 12.5% for computers and related equipment, 11.7% for electronic components, and 30.5% for other ICT products.

Based on the identified problems of the digital economy and the development of small and medium-sized businesses, we can conclude that entrepreneurs do not always have the opportunity of successfully implement in their business with the use of digital technologies (Figure 3.).

Figure 3. Total expenditures on information and communication technologies in Kazakhstan

Source: Calculations based on data from the statistics committee of the Republic of Kazakhstan. http://stat.gov.kz

Competitive advantages based on resource factors, such as natural, labor, financial resources, the availability of infrastructure and fixed assets. For small businesses, considered within the digital economy, is access to timely information, which is the availability of highly skilled workers identified in this list, as well as the digital platforms needed to do business or develop a quantitative line of business. Digitalization of interaction between the state and business aimed at reducing transaction costs of entrepreneurs, increasing transparency of decisions made by state bodies and organizations. Marking of manufacture and import goods together with the creation of a platform for the introduction of a unified information environment. In addition, the issuance of electronic invoices will create an ecosystem aimed at ensuring the prevention, restriction and suppression of unfair competition; quality assurance and prices of purchased goods, confirmation of the authenticity of goods, combating illegal import, production and circulation of goods, including counterfeit goods.

One of the important conditions for the effective development of the leading sectors of human activity in the digital economy is the formation of an appropriate institutional environment. One of the main institutions is personnel and knowledge, which create conditions for the successful development of the digital economy (Bu- rov et al., 2018; Bekebayeva et al., 2019).

Today, changes in the country’s economy, forecasting its further development affect all levels of primary, secondary, vocational and pre-University education - this directly related to the quality of knowledge received by students. In digital technology and its development, one of the most raised issues is literacy. This literacy needs to start from the beginning. The use of digital technologies is expanding in the education system:

1. Each educational institution has access to the Internet and individual sites in accordance with state require-

1230 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online ments. 2. General education programs include courses in computer science and information and communication technologies, as well as training for the digital economy.

Among the disadvantages: 1. Low training and complete mismatch of educational programs to the needs of the digital economy. 2. At all levels in the educational process, there is a shortage of personnel. 3. Procedures of final certification are insufficient quantitative means of educational activity; the process not connected to the digital information environment.

Therefore, today it is necessary to create a favorable environment for the “creation” of a new type of natural leaders, starting with higher education institutions - initiative, creative, entrepreneurial mental, possessing the necessary knowledge, skills and abilities, quickly adapted to the changing environment, able to take on tasks of various nature and focused on digital technologies.

Successful implementation of this direction by 2022 will mean: 1. Increasing by an order of magnitude the number of technological start-up projects initiated in Kazakhstan and their total capitalization. 2. Kazakhstan has a private professional venture capital industry that meets the needs of a fast-growing economy. 3. “Success stories “of Kazakh startups in the international arena, including “exit”.

In the longer term, the goals are to create all conditions for the emergence of unicorns and smaller companies with high capitalization in Kazakhstan, as well as the formation of a culture of technological entrepreneurship. For this purpose, the necessary institutional conditions created, as well as measures to stimulate innovation, venture financing, creation and development of technological entrepreneurship.

The innovation ecosystem will be created both because of existing technoparks, venture funds, research in- stitutes and universities, and based on the created technopark “Astana hub”. This environment is designed to create conditions for attracting ideas, technologies, digital solutions and talented professionals from around the world, as well as actively attracting citizens of the Republic of Kazakhstan who are engaged in it projects abroad.

An important consequence of the creation of an innovation ecosystem in the country will be an increase in the share of technologies of Kazakh origin.

Support for innovative development platforms

The main breakthrough event on this initiative will be the launch of the International Technopark of its startups (Astana hub), which will implement measures to support and develop the digital economy. For this purpose, the regulatory conditions necessary to turn Astana hub into a point of attraction for innovative activities from all over Kazakhstan and the CIS as a whole, as well as from other countries will be organized. Astana hub integrated into the system of international it clusters such as Israel, California, Singapore and Berlin and will become a bridge for its residents to enter international markets.

In addition, the initiative involves improving the quality of the existing infrastructure of innovative development-incubators and accelerators of the Republic of Kazakhstan, as well as the adaptation of legislation, including the creation of financial and tax preferences for startups and improving the protection of intellectual property.

All successful innovation ecosystems are open to the world and compete for human capital. The Program will create favorable conditions for attracting technological entrepreneurs, scientists and other qualified specialists to Kazakhstan.

1231 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online

Foreign entrepreneurs and technology professionals are a source of specific “know-how” needed to develop a local ecosystem of startups. Their experience, as well as technologies of research and development, entrepreneurship, management - all the developments that foreign experts are able to share-can help accelerate the formation of a local ecosystem of startups. In addition, they provide a diversity of cultures and knowledge, which in the future can become a competitive advantage for both the ecosystem itself and each of its participants.

The task of attracting foreign specialists and scientists requires, first of all, ensuring the most favorable conditions for their work and residence, security and competitive remuneration. In the longer term, such professionals provided with evidence of the use of their developments, and their effective participation in the digital economy.

In this regard, the possibility of introducing the concept of e-residence (e – residency) - an opportunity for foreigners to conduct business activities on the territory of Kazakhstan, who for one reason or another refused to acquire the residency of the Republic of Kazakhstan, will be worked out. In parallel with the attraction of foreign intellectual capital, the conclusion to a qualitatively different level of research activity in Kazakhstan provided. To do this, it proposed to develop mechanisms to stimulate research activities of organizations of the Republic of Kazakhstan, to open business schools, as well as to attract large international companies to open their research centers. Innovation is impossible without fundamental and applied science.

Cooperation between startups and leading Universities of the country will be established for the development of R&D. To do this, the Government will define tasks for targeted scientific grants that can be received by startup teams together with leading Universities. In addition, the state provides all conditions for encouraging multi- national companies to localize the development of their products, as well as testing breakthrough technologies on the territory of Kazakhstan. For this purpose, a shortlist of areas of technological development defined and a legislative opportunity gives to any company in the world to test them in a controlled environment, without the risk of violating the current legislation in their countries. The mechanism mainly used in financial technology, but it extends to other industries. In addition, the main objective of this initiative is the widespread popularization of innovation in the Republic of Kazakhstan. In addition to mass media support, more targeted mechanisms will be involved - such as mentoring programs for startups by successful technology entrepreneurs and training of students of leading Universities in the basics of entrepreneurship (on the example of Israel). This practice also can be extended to an earlier stage – in school.

5. Discussion and Conclusion

Everything that has been done today is focused on the future. All education, health care, economy, and political reforms are aimed at strengthening the future of our youth. As our economy grows, we also raise the welfare of the people. Youth innovative entrepreneurship as a national doctrine for the modernization of the economy. In the conditions of modernization of the country’s economy, there is a qualitative transition to the model of “knowledge economy”, where innovations change raw materials, which were the dominant factor of the past industrialization. But, despite the fact that the message was made annually, the tasks set in it, in most cases, will not affect the scale of the year. In particular, the head of state noted that through these messages, he sets his strategic goals for the people and show ways to implement it, defines responsibilities. For example, such vital ideas as ensuring the development strategy of Kazakhstan until 2030, taking the country in the 50 most competitive States, were brought, first of all, through these messages to the people. Such ideas, in fact, turning strategic goals into life is a very important task assigned to the government.

The critical mass of young entrepreneurs-innovators with their ability by actively innovating contributes to socio-economic and technical-technological changes, which is especially important for deepening the development of post-industrial trends in the domestic economy. Under such conditions, there is a need to build a doctrine of the formation of youth innovative entrepreneurship in the country at the turn of financial crises and the transition to stable development. At the same time, the existing achievements of domestic and foreign scientists do not contain postulates that the state should adhere to in order to create favorable conditions for the

1232 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online development of youth innovative entrepreneurship, the implementation of small and medium-sized business transformations as a basis for innovation and the start of entrepreneurship with small investments. That is why there is a need for an in-depth study of the gradual formation of the innovative potential of young people in the country, the degree of use of which in the near future will determine the level of development of the state. To characterize modern preconditions and bases of formation of the doctrine of the development of youth innovative business in the conditions of the fight against youth unemployment and transition to the model of “economy of knowledge”. In modern conditions, youth entrepreneurship is an important element of the formation of the middle class, and therefore its support should become the main task of state policy. Hence, it can be concluded that the issues of digitalization are relevant in our region, showing interest in it steps taken in the field of small business. As a result, we want to note that the digital economy is the advanced vector of our country. I think that small business is one of the foundations of this program, which plays an important role in the successful digitalization of Kazakhstan. In short, a website has been created to solve most of the problems of small businesses. The site is a platform for business, which contains modern IT solutions for entrepreneurs, state support measures. Internet, telephony and television services have been launched on the platform specifically for legal entities and individual entrepreneurs. Today, with the help of the digital platform, entrepreneurs can sell and buy goods and services, find business partners and potential investors. Ultimately, this is the most important task that the government, together with local Executive bodies, implements. Our active and fruitful work will allow us to successfully solve the tasks set by the Head of state. I am also confident that our joint work will create the necessary conditions for the Republic of Kazakhstan to become one of the 50 most competitive countries in the world. Now we hope that the Republic will pursue a consistent foreign policy, improve its internal well-being and build a civilized, legal society in the future.

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Gaziz SAGITULY ORCID: https://orcid.org/0000-0002-8621-1516

Almagul OTESHOVA ORCID ID: https://orcid.org/0000-0001-6119-3860

Natalia PRODANOVA ORCID ID: https://orcid.org/0000-0001-5140-2702

Natalia SAVINA ORCID ID: https://orcid.org/0000-0001-6297-5688

Dmitry BOKOV ORCID ID: https://orcid.org/0000-0003-2968-2466

This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/

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1236 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 https://doi.org/10.9770/jssi.2020.9.4(10)

GREEN CAMPUS COMPETITIVENESS: IMPLEMENTATION OF SERVANT LEADERSHIP

Roy Setiawan1, Anis Eliyana2,*, Tatik Suryani3

1,2Department of Management, Faculty of Economics and Business, Universitas Airlangga, Indonesia 3Department of Management, Sekolah Tinggi Ilmu Ekonomi Perbanas, Surabaya, Indonesia

E-mail: 2*[email protected] (Corresponding author)

Received 20 November 2019; accepted 10 April 2020; published 30 June 2020

Abstract. In order to achieve the best performance and innovation, every organizations have to achieve its competitive advantage. The advantage which comes from the employee is the extra role behaviour (Organizational Citizenship Behaviour or OCB). As the requisite for it, the other supporting factors are needed. Those factors are Servant Leadership and Organizational Commitment. In this research, Organizational Commitment is significantly affect OCB, and Servant Leadership is not significantly affect OCB. But Servant Leadership could affect OCB, through Organizational Commitment as an intervening variable at the green campus context.

Keywords: Servant Leadership; Organizational Commitment; Organizational Citizenship Behaviour; Green Campus

Reference to this paper should be made as follows: Setiawan, R., Eliyana, A., Suryani, T. 2020. Green campus competitiveness: implementation of servant leadership. Journal of Security and Sustainability Issues, 9(4), 1237-1242. https://doi.org/10.9770/jssi.2020.9.4(10)

JEL Classifications: D23

1. Introduction

In the current era of globalization, universities are required to produce quality and relevant innovations. The Indonesian government tighten regulations related to the environment (Agustia et al., 2019). This need is a consequence of global competition in the world of higher education (Hamid et al., 2015). The birth of innovation in an organization cannot be separated from the role of humans in it. Human quality in the organization greatly determines the competitiveness of the organization. Innovations that are born can cover many aspects, one of which is how to manage an environmentally friendly organization (Green Campus). The researchers stated that in the process of giving birth to new innovations, it is necessary to have a strong Organizational Citizenship Behavior (OCB) in each member of the organization (Akturan and Çekmecelioğlu, 2016; Tai et al., 2012). The adoption of eco-friendly operations and products increased an organisation’s competitive advantage (Sukoco et al., 2018). Higher education as an organization has characteristics that are somewhat different from other organizations. The traditional organizational structure of higher education shows power and authority centered on departments or faculties. Another feature that marks the organization of higher education is unstructured management practices and loose control as organized anarchy. With the characteristics of universities like that, of course leadership that is different from leadership in other organizations is needed (Birnbaum and Edelson, 1989).There are not many campuses that declare themselves as green campuses in Surabaya, where the green campus can be interpreted as building design, education policy, rules of life on campus, and environmentally friendly culture. Therefore it is very interesting to examine campus leadership in Surabaya which has declared itself to be a distinguishing green campus from other campuses(Choi et al., 2017; Ribeiro et al., 2019). JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online

Previous studies stated that the formation of OCB was strongly influenced by Servant Leadership (Harwiki, 2016; Newman et al., 2015).However, research on Servant Leadership in forming OCB in universities that embraces a green campus spirit is very rarely found, therefore in this article we will examine how the relationship of Servant Leadership and OCB through the Organizational Commitment to the green campus context as a result of innovation.

2. Literature Review

Servant Leadership as a practical altruistic philosophy that supports people who choose to first serve, and then lead as a way to expand services to individuals and institutions. Servant Leadership encourages collaboration, trust, foresight, listening, and ethical use of power and empowerment. Servant leadership as one of the biggest forms of charismatic leadership is influenced by morals, which is shown by its most important characteristics in the form of humility, relational power, autonomy, moral development of followers, and emulation of leader’s service orientation (Ding, 2012).

Organizations need employees who have high organizational commitment so that the organization can continue to survive and improve the services and products it produces. Employees who have high organizational commitment are employees who are more stable and more productive so that in the end it is also more profitable for the organization. The feeling of attachment to philosophy and work units is likely to survive in the work unit will be higher than employees who do not have a sense of attachment to the work unit. Organizational commitment is a strong desire or motive to remain a member of the organization; a desire to show a high level of effort in the name of the organization; and strong beliefs in accepting the values and goals of the organization (Cheasakul and Varma, 2016; Tarikh et al., 2016; Muradl, Ahmadov, 2019).

OCB is free individual behavior, not directly or explicitly recognized in the reward system and in promoting the effective functioning of the organization. Or in other words, OCB is employee behavior that exceeds the required role, which is not directly or explicitly recognized by the formal reward system. Free in the sense that the behavior is not a requirement that must be carried out in certain roles or certain job descriptions, or behavior that is a personal choice. OCB is also often interpreted as behavior that exceeds formal obligations (extra roles) that are not related to direct compensation. That is, someone who has a high OCB will not be paid in the form of certain money or bonuses, but OCB is more about the social behavior of each individual to work beyond what is expected, such as helping colleagues during voluntary breaks is one example (Akturan and Çekmecelioğlu, 2016; Chen et al., 2018; Dirican and Erdil, 2016) . In previous studies, servant leadership had an effect on organizational commitment and OCB (Newman et al., 2015; Van Dierendonck, 2010) .

3. Method and Measurements

The green campus referred to in this study is a campus that officially declares itself as an environmentally friendly campus both in terms of buildings, policies, rules, and culture. The population of this study was 307 employees at the Green Campus in Surabaya with the number of samples studied was 110 employees. These 307 people are non-academic employees who work in all support units or bureaus on the green campus in Sura- baya. Processing data in this study uses the path analysis method and assisted with SPSS software. The path analysis method is used to determine the magnitude of the indirect effect of the variables under study so that it can contribute to the scientific world.

The measurement of servant leadership used in this study is based on 7 dimensions of Liden et. al., (1979) and organizational commitment based on the Mowday (1979) and Organ (1997).

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3.1. Research Model

The following is the research model presented.

Servant H1 Organizational H2 Organizational Leadership Commitment Citizenship Behavior

Figures 1. Research Model

3.1.1. Hypotheses

The following is the hypothesis in this study: Hypotheses 1: Servant Leadership influences Organizational Commitment Hypotheses 2: Organizational Commitment influences Organizational Citizenship Behaviour Hypotheses 3: Servant Leadership influences Organizational Citizenship Behaviour

4. Results

All question items that measure servant leadership, organizational commitment, and OCB variables have corrected item-total correlation values that are greater than the r table value at n = 110 which is 0.187. Thus, all question items that measure servant leadership variables can be declared valid.

The magnitude of the Cronbach alpha value in each dimension and the servant leadership, organizational commitment, and OCB variables has been greater than the critical value of 0.6, thus the question items that measure each research variable used can be stated to have fulfilled reliability.

Based on the results of the regression analysis in models 1 and 2 can be described the estimation results of the path coefficient as follows

Model Endogen Eksogen Beta t Sig t Organizational Servant I 0.412 4.702 0.000 Commitment Leadership Servant Organizational 0.161 1.755 0.082 Leadership II Citizen Organizational Behaviour 0.409 4.446 0.000 Commitment

Figures 2. Path Analysis

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0.169

0.170 0.248

Organizational Servant Komitmen 0.412 0.409 Citizenschip Leadership Organisasional Behavior

0.161

Figures 3. Result Model Analysis

Thus hypothesis 1 and hypothesis 2 are accepted, and hypothesis 3 is rejected, and organizational commitment variables act as mediators according to the results shown in Figures 2 and Figures 3.

5. Discussions

Servant leadership behavior between leaders and subordinates will encourage the organizational commitment of employees. The concern of leaders for employees besides making employees will be loyal to the organization; will make employees continue to strive to provide the best results of their efforts to increase success for the organization. Individuals who have high commitment are able to show OCB behavior as a result of attitudes that are passed on in the form of behavior. With the high organizational commitment of employees, it can make employee OCB behavior emerge, so that employees will show voluntary behavior that is not included in the job description and without orders from superiors.

This study shows that if the organization wants employees to show extra role behavior that can be an advantage and added value for the organization, then the organization must provide positive support for employees so that employee perceptions of servant leadership become high, then a commitment to the organization will be formed, will be followed by OCB.

The servant leadership behavior that must be truly demonstrated is how leaders prioritize the interests of employees. This will form a good perception of the employee towards the leader, so that the employee will commit which will then shape OCB. This clearly shows that employees who have had a long working period in the organization show OCB, so that it can be learning for managerial roles of employees.

In addition, to maintain OCB, the organization can continue to enhance the planting of good value, and continue to build organizational culture that is in accordance with the value of the organization. This can be started from the leader’s example to show his commitment to good value. Thus, employees will always give birth to new ideas.

6. Conclusion

The conclusion of this study is that servant leadership has an influence on organizational commitment and OCB both directly and indirectly. However, the indirect effect caused by organizational commitment variables is greater so that it acts as a mediator variable in this study. Therefore, in increasing OCB it is suggested that the servant leadership pattern that is applied as high as possible can generate organizational commitment.

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Acknowledgements

The authors would like to thank the editor and anonymous reviewers for their supportive comments and suggestions. The authors received no direct funding for this research.

Roy SETIAWAN is is a doctoral student of Universitas Airlangga, Indonesia. His research interest is human resource management, organizational behaviour, and leadership. ORCID ID: https://orcid.org/0000-0003-2934-7983

Anis ELIYANA is a Professor and also a lecturer of Universitas Airlangga, Indonesia. Her current research focuses include human resource management, organizational behaviour, safety and health, and spiritual leadership. ORCID ID: https://orcid.org/0000-0003-2172-5935

Tatik SURYANI is Professor of Management Department of Sekolah Tinggi Ilmu Ekonomi Perbanas, Indonesia. Her current research focuses include human resource management, organizational behaviour, and entreprenurship ORCID ID: https://orcid.org/0000-0002-7472-9617

This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/

1242 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 http://doi.org/10.9770/jssi.2020.9.4(11)

BLACK FRIDAY AND OTHER EFFECTS - ARE THEY STILL SUSTAINABLE IN FINANCIAL MARKETS?

Indrė Dailydytė1, Ieva Bužienė2

1Faculty of Economics and Business Administration, Vilnius University, Saulėtekio av. 9 LT-10222 Vilnius, Lithuania 2Vilnius University Business School, Saulėtekio av. 22 LT-10222 Vilnius, Lithuania

E-mail: [email protected], [email protected]

Received 15 October 2019; accepted 9 April 2020; published 30 June 2020

Abstract. Investment in the modern world is growing (according to EUROSTAT, the annual growth rate for non-professional investors in Europe is 3% between 2016 and 2018) and both professional and non-professional investors are becoming market participants. For these reasons the sustainability of financial markets effects are becoming very important and widely discussed topic. According to Khan (2011), the ability to use calendar effects properly can bring profits. In order to understand calendar effects behavioral finance theory plays an important role. It explains the factors behind investor behavior that cause markets to have effects like black Friday, January, weekend, Halloween and many other. Calendar effects sustainability are one of the most widely discussed topics in the financial market literature because their analysis is able to explain changes in returns. This research analyzed US financial market based on S&P 500 index changes. In examined 2009-2018 period black Friday effect is no longer sustainable. Meanwhile January and Halloween effects were sustainable. Obtained results further more confirm importance of examining calendar effects and approves ideas of behavioral finance theory authors.

Keywords: calendar effects, black Friday effect, January effect, Halloween effect, weekend effect, market anomalies, financial markets sustainability

Reference to this paper should be made as follows: Dailydytė, I., Bužienė, I. 2020. Black Friday and other effects - are they still sustainable in financial markets, Journal of Security and Sustainability Issues, 9(3), 1243-1255. http://doi.org/10.9770/jssi.2020.9.4(11)

JEL Classifications: D53

1. Introduction

Financial markets are one of the most popular investment direction not only in Europe but also worldwide. Investment decisions depend on many aspects such as: selected type of investment, position of financial market now and in the future, expected returns. These days it is no longer offered to rely on past performance to make right decisions for the future. Past behavior is no longer sustainable. Despite these factors the actions of investors are becoming increasingly important in financial markets. One of the main ideas of classical financial theory according to Fama (1965) “The Behavior of Stock-Market Prices“ announce that investors and their decisions in financial markets are rational. According to that stock prices cannot be defined or predicted. However classical financial theory was not able to explain why sudden and periodic stock price deviations exists. Theory of financial behavior (also known as behavioral finance) is being increasingly studied these days. This theory contrary to Fama (1965) states that decisions made by investors are not rational and often affected more by psychological aspects than economic (Ritter, 2003). This theory examines and explains various markets deviations, seasonality and causes of calendar effects. There are few calendar effects on the financial market but most popular is black Friday, Halloween, weekend, January effects. JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online

The purpose of this paper is to analyze black Friday and other calendar effects and determine whether calendar effects are still sustainable on the financial markets.

2. Literature review

In financial theory the key ideas of leading authors combine the notions of investor rationality and market efficiency. Modern portfolio theory brings up the main idea that investors are rational and market is efficient (Markovitz, 1952). These ideas were also agreed and reiterated by Modigliani, an Italian-American economist along with another American economist Miller (1961). The efficient market hypothesis developed by Fama (1970) states that prices fully reflect all available information in the market. In other words - the market is efficient because investors accept all available information, prices are directly influenced by it so future prices cannot be predicted. Based on these ideas it can be concluded that authors believe - prices tendency cannot be influenced by calendar effects, seasonality or other market anomalies. Stock price fluctuations and anomalies have allowed another discipline behavioral finance to develop. Behavioral finance unlike classical financial theory is able to explain the causes of such phenomena.

Behavioral finance - is stated the opposite of classic financial theory. Statman (2014) described behavioral finance as a solid structure that combines certain parts of standard finance replacing them with others and adding “bridges” between theory, evidence and practice. Other definitions of this theory also exist: Shiller (2003) defines behavioral finance as a broader perspective that includes psychology and sociology. No matter how we formulate the definition of behavioral finance it will combine all authors ideas that classical financial theory was not able to explain certain market anomalies and that investors behavior is not always rational. Behavior finance takes into account more factors that determine investment decisions than classical theory. Most important factors are given in Table 1.

Table 1. Psychological factors influencing decision making

Fisher (2014) Byrne, Utkus (2013) Jurevičienė, Jermakova (2012) Representativeness Anchoring Tendency to focus on recent experience Availability Representativeness Tendency to trust your knowledge Cognitive/ heuristic Anchoring Availability Optimism Affect heuristic Conservatism Mental accounting Glass half empty/half full - Fear Aversion to sure loss Love Emotional A sense of generality Greed

Source: compiled by the authors based on the authors mentioned in the table

Information in the Table 1 shows that factors such as representativeness, availability, conservatism/tendency to focus on recent experience, fear/aversion to sure loss are discussed by more than one author, so it can be assumed that their importance in decision making is much greater.

Pompian (2012) presents the following segments of psychological factors that influence decisions: l Cognitive/heuristic. According to Pompian they are divided into two categories: belief perseverance - propensity to adhere to one already existing or recently accepted unreasonable/illogical belief. According to author another category relates to how people illogically/irrationally handle information when making various financial decisions. l Emotional. According to Pompian those are mostly decisive of impulses, intuitions so they are much more difficult to control than cognitive. Often, emotional factors are easier to adapt than trying to correct them.

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Market anomalies and their classification. Lithuanian dictionary introduce the concept of anomaly as –“anom - aly - irregularity, deviation from the norm” however the term anomaly itself is associated with Kuhn (1970). In his view the established paradigm shifts with an increasing number of anomalies and cannot explain why anomalies occur. Market anomalies can be understood as empirical results that are completely inconsistent with existing pricing theories (Schwert, 2002). Tversky and Kahneman (1986) anomaly describe the as: - “a deviation from current paradigms that are too widespread to be ignored, too systematic to be dismissed as accidental error and too fundamental to be applied in the relaxation of the normative system” (The Journal of Business, 59(4), p.251-278). It is noticeable that ideas of Kuhn, Tversky and Kahneman, Schwert are based on deviations from the existing, well-established situation. Tversky and Kahneman also emphasize an important feature of anomalies – systematics. Anomalies are sustainable in many areas including and financial markets. Market anomalies are mostly influenced by investors psychological factors such as mood, desire to be like others or be different than others, social factors and many others discussed earlier. According to Avramov et al (2015) anomalies reflect persistent behavioral trends in financial markets. Anomalies are fundamentally contrary to the efficient market hypothesis and the hypothesis itself cannot explain the cause of such anomalies. Behavioral finance which can explain market anomalies sustainability is currently rapidly expanding field attracting more and more researchers to understand not only the anomalies themselves but also how they can be sustainably used for profit. Investors can use anomalies for profit to get statistically reliable and “positively rated risk” returns (Khan, 2011).

In the scientific literature about market anomalies can be studied by many authors (Schwert, 2002; Cao and Wei, 2005; Latif et al 2011; Dzhabarov and Ziemba, 2011; Masood et al., 2019; Masood et al., 2020; Chehabeddine, Tvaronavičienė, 2020) agree on sustainable anomalies which can be divided into: 1. Calendar effects (January/turn of the year, weekend, Friday/Black Friday, pre-holiday, Halloween, etc.) 2. Fundamental effects (value, size, momentum effect, etc.) 3. Technical effects (moving averages, short-term price drift, etc.)

To sum up anomalies are perceived as a deviation from the norm (Lithuanian dictionary) and their sustainability is noticeable in many areas. The existence of market anomalies is greatly influenced by psychological factors which are examined by authors such as Fisher (2014); Byrne and Utkus (2013); Jurevičienė and Jermakova (2012) and others. Analyzing anomalies and using it properly can help to make a profit Khan (2011). There are three major types of market anomalies but most sustainable analyzed anomalies are calendar effects/calendar anomalies because their analysis is able to explain changes in returns. According to Khan (2011) ability to use calendar effects properly can bring profits, therefore calendar effects will be examined widely.

3. Black Friday and other effects - calendar market anomalies

In Nawaz and Mirza (2012) review about calendar anomalies authors described them as irregular manifestation of stock returns that recur over a given calendar period. Calendar anomalies/calendar effects are different stock market behavior occurring over a certain calendar period, with a perennial tendency (Burton and Shah, 2013). Average changes in market index prices depend on day, month and year so researchers increasingly analyze the sustainability of these anomalies in stock markets. Analyzing and understanding calendar effects can be the key to find the right investment time. Many authors have tried to observe these calendar anomalies which already been observed over the time on different global stock exchanges. Nawaz and Mirza (2012) highlighted weekend, month, January and holiday effects. Those effects were also emphasized by Dzbabarov and Ziemba (2011); Chinko and Avci (2009) and others.

In Burton and Shah (2013) book already discussed calendar effects are analyzed and additionally emphasized pre-holiday effect. Garg, Bodla and Chhabra (2010) examine Friday effect. Dzbabarov and Ziemba (2011) analyzed market anomalies in 1993-2009. During this period authors noticed that anomalies in the market are still sustainable and the same as before, only change during this period is change in stock prices. In authors opinion effects such as January, month, holiday have high forecasting accuracy and it create value. A lot of the literature highlighted very similar effects so in this paper some of the most common and some of the less studied

1245 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online but very important effects will be highlighted: l Black Friday/Friday effect l January effect/turn of the year l Weekend effect l Halloween effect

Black Friday effect. Historically, Black Friday on financial market has the opposite meaning than these days and is not associated with retails. Black Friday - 1869 September 24th stock market disaster. On this day, after a long period of speculation the gold value has plummeted and market has fallen tremendously (Wimmer, 1975 „The gold crisis of 1869“). These days concept of “Black Friday” is more commonly used in retail when after US Thanksgiving day supermarkets offered various discounts on goods and services. However Black Friday (or simply Friday) anomaly is also sustainable in financial markets, when market returns are higher than usual on this day. Black Friday trends are really important for possibility to get a higher profits (Lenkkeri et al, 2006). Traders applied discounts may affect their stock prices so investors analyze market during this time, observing the retail sector as well. There are opinions that strong Black Friday can predict a good upcoming holiday sea- son and of course higher returns during that period. Caporale (2017) examined the sustainability of this effect in the markets (stock prices, FOREX, etc.). According to a survey this anomaly in the stock market is not strong but FOREX and gold markets are strongly reacting to this calendar day. Garg et al (2010) noticed that Friday is the last day before the weekend when investors tend to buy more shares than usual so this day returns are significantly higher compared to other days. However, there are some markets where this effect is no longer sustainable - Nawaz and Mirza (2012) state that in Singapore and Kuwait stock markets this effect is not noticed.

January/turn of the year effect.One of the most common effects found in literature is January effect. In 1976 Kinney carried out first empirical research and proved that January effect in US financial market exists. This stock market anomaly has its own explanation: “as goes January, so goes the year” (Coopera et al, 2006). January and other calendar effects sustainability prove that efficient market hypothesis is not entirely correct in practice. January distinguished by a significant change in returns, however Burton and Shah (2013) believe that January effect is quite different from others. According to the authors, tax aspect plays an important role here. Losses on shares sale can benefit the taxpayer when the taxable income is reduced due to the loss. These sales usually occur at the end of the year, causing stock prices to fall even further. In January the number of these sales decrease so stocks are recovering (Burton and Shah, 2013). This idea is also expressed by Roll (1983). Dzhabarov and Ziemba (2011) research proves that this effect not only exists in financial market but is as significant sustainable as ever.

Weekend effect. Burton and Shah (2013) describe weekend effect as the idea that investment returns are unusually low at the beginning of the week and unusually high at the end of the week. Weekend effect is another anomaly proving that market participants are not completely rational. This effect is explained through several prisms. One is that companies have a tendency to report bad news on Fridays before the market closes, so on Monday the stock reacts to it and their prices fall (Kamara, 1997). Moosa and Ramiah (2017) also think that weekend effect can be understood through investor mood - comparing Monday to Friday. Important calendar anomalies are analyzed in different markets: Sutheebanjard and Premchaiswadi (2010) analyze the sustainability of this effect in Thailand stock market during 2005-2009 period and noticed its existence. Of course many before mentioned authors examine the sustainability of this effect: Burton and Shah (2013) noticed this effect existence in US stock market and higher Fridays profitability since 1952. Nawaz and Mirza (2012) in literature review about calendar anomalies, highlighted that weekend effect is one of the most popular anomalies.

Halloween effect. The Halloween effect is based on the idea that investment returns are higher between Oc- tober 31st. (Halloween) and May 1st. This theory states that it would be wise for investors to buy shares from November till April. Halloween effect is based on the idea -sell in May and go away, which would mean that it is expedient to sell in May because the value of the shares is higher (Dzbabarov and Ziemba , 2010). This effect is still widely studied in different countries markets: Carrazedo, Curto and Oliveira (2016) analyzed Hallow-

1246 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online een effect in Europe and noticed that strategy sell in May and go away is completely reliable trading strategy. Empirical results show that it works every two out of three calendar years and can be applied to more than 95% of the sample (Carrazedo et al, 2016). This effect is still sustainable today. Bouman and Jacobsen (2002) believe that this effect may be influenced by summer holidays. They affect market liquidity - as investors are disinclined to risk during the summer period, which directly determines the difference in returns between different seasons. Jacobsen and Zhang (2014) research has proven that Halloween effect sustainable in 86 of 108 countries, authors noticed that this market anomaly has only intensified over last 50 years. However, there are authors who take the opposite view: according to Dichtl and Drobetz (2015) research Halloween effect is no longer sustainable and the strategy sell in May go away no longer give free returns.

To sum up calendar effects are widely studied by many authors: Dichtl and Drobetz (2015); Jacobsen and Zhang (2014); Burton and Shah (2013); Dzhabarov and Ziemba (2011), etc. Over the time authors noticed that most sustainable calendar effects in markets are Black Friday/Friday, January/turn of the year, Halloween and weekend effects. Although research shows that these effects still sustainable in financial markets (Dzbabarov and Ziemba, 2011), analyzing individual anomaly some researches deny their existence (Dichtl and Drobetz, 2015, Nawaz and Mirza, 2012), that is why this topic is still widely researched.

4. Research methodology

The main purpose of this research is to determine if calendar effects like: Black Friday, January/turn of the year, weekend, Halloween are noticeable and sustainable in US financial market. In order to determine it S&P 500 index data of 2009-2018 period were analyzed (data is taken from official Nasdaq webpage). Main research methods are statistical data analysis, graphical representation (using MS Excel).

Daily changes. Daily changes are important for examining Black Friday effect. They are calculated from the difference between shares value at the beginning of the day and at the end of the day, which is available online. From available data daily average changes were calculated for each day of the week (averages for each Mon- day, Tuesday, etc. changes from 2009 till 2018). Results show the tendency of different days of the week for the whole period. The received averages are used to calculate overall average for each day (Table 2), average of X is calculated using the formula -

Table 2. Calculation of daily changes

Monday Tuesday Wednesday Thursday Friday X Monday average X Tuesday average X Wednesday average X Thursday average X Friday average 2009 2009 2009 2009 2009 2009 X Monday average X Tuesday average X Wednesday average X Thursday average X Friday average 2010 2010 2010 2010 2010 2010 ... - - - - - X Monday average X Tuesday average X Wednesday average X Thursday average X Friday average 2018 2018 2018 2018 2018 2018 2009-2018 X Mondays average X Tuesdays average X Wednesdays X Thursdays average X Fridays average averages 2009-2018 2009-2018 average 2009-2018 2009-2018 2009-2018

Source: compiled by the authors based on statistical formulas

Weekly changes. Weekly changes are necessary in order to determine January/turn of the year effect sustainability in the US financial markets. They are calculated as the difference between Friday and Monday index values. Average changes (averages) are calculated as an average of week-day (Monday-Friday) value changes comparing to previous day (see Table 3).

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Table 3. Calculation of weekly changes

1st. week 2nd. week ... 52nd. week X average 2009 1st week X average 2009 2nd week (Monday X average 2009 52nd week 2009 (Monday change+ Tuesday change+Tuesday change +...+Friday - (Monday change+ Tuesday change change +...+Friday change)/5 change)/5 +...+Friday change)/5

X average 2010 1st week X average 2010 2nd week (Monday X average 2010 52nd week 2010 (Monday change+ Tuesday change+ Tuesday change +...+Friday - (Monday change+ Tuesday change change +...+Friday change)/5 change)/5 +...+Friday change)/5 ... - - - - X average 2018 1st week X average 2018 2nd week (Monday X average 2018 52nd week 2018 (Monday change+ Tuesday change+ Tuesday change +...+Friday - (Monday change+ Tuesday change change +...+Friday change)/5 change)/5 +...+Friday change)/5 2009-2018 X average 2009-2018 1st week X average 2009-2018 2 nd. week X average 2009-2018 52 nd. week averages for (2009 1st.week average+ 2010 (2009 2nd.. week average+ 2010 2nd. (2009 52nd.. week average+ 2010 - individual 1st.week average.+...+2018 1st. week average.+...+2018 2nd.week 52nd.week average.+...+2018 52nd. weeks week average)/10 average)/10 week average)/10

Source: compiled by the authors based on statistical formulas

Monthly changes. Monthly changes allow to evaluate whether Halloween effect on the US financial market exists or not. They are calculated as the difference between last and first day of the month. Every day index change is aggregated into months and calculated as total monthly change using the formula of averages (Table 4).

Table 4. Calculation of monthly changes

January February ... December X average of 2009 X average of 2009 X average of 2009 2009 (January1st.+January2nd.+.... (February1st.+February2nd.+.... - (December1st.+December2nd. +January 31st.)/31 February29th.)/28 +....+December 31st.)/31 X average of 2010 X average of 2010 X average of 2010 2010 (January 1st.+ January (February1st.+February 2nd.+.... - (December 1st.+ December 2nd.+....+January 31st.)/31 February29th.)/28 2nd.+....+December31st.)/31 ... - X average of 2018 X average of 2018 X average of 2018 2018 (January 1st.+ January (February1st.+February2nd.+.... - (December 1st.+ December 2nd.+....+January 31st.)/31 February29th.)/28 2nd.+....+December 31st.)/31 X average 2009-2018 X average 2009-2018 2009-2018 X average 2009-2018 (January2009average+January (December 2009 average+ monthly (February2009average+February2010avera - 2010average+...+January 2018 December 2010 average+...+ changes ge+...+February 2018 average)/10 average)/10 December 2018 average)/10

Source: compiled by the authors based on statistical formulas

Using MS Excel’s STDEV function standard deviations for the relevant periods (weekly, months) have been calculated which show the dispersion of the averages obtained over the observation period around the average. This will help to estimate the riskiness of investing in different periods. Results of index changes over the time will be expressed as a percentage to facilitate the interpretation of the resulting data. All S&P 500 index changes will help to find out does calendar effects exist and are they sustainable in the US financial markets.

5. Research results

After reviewing literature about calendar effects, this section will provide the results obtained by examining trends in the S&P 500 index. S&P 500 (SPX) index values and changes are calculated as the difference between current and the previous trading day.

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Black Friday effect. For this effect analysis daily changes were examined. They show index changes for different days of the week and their averages. This allows to notice the difference between days of the week, compare index changes on a regular Friday and other days of the week with index changes on a Black Friday. 2009-2018 period were examined - Black Friday date fluctuated between November 23rd-28th. Different days changes shown in the Table 5.

Table 5. Index daily average changes for 2009-2018

Years Days 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009-2018 Mondays 1,98 2,09 1,17 0,39 -1,15 -1,22 -0,81 0,24 -0,06 -0,67 0,20 Tuesdays -0,91 -0,56 -2,69 1,10 0,88 1,71 0,00 0,89 1,93 -3,58 -0,12 Wednesdays 2,46 2,46 3,42 -0,46 2,38 0,57 -1,64 1,53 0,56 -0,87 1,04 Thursdays 1,27 0,12 -2,61 1,39 -0,48 2,53 4,41 0,95 0,50 -1,05 0,70 Fridays 0,24 -1,22 0,95 0,46 2,77 -1,64 -0,68 -0,80 -0,14 2,18 0,21 Black Friday change -13,98 -4,76 -2,74 18,12 -2,88 -7,22 1,29 7,08 0,00 -0,80 -0,59

Source: compiled by the authors based on obtained results

From the Table 5 results, days with the highest returns for analyzed period are Wednesdays and Thursdays, when change in returns was higher than the other days. Average change on Wednesday is 3.5 times bigger than total index change on Monday, Tuesday and Friday combined. Meanwhile, Thursday’s change is 2.4 times bigger. Based on overall averages for the entire period Friday and Monday index changes were similar about 0.2. Tuesdays mostly had negative returns. Only 30% of the total period Black Friday gave a positive return. Black Friday, November 23rd, 2012 had an unusually positive 18.12 change - 17.65 points higher than average∼ for that year Fridays returns. Based on Table 5 data another table with percentage day index change was made which makes it easier to see which days of the week were most profitable.

Table 6. Daily Profitability 2009-2018 (Percent)

Profitable Unprofitable Mondays 50% 50% Tuesdays 60% 40% Wednesdays 70% 30% Thursdays 70% 30% Fridays 50% 50% Black Friday change 40% 60%

Source: compiled by the authors based on obtained results

Data in Table 6 shows that during 2009-2018 period changes in the US S&P 500 stock index were profitable on Tuesdays, Wednesdays and Thursdays, while Monday and Friday index changes showed the same profitability and unprofitability. Black Friday did not reveal - 60% of the index change was negative and the overall average index change for all Black Fridays was - 0.59. However, in 2012 and 2016 Black Friday return changes were unusually large, so cannot be assert that Black Friday effect have disappeared. Data in a Table 5 shows tendency - the index change is unusually large every 3 years (2015 change is positive but not unusual). This research results confirm the argument that Black Friday effect still exist. However, it is statistical significance and impact on US financial markets should be proven by larger data sample research.

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Figure 1. Friday and Black Friday tendency 2009-2018

Source: compiled by the authors based on obtained results

As shown in Figure 1, Fridays have a tendency - from 2009 index changes are decreasing, after year they are increasing and it repeats until 2017. Fridays trend is strong in 2010-2016 period, but in 2017-2018 period change was positive. Does Friday tendency recur cannot be determined from Figure 1. Until 2012 index change is increasing, later in 2014 it significantly decrease and in 2016 again a significant positive change in the index is observed. To confirm this trend larger sample needs to be considered. Analyzing only Black Friday data changes, Black Friday has no trend over the analyzed period. Index changes only 4 times were positive of which 2 times was unusually high. Based on obtained data, the sustainability of the Black Friday effect cannot be confirmed - Black Friday did not occur in the US during the analyzed period of 2009-2018.

January/turn of the year effect.To verify January/turn of the year effect weekly S&P 500 index was observed. Changes were examined in order to confirm or deny that January returns are higher than those in December. Ob- served weekly changes allowed broader data analysis and more accurate testing of the effect. Weekly changes calculation was described in the research methodology. Data shows that December index values were mostly negative and especially returns of the last weeks of December. Index change for the last week of December (whole analyzed period) was - 109,63. Average index changes in December were - 31.48 while in January 2.71. Weekly changes already show that January changes are positive and return is higher than in December. Big difference is seen between the last week and the first week of the year - index change is 103.45.

Table 7. January and December weekly profitability 2009-2018 (%)

January December

Profitable Unprofitable Profitable Unprofitable First week 70% 30% 50% 50% Second week 60% 40% 50% 50% Week three 50% 50% 70% 30% Week four 60% 40% 20% 80% Average one week profitability 60% 40% 47% 53%

Source: compiled by the authors based on obtained results

Table 7 data shows that in January 3 of 4 weeks are profitable and weekly profitability overall reaches 60%. De- cember results are opposite - 3 out of 4 weeks are showing negative returns. In order to enhance the accuracy of the weekly changes profitability, average weekly profitability were calculated. According to the data of January between 2009 and 2018 period, index changes were mostly negative and amounted to about - 0.35. However, in December average weekly changes over the whole period were - 0.76 and it is 2 times lower than in January.

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Average changes expressed as a percentage are given in the following table:

Table 8. January and December average weekly changes 2009-2018 (%)

January December Profitable Unprofitable Profitable Unprofitable First week 70% 30% 40% 60% Second week 50% 50% 30% 70% Week three 40% 60% 80% 30% Week four 50% 50% 40% 60% Average one week change 53% 47% 47% 53%

Source: compiled by the authors based on obtained results

Differences between data in Table 7 and Table 8 are visible. First January week showed a positive index change. 2 out of 4 weeks portability was 50% and one week was unprofitable. Third week of December was the most profitable of the entire period, while remaining three weeks were unprofitable. January data also show that week three has a negative profitability but it is not significant because, overall January profitability (all 4 weeks) is positive and confirms the trends observed in Table 7. To confirm obtained results, standard deviations of analyzed data were calculated. The last 3 years weekly index have higher than average standard deviations 10,32; 11,14; 11,76. However, these standard deviations reflect investment risk associated with negative returns. This only further confirms the sustainability of January/turn of the year effect in the analyzed 2009-2018 period in the US financial market.

Halloween effect. For this effect analysis monthly S&P 500 index changes were selected in order to see if returns from November to April are higher than returns from May to October. Monthly index changes show that index change during the Halloween period is 12.8, while in non-Halloween period change is 9.41. Most profitable months were March, July and November. Two of these months belong to Halloween period. Profitable and unprofitable monthly changes are expressed as percentage in the following data:

Table 9. 2009-2018 months profitability 2009-2018

January February March April May June July August September October November December Profitable 50% 70% 70% 70% 60% 30% 80% 50% 60% 70% 90% 80% Unprofitable 50% 30% 30% 30% 40% 70% 20% 50% 40% 30% 10% 20%

Source: compiled by the authors based on obtained results

5 out of 6 months of Halloween period (November-April) are profitable. 4 out of 6 months of non- Hallow- een period (May-October) are also profitable. To enhance reliability of obtained results the average monthly changes were calculated. November - April and May - October average changes over the whole period were negative. Biggest index change is recorded in July and does not belong to the Halloween effect. However, overall Halloween period average was 48% higher than in May - October and this confirms sustainability of the effect again.

Table 10. Monthly average changes in percentage 2009-2018

January February March April May June July August September October November December Profitable 50% 70% 50% 70% 60% 30% 80% 50% 60% 70% 90% 80% Unprofitable 50% 30% 50% 30% 40% 70% 20% 50% 40% 30% 10% 20%

Source: compiled by the authors based on obtained results

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Table 10 data shows that November – April has 4 profitable and 2 neutral months (November is the most profitable of the whole period). In contrast, May – October has 4 profitable months and 1 neutral month (profitability and unprofitability are 50%). June is the most unprofitable month of all years. Halloween period profitability (for all months combined) is 68% and May to October 58%, so this further confirms Halloween effect. Standard deviations also confirms the Halloween effect: monthly standard deviations are high and associated with positive returns. Average maximum standard deviation for the whole period is being recorded in February 12,64. Considering non-Halloween period, during the 2009-2018 highest standard deviations are observed in June (11,47) and August(11,84), but they are associated with negative returns, so investment risk during this period is high. All obtained data allows to state that in 2009 - 2018 period in US financial markets Halloween effect were sustainable.

Research results disprove the sustainability of Black Friday effect but do not prove that effect disappeared because returns change due to this effect was unusually large for 2 periods. While Black Friday effect on US financial market was not sustainable, the January/turn of the year and Halloween effects were active. In Janu- ary, 3 weeks were mostly profitable, while December had 3 unprofitable weeks. Weekly changes and weekly average changes showed different results, but overall January profitability for the whole period was higher than December. Halloween effect in the US was most sustainable, because 5 out of 6 Halloween months were profitable. The results obtained from average index changes further more confirmed the effect: 68% November to April were profitable in analyzed 2009 - 2018 period. Two of the three examined calendar effects in the US financial markets occurred and were sustainable in analyzed 2009-2019 period.

Conclusions

Classical financial theory, which states that investors are rational and make decisions based on all available information in the market (Markovitz, 1952) could not explain the origin of recurring trends in financial markets and did not reflect the real market situation. This led to emergence a new and still developing discipline - behavioral finance. It combines classical financial theory with other sciences: psychology, sociology (Shiller, 2003) and examining the factors that determine anomalies in financial markets. In order to explain the anomalies in the market authors usually analyze psychological factors that determine investors decisions. Byrne and Utkus (2013); Jurevičienė and Jermakova (2012) defined these factors as biases for which investors deviate from the classical financial theory paradigm. Pompian (2012) divided biases into cognitive/heuristic and emotional.

Market anomalies are usually grouped into calendar (January/turn of the year, weekend, Friday/Black Friday, Halloween, etc.), fundamental (value, size, momentum, etc.) and technical (moving averages, short - term price drift, etc.). Most commonly sustainable calendar effects in financial markets are Black Friday, January/turn of the year, Weekend, Halloween. These effects were examined by authors: Nawaz and Mirza (2012), Dzbabarov and Ziemba (2011); Chinko and Avci (2009).

This research examines the US financial market S&P 500 index in order to confirm or deny that Black Friday, January/turn of the year and Halloween effects are sustainable in the market. Changes in daily S&P 500 index and average changes results used for Black Friday did not confirm the existence of this effect in 2009-2018 period. According to the research results, these January/turn of the year and Halloween effects in the US financial markets were significant and sustainable in analyzed 2009 - 2018 period, so investors based on this and other authors analyzes, can gain a deeper understanding of index changes and trends in financial markets and use it to make profitable investment decisions.

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Indrė DAILYDYTĖ Research interests: financial market, behavioral economics, market anomalies. ORCID ID: orcid.org/0000-0002-9928-081X

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1256 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 https://doi.org/10.9770/jssi.2020.9.4(12)

THE GADE CLEAN AND THE GOLD WASTE BANK: SOCIETY’S ECONOMIC EMPOWERMENT BASED ON ENVIRONMENTAL HYGIENE

Bayu Arie Fianto1*, Uci Wulansari2, Irine Ardiyanti3, Meryem Tlili4

1,2,3Department of Shari'a Economics, Faculty of Economics and Business, Universitas Airlangga, Indonesia 4Ez-Zitouna University, Tunisia

E-mail: 1*[email protected] (Corresponding author)

Received 17 November 2019; accepted 31 March 2020; published 30 June 2020

Abstract. The Gade Clean and Gold is one of the forms of CSR program (Corporate Social Responsibility) of a state-owned enterprise of pawnshop company in addressing the waste problem in Indonesia. The program allows the public to exchange waste in the waste bank that has been established by the pawnshop with gold savings. The research aims to examines the role of The Gade Clean and Gold program in the society’s economic empowerment that is based on environmental hygiene. This study is conducted using descriptive analytics method, based on interview, desk study, and field observation. The results of this paper showed that The Gade Clean and Gold was successful in raising people’s interest in investing in sustainable economies as well as increasing public awareness of the environment.

Keywords: waste bank; gold investment; community empowerment; waste management; CSR

Reference to this paper should be made as follows: Fianto, B.A., Wulansari, U., Ardiyanti, I., Tlili, M. 2020. The gade clean and the gold waste bank: society’s economic empowerment based on environmental hygiene. Journal of Security and Sustainability Issues, 9(4), 1257-1264. https://doi.org/10.9770/jssi.2020.9.4(12)

JEL Classifications: Q53, Q56

1. Introduction

Waste has become a global problem and will continue, as every person produces waste every day. The industrial growth that is increasing rapidly also increases product waste which can pollute the environment at a dangerous level (Sukoco et al., 2018; Vegera et al., 2018). The increase in human population and the increasingly complex economic activity are the major factors that cause the amount of waste to increase rapidly. Not only in terms of the quantity that continues to increase, but the quality or the composition of waste is also increasingly complex. The world generates 2.01 billion tons of municipal solid waste in 2016 and this number is expected to grow to 3.40 billion tons by 2050 under a business-as-usual scenario (Kaza et al., 2018).

In the year of 2016, the amount of waste in Indonesia reaches 65.2 million tons per year with a population of 261,115,456 (Environment Statistics of Indonesia, 2018) at an average rate of 0.68 kilograms per person per day (Kaza et al., 2018). These conditions require serious handling because waste can be the source of problems such as flood disaster until the occurrence of various diseases. Areas with poor waste handling, experience two times higher diarrhea incidence and acute respiratory infections six times higher than the area with good handling of waste collection. The increasing volume of waste raises the public awareness of waste management that is characterized by the emergence of various innovations and researches on waste management. Such as green innovation that encourages companies to convert waste products into viable products that increase company value (Agustia et al., 2019). Waste management is carried out by various parties from the government level as policymakers and facilitators; community as actors in waste management; and private companies as JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online community partners in terms of financing through CSR programs (Wijayanti and Suryani, 2014). Procurement of transportation of waste transporter, waste shelters, until cleaning service by the government require a high enough cost. Therefore, awareness is needed from various parties in the waste management. One of the partici- pations of Indonesian people in waste management is the presence of waste banks. BPS (Environment Statistics of Indonesia, 2018) mentions that waste banks have been existed in all capitals of province in Indonesia, as many as 5,244 waste banks spread over 34 provinces or 219 districts or cities in 2017. According to directorate general of waste management, Ministry of Environment and Forestry, the establishment of waste bank contributed to 1.7% of national waste reduction or equal to 1.389 thousand tons of waste per year.

Waste bank has a double value, both materially, and also the increase in the quality of the environment. Working system of waste bank starts with waste bank customers collecting wastes, then deposited them to the manager of waste bank to be weighed and judged by a certain nominal. The amount is stored in the form of savings that can be disbursed at the specified time.

With the high participation of the community, the waste bank system can be used as an alternative to the community based waste management model. Waste bank also becomes a tool for bringing together stakeholders: local government, public (communities), private sectors, non-governmental organizations and mass media (Wijayanti and Suryani, 2014). The impact that is obtained in the presence of waste bank is realized in synergy between communities, waste banks and governments in realizing the government’s program and community empowerment (Wulandari, Utomo and Narmaditya, 2017).

One of the private sectors that innovate the waste bank is the state-owned enterprise of pawnshop company, which is PT Pegadaian’s CSR program (Coorporate Social Responsibility) “The Gade Clean and Gold”. The company established a waste bank that can exchange waste with gold savings, so the environment becomes clean while providing education to invest (Wulandari et al., 2017). Example of the program’s outcome is waste bank in Sidokumpul village, Gresik, East Java, Indonesia. Gresik city produce 200 tons waste per day includes plastic and household waste.

The research aims to examine the role of The Gade Clean and Gold program in the economic empowerment of environmental hygiene-based communities in Sidokumpul, Gresik, East Java. Hopefully, this research can provide an alternative in increasing interest and awareness of the community to waste management and the importance of saving and investing gold through waste management.

2. Literature Review

The level of waste generation significantly depends on economic development, the richer the country, the more waste is generated (Minelgaite, 2019). In the study of Minelgaite (2019), it analyzes the relationship of waste problems that are increasing seriously in the European Union with a change in the attitude of public awareness to waste (reduce, reuse, and recycle). The author concluded that reducing and reusing behaviors influenced waste generation insignificantly and relationship between recycling behavior and waste generation was positive and statistically significant.

Minelgaite (2019) also mentioned that the most effective tools for solving the waste problem should be the enhancement of reducing, reusing, and recycling behaviors. The research of Wulandari, Utomo, and Narmaditya (Wu- landari et al., 2017) found that waste bank was as an alternative model for waste management in an effort to reduce the waste problem and improve the local economy. The author mentions that the waste bank model requires an active role of the community. Other researchers, such as the research of Wijayanti and Suryani (2014), it mentioned that the waste bank has a role in bringing together various parties: local government, public (communities), private sectors, non-governmental organizations, and mass media in resolving waste problems and environmental hygiene.

The research of Wulandari, Utomo, and Narmaditya (Wulandari et al., 2017) also explained about the role of waste bank in supporting the community economy. Waste management model emphasizes the active role of

1258 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online the community, both as a customer, waste bank managers and also driving community in improving the local economy. The research of Indrianti (2016) strengthens the previous research, the author mentions that on the economic side, MJ-SWB (Miftahul Jannah Solid Waste bank) generates income for the Taman Pendidikan Al Qur’an or TPA (Al Qur’an educational place), this proves that MJ-SWB is able to financially support the learning process of TPA Miftahul Jannah in a susainable manner.

The research found six factors that are influencing the level of community participation in waste management through the waste bank program, namely socialization of waste management, community economy, environmental education, environmental hygiene, waste management facilities provided by the government and waste bank service system. In attracting people, it is needed an innovation in the trash bank to capture broader and more intensive community participation. PT Pegadaian provides an innovation to the waste bank through the redemption of waste with gold saving through the waste bank. Gold is one of the valuable items that can be accepted by everyone as a means of exchange or jewellery. Gold dominates the other items in terms of durability, homogeneity, divisibility, rarity, and global, that is why gold is an ideal store of value, i.e. something that can be saved for future use, even very far into the future (Meera, and Larbani, 2006). In other words, people see gold as a good source of investment thereby holding on to it acceptance (Yusuf, Ghani and Meera, 2013).

Further in this paper, it will analyze the role and excellence of The Gade Clean and Gold, which is an innovation in the general waste bank program.

3. Method

This study uses a qualitatively descriptive method. The approach in this study is a qualitative approach and describes the waste bank as a community-based waste management model to increase awareness of long-term investing to support the community economy. Surveys consist of in-depth interviews while the observation methods include field observations on research objects as well as data is gathered from various literature studies.

The location of this research is in Sidokumpul Village, Gresik, precisely Adil Sejahtera waste bank, where the reason for the selection of this observation object is because Sidokumpul is one of the areas with the waste bank system that has used the gold savings account that the sharia-driven pawnshop. One of the other factors is because Gresik is the largest area that has the largest waste bank system in East Java as an environmental management effort.

The interview was conducted with the Ms. Cholifah, as the director of the waste bank ‘Fair Prosperous’ in Sidokumpul village, Gresik; Mr. Yazid as the person in charge of The Gade Clean and Gold program; and Mrs. Kiki, one of the waste bank participants. We conducted an in-depth interview on the condition of the waste bank that became the research assessment, explaining how gold savings account exchange performance through the waste collected by the community.

4. Result and Discussion

4.1. The Gade Clean and Gold Waste Bank System

PT Pegadaian is a state-owned enterprise company engaged in finance since 1901. PT Pegadaian has 3 core services including financing business, gold business, and various services. As a state-owned enterprise that serves as an agent of development, pawnshop or “Pegadaian bersih-bersih” program and increase financial in- clusion. One of the best CSR (Corporate Social Responsibility) programs is The Gade Clean and Gold, which is sorting trash-saving gold (Pegadaian, 2018). Through the Gade Clean and Gold, the pawnshop invites the community’s participation to create a clean environment by sorting out the waste and redeeming it to the trash bank to be converted into gold savings. This program aims to improve the health and welfare of people’s lives, reduce the impact of environmental waste, improve livelihoods, and socialize the product service of Pegada- ian. The reason for choosing Sidokumpul village is because this village is one of the small villages in Gresik

1259 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online district. Initially, Sidokumpul became a poor village before the local government (head of village) launched a waste bank program. It takes enough time to be able to convince residents to take part in saving waste, until the pawnshop manages to hold the “Adil Sejahtera” waste bank, the name of the waste bank Sidokumpul, the amount of interest in the population is increasing.

The Gade and Gold Waste Bank system is not much different from the trash bank system in general. Gade Clean and Gold Waste Bank has 3 important actors, namely customers waste bank, trash bank manager, and the pawnshop. Trash banks are usually present in every RT/RW (RT or Rukun Tetangga is the division of villages in Indonesia under Rukun Warga or RW, while Rukun Warga is the division of regions in Indonesia under the Village or Kelurahan), where the customers are residents of the community.

Trash bank customers first open a gold savings account in the pawnshop. After that, the customer collects and sorts the waste that corresponds to the criteria. Waste banks receive waste that is included in plastic waste, paper, glass, and iron. Then the waste is deposited to the trash bank every two weeks, meaning that in one month there are two collections. Waste bank will weigh and record the acquisition of each customer with nominal money. Then at the end of the month, the amount of money will be converted into gold savings (see Figure 1).

Collect and Sort the Trash plastics and mirrors

Deposites in a waste bank

Weighs & Store in the judges warehouse

Converting the value Sorting again of waste savings to gold

Selling to the Creating as collectors a handicrafts

Sold out

Income for Profits customers’ waste waste bank

Deposites to Labor Wages & pegadaian Village Development

Savings gold customers` waste bank waste bank Figure 1. The Gade Clean and Gold Waste Bank System.

1260 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online

Waste that is accumulated in waste warehouse for one month will be sorted for sale to the collectors as well as for handicrafts. The handicrafts are done by empowering the creativity of local residents, which then when the craft has sold, its profits will be divided for (1) the crafters and (2) the waste banks.

Waste bank also gets profit from the difference in the purchase price of customers’ waste with the selling price to the collectors. The profit will be divided for (1) the interests of waste banks such as labor wages and (2) the development of the surrounding. Meanwhile, the proceeds from the customer waste will be paid to the pawnshop to be changed into gold saving form. Then for each month, it will be reported to the customer about the gold savings balance earned.

Good synergy between the community, waste bank, and pawnshop will help the success of The Gade Clean and Gold program in realizing a clean and free of waste.

4.2. The Impact of The Gade Clean and Gold Waste Bank in Sidokumpul Village to Local Economy

The majority of waste bank customers in Sidokumpul Village are housewives. Starting from PKK (a program at village level to educate women on various aspects of family welfare) members in the village who want a clean environment, see a lot of household waste wasted or even hoards to cause an unhealthy scenery to the concern of the onset of disease. Then the establishment of trash bank by local village named “Adil Sejahtera” waste bank which is currently registered to the national waste bank. Initially, the waste bank only deposited the waste from the customer to the collectors who then the money was made in the savings of the customer cash nominal. Waste collection is scheduled every month. To facilitate the sorting of waste, RT 2 RW 7 with Coordinator of The Gade Clean and Gold Program and director of trash bank, schedule the citizens to deposit the trash every 2 weeks. From the economic side, every month each deposit is around Rp 6000-8000 per customer. Thus, the public can see that waste is no longer just as a problem but as a money-generating tool. Wastes that are collected by the community are like household wastes such as; paper, plastic, cans, bottles, cardboard, and so on. People can benefit from the presence of this waste bank, in addition to the additional money, it also began to create a clean environment from the consequences of citizens who started to care about the environment by collecting household waste.

Seeing the response and the spirit of customers of the Adil Sejahtera waste bank in the socialization of the “Pegadaian bersih-bersih” program was welcomed positively by the citizens. The Gade Gold and Clean program is one of the shariah pawnshop CSR programs that offer the savings of waste bank into a gold account savings. This program in addition to participating in the growing awareness of clean environment, it also aims to increase the awareness of long-term investments in society. After 4 months of waste Bank the Gold and Waste Bank in RT 2 RW 7 village Sidokumpul Gresik, it has 52 customers with total achievement of gold savings overall reaches 24 grams of gold. Through the Gade Gold and Clean program, it is hoped that the community will be more aware of the importance of saving and investing. In addition to the dominant motives, people are aware of the importance of protecting the environment. The average income earned by depositing waste is only around 6000 to 8000 rupiahs per month. This is due to the low selling price of waste that is not much. That is, saving trash is not the main income but adds to the main income for housewives. By collecting waste from daily household use, you can save the results of the waste savings. Not to fulfill daily needs but to be used for a certain period of time.

4.3 The Impact of The Gade Clean and Gold Waste Bank in Sidokumpul Village to Environment

At first, waste bank program is implemented to emerge public awareness of environmental hygiene with recycling system. This is due to the government’s assumption that there is a need for community empowerment to participate in solid waste management.

Recycling makes the goods can be re-utilized and can be economical valued. This economical value becomes an attraction for people to collect solid waste in waste bank. The gold savings incentive that is promoted by The

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Gade Clean and Gold program caused the increasing interest of people in collecting and sorting waste, which has an impact on the environment to become cleaner. The word gold and trash have opposite connotations, but The Gade Clean and Gold program changes the public’s perception of waste which at first has no value and is then considered to have value. The perception slowly raises the habit of society to care for the environment, no longer at the recycle stage, even at the stage of reuse and reduce. When it has become a habit then hygiene will be a part of the community. A clean environment will affect both the physical and mental health of people, preventing various disasters that are caused by waste, and reducing the use of production materials that drain natural resources such as paper and iron.

Another role of PT Pegadaian on The Gade Clean and Gold program is as a facility provider. When a community wants to apply the waste bank system, the problems that arise a lot is the lack of facilities such as the place and the tools necessary for the sustainability of the waste bank. PT Pegadaian provides waste bin, temporary waste warehouse, to the trash bank office to support The Gade Clean and Gold program in Sidokumpul Village. In addition, The Gade Clean and Gold participated in the management of environmental governance to create a clean and beautiful environment.

4.4 Synergity Element of The Gade Clean and Gold Waste Bank in Sidokumpul Village

D GA AIA E N P increasing public awareness of the environment, increase awareness of long-term investing

(B) (A)

and environmental and

care about the garbage the about care

(D) management, environmental

T system waste bank waste system

A N

and Gold and management and Gold and

E S

support The Gade Clean Gade The support (C)

O B K R V A E N

Figure 2. The synergy of government, waste bank, and pawnshop (PEGADAIAN).

Synergy from pawnshop, waste banks, and local governments is embodied in the Intercept (A), (B), (C) and (D). Intercept (A) shows the cooperation between pawnshop and waste bank. The cooperation is realized in supporting efforts to foster public awareness to participate in waste management efforts as well as an awareness in investing gold through The Gade Gold and Clean program. Through such participation, it is not only profitable from the economic side, which is the micro economic empowerment, but also in the case of environmental and social problems. Figure 2 shows the pattern of establishing awareness in investing and maintaining the environment through pawnshop, not only based on individual but the need of synergies between waste bank, pawnshop and government through three models of Helix above.

Intercept (B) collaborative and cooperative relationship of the pawnshop with the government and waste bank in which there is a form of active participation of the community or society in an effort to support the government program, in this case, Sidokumpul Village in the community investment empowerment.

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Intercept (C) is a joint venture between the trash bank and the government. This is manifested in collaboration in realizing the local economy, community empowerment, and also an alternative model to address waste, social and economic problems.

Intercept (D) is a third-party collaboration (trash bank, and the government) in realizing a better local economy. Through the synergy of this element, economic empowerment programs make the community more independent and improve the economy, social and environment.

According to Birkhölzer (2009), describing the local community requires the same purpose, not only for individual purposes (for common good). Local economy begins based on the community or local community. In addition, an integrated holistic approach is essential in defining economic problems. It means that it does not only result in the production of goods and services, but also takes the environment, social and culture into account. Building and improving social capital is important to improve the capacity, knowledge, and ability of the local people.

5. Conclusions

The Gade Clean and Gold is one of the innovations to the waste bank system so that people are more interested in maintaining the environment to stay clean by managing waste. This program has 3 important roles which are supporting community economic empowerment, keeping the environment clean, and bringing people’s interest in investing, especially gold investment. In support of the success of The Gade Clean and Gold program, there needs to be a synergy between stakeholders, namely the community, waste banks, governments, and pawnshop. In regards of supporting the economic of the society, the Gade Clean and Gold might reproduce the waste to become higher valuable goods (i.e., souvenirs), the profit of high valuable goods might be invested in the gold saving to support the development of the village. The Gade Clean and Gold in the village of Sidokumpul Gresik has helped the community to create a clean and beautiful environment, to be an income support generator, as well as an interest generation in investing.

References

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Meera, A.K.M., and Larbani, M. (2006). Seigniorage of fiat money and the Maqasid al‐Shari’ah: The compatibility of the gold dinar with the Maqasid Humamics, 22, 2, 84-97. https://doi.org/10.1108/08288660610669383

Subdirektorat Statistik Lingkungan Hidup. (2018). Environment Statistics Of Indonesia 2018 (Badan Pusat Statistik)

Sukoco, B M, Suprayogi, N, & Hidayati, N A (2018) The Effects of Market Orientation on Environmental Social Responsibility Pro- grammes: The Moderating Effects of Institutional Pressures Pertanika Journal of Social Sciences & Humanities

Tim Penyusun. 2018. Annual Report PT Pegadaian: Menuju PEran Baru (Jakarta: PT Pegadaian Persero)

Vegera, S., Malei, A., Sapeha, I., Sushko, V. (2018). Information support of the circular economy: the objects of accounting at recycling technological cycle stages of industrial waste. Entrepreneurship and Sustainability Issues, 6(1), 190-210. http://doi.org/10.9770/ jesi.2018.6.1(13)

Wijayanti, D.R., and Suryani, S. (2014). Waste Bank as Community-based Environmental Governance: A Lesson Learned from Sura- baya Procedia - Social and Behavioral Sciences, 184, 171-9. https://doi.org/10.1016/j.sbspro.2015.05.077

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Wulandari, D., Utomo, S.H., Narmaditya, B.S., (2017). Waste Bank: Waste Management Model in Improving Local Ecomy. Interna- tional Journal of Energy Ecomics and Policy, 73, 36-41

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Acknowledgements

The authors would like to thank the editor and anonymous reviewers for their supportive comments and suggestions. The authors received no direct funding for this research.

Bayu Arie FIANTO is a lecturer at Universitas Airlangga, Indonesia. His research interests include Financial Economics and Islamic Economics. ORCID ID https://orcid.org/0000-0002-0163-2224

Uci WULANSARI is a student and junior research assistant in Faculty of Economics and Business, Universitas Airlangga, Indonesia. Her research interest is Islamic economics focuses on Islamic finance. ORCID ID https://orcid.org/0000-0002-3328-1334

Irine ARDIYANTI is a student and junior research assistant in Faculty of Economics and Business, Universitas Airlangga, Indonesia. Her research interests are Islamic banking and finance. ORCID ID https://orcid.org/0000-0002-6407-3095

Meryem TLILI is post graduate student in Islamic Finance of Ez-Zitouna University, Tunisia. Her research insterests include Islamic finance, Islamic insurance, and Islamic economics ORCID ID https://orcid.org/0000-0002-5048-0634

This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/

1264 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 http://doi.org/10.9770/jssi.2020.9.4(13)

DETERMINANTS OF EARNINGS MANAGEMENT: AN EMPIRICAL ANALYSIS

Novia Wijaya1, Kashan Pirzada2*, Chelsea Fanady3

1Trisakti School of Management, Jl. Kyai Tapa No. 20, 11440, Jakarta, Indonesia 2College of Business Tunku Puteri Intan Safinaz School of Accountancy, Universiti Utara Malaysia, Kedah, Malaysia 3Trisakti School of Management, Jl. Kyai Tapa No. 20, 11440, Jakarta, Indonesia

E-mail: [email protected], 2*[email protected] (Corresponding author); [email protected]

Received 18 October 2019; accepted 17 April 2020; published 30 June 2020

Abstract. The objective of this research is to acquire empirical evidence regarding the influence of firm size, firm leverage, firm age, audit quality, female directors, profitability, board size, audit committee size and board meeting towards earnings management of non- financial companies listed in Indonesia. Methodology/technique: the population under this research is non-financial companies listed on the Indonesian Stock Exchange (IDX) from 2014 to 2017. The samples were obtained secondarily are then selected through a purposive sampling technique by defining the sampling criteria. There were 127 non-financial companies listed on the Indonesian Stock Exchange which resulted in 508 data sets being available throughout the research. This research also uses hypothesis testing as part of the data analysis. The outcome of this research suggests that firm leverage, audit quality and profitability have an effect on earnings management for stable financial results. Meanwhile, firm size, firm age, female director, board size, audit committee size and board meeting do not have an effect on earnings management in non-financial companies listed on the Indonesian Stock Exchange.

Keywords: earnings management; firm size; firm leverage; firm age; audit quality; profitability.

Reference to this paper should be made as follows: Wijaya, N., Pirzada, K., Fanady, C. 2020. Determinants of Earnings Management: An Empirical Analysis. Journal of Security and Sutainability Issues, 9(4), 1265-1273. http://doi.org/10.9770/jssi.2020.9.4(13)

JEL Classifications: G32, G39.

1. Introduction

Financial statement has always been a useful tool in accounting practice as a direct vision into a firm’s financial activities, status and performance. Financial statements summarize the process of recording transactions occurring in the current financial year. The use of these documents is particularly crucial in the decision-making process for internal stakeholders. Likewise, external stakeholders also rely on financial statements to assess the risk and return of their investment decisions. One of the types of information contained in financial statements is the profits generated by the company. This information is particularly crucial in the decision-making process for some stakeholders (Arniati, Puspita, Amin, and Pirzada, 2019; Hilkevics, Semakina, 2019).

As such, the quality of financial reporting is particularly important, and is something that companies are very eager to get right. This signifies that management tends to act opportunistically and manipulate earnings to make its financial statements looks as favorable as possible. These acts of management involved in manipu- lating financial statements, either by escalating the income or depressing the expense, are commonly known as earnings management (Saftiana, Mukhtaruddin, Putri, & Ferina, 2017). Earnings management is however considered legal for as long as the creation of the desired level of earnings lies within the accepted accounting principles. Its practice may commonly involve changing the accounting methods or changing the accounting policies and estimates (Subramanyam, 2014). Earnings management has become a popular topic worldwide JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online as its cases involved the giant companies such as Enron, Xerox and Worldcom. Indeed, several well-known companies in Indonesia such as Lippo Bank (Suhendra & Wardani, 2013) and Kimia Farma (Tempo.co, 2003) have also dealt with earnings management illegally.

Earnings management is one of the main concerns for a company, knowing that this issue is still happening in the 21st century which may later hit the larger parts of Indonesia’s capital market. Previous findings show that earnings management is likely to be affected by board characteristics (Bala & Kumai, 2015). Meanwhile, others emphasize corporate governance as one factor that will reduce the practice of earnings management (Miko & Kamardin, 2015). Therefore, this research aims to answer the following question: “Do firm size, firm leverage, firm age, audit quality, female directors, profitability, board size, audit committee size and board meeting have an influence on earnings management?”

2. Literature Review

2.1 Agency Theory

Agency theory is a theory that provides structure for establishing relationships with the involvement of contract wherein the principal appoints an agent, for the purpose of handing over responsibility (Jensen & Meckling, 1976). The principal has full authority to control the agent and restrict them from committing deviant activities by monitoring costs. Nevertheless, the agents may take advantage of the principal by performing opportunistic behavior such as earnings management, as the principal are the one who endure the costs associated with the inherent risk of an agency relationship.

2.2 Signaling Theory

Signaling theory is derived from the word “signal” which is categorized as an observable feature that could be manipulated by a signaler such as the managers’ ability to manage the receiver’s interpretation (Spence, 1973). The purpose of this signal is therefore to minimize information asymmetry by delivering and communicating positive information regarding a firm’s attributes to outsiders. In order to send these positive signals to outsiders, managers are likely to be engaged in the practice of earnings management to make the firm performance look most favorable.

2.3 Hypothesis Development

2.3.1 Firm Size and Earnings Management Firm size may differ in many ways and has an effect on how a firm reports its information to users. Large-sized firms tend to have more resources compared to small-sized firms meaning they have more bargaining power to negotiate with its auditor. Stronger control of management and pressure from analysts may therefore lead to a higher occurrence of earnings management (Bassiouny, Soliman, & Ragab, 2016). Based on the above discussion, the following hypothesis is proposed:

H1: Firm size has an influence on earnings management.

2.3.2 Firm Leverage and Earnings Management Leverage indicates the amount of assets that are financed by debts. Higher leverage ultimately increases the likely chance that a firm will be incapable of paying all of its obligations to the lenders (Saftiana et. al., 2017). It often contributes to higher risk as it may yield to higher debt-financing costs and may lead to a breach of the debt-cove- nant. Increasing earnings may also be an alternative to help company that depends on debt to avoid renegotiation costs (Bassiouny et. al., 2016). As such, the act of earnings manipulation tends to be used in highly leveraged firms to avoid the violation of these covenants. Based on the above discussion, the following hypothesis is proposed:

H2: Firm leverage has an influence on earnings management.

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2.3.3 Firm Age and Earnings Management Firm age is commonly associated with firms that have existed in the market for a prolonged period of time (Al- saeed, 2006). Firms that live longer usually have lower levels of engagement in earnings management as they are commonly reputable and are more aware of the codes and ethics that control their practice (Bassiouny et. al., 2016). Moreover, older firms are more likely to reveal additional information in their financial statements in order to elevate its reputation in the eyes of the public. Based on the above discussion, the following hypothesis is proposed:

H3: Firm age has an influence on earnings management.

2.3.4 Audit Quality and Earnings Management The big four auditing companies generally produce higher quality of audit as errors are detected easily and with more accuracy (Wati, Primiana, Pirzada and Sudarsono, 2019). The big four auditing firms such as KPMG, Pricewaterhouse Coopers, Ernst & Young and Deloitte are likely to produce higher quality audit reports as they are more conservative in reporting earnings which decreases the possibility of information asymmetry, thus lessening the practice of earnings management (Soliman & Ragab, 2014). In addition, these auditing firms also have reputation to be managed, therefore increases the likelihood that they will detect if a company is practicing earnings management or not. Based on the above discussion, the following hypothesis is proposed:

H4: Audit quality has an influence on earnings management.

2.3.5 Female Directors and Earnings Management Females tend to be more caring than males, and as such, females act towards the moral code decreasing the likelihood of earnings management (Pirzada, Mustapha, and Alfan, 2016). However, higher participation of female directors on boards may also yield to higher earnings management because females often show their sympathetic side more than males, which will make them weak when forced to supervise and monitor the activities of management (Bala & Kumai, 2015; Thandabhani, 2020). Based on the above discussion, the following hypothesis is proposed.

H5: Female directors have an influence on earnings management.

2.3.6 Profitability and Earnings Management Profitability is an indicator to measure the ability of a firm to generate profit in relation with the usage of its assets and capital. It is an important concept to show whether a firm has utilized the resources appropriately to achieve its objectives. In accordance with research by Arifin and Destriana (2016), highly profitable firms have a higher likelihood to practice earnings management as these firms have greater capability in deciding the level of profit that they desire and can act opportunistically (Susanto, Pirzada, and Adrianne, 2019). Based on the above discussion, the following hypothesis is proposed:

H6: Profitability has an influence on earnings management.

2.3.7 Board Size and Earnings Management The scale in which the firms operate determines the number of directors needed. A large board size is useful as it provides greater capability and variety of knowledge which could increase productivity although it may also increase agency costs due to the involvement of many directors (Bala & Kumai, 2015). In accordance with research by Aygun, Ic & Sayim (2014) and Abed, Al-Attar, & Suwaidan (2012), boards with greater numbers of directors often indicate less engagement in earnings management as it allows the involvement of shared experiences in detecting earnings management. Based on the above discussion, the following hypothesis is proposed:

H7: Board size has an influence on earnings management.

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2.3.8 Audit Committee Size and Earnings Management The audit committee helps to ensure that financial statements prepared by the management are reliable and accurate (Solikhah, Firmansyah, and Pirzada, 2017). The audit committee will also apply internal control over the financial statements to make sure that it meets any applicable laws and regulations (Lin & Hwang, 2010). A larger audit committee may reduce earnings management as its duty involves ensuring the quality of financial reporting which minimizes the manipulation of earnings (Soliman & Ragab, 2014). Based on the above discussion, the following hypothesis is proposed:

H8: Audit committee size has an influence on earnings management.

2.3.9 Board Meetings and Earnings Management A board meeting is a good tool to help the company move in the right track and to ensure that the management is carrying out the job effectively (Kankanamage, 2015). It is deemed to be ineffective to have too many board meetings as it could distort the director’s attention in completing tasks that are different from the firm’s initial objectives (Pirzada, 2016). Therefore, directors may lose focus regarding its progress on firm performance (Bala & Kumai, 2015). Based on the above discussion, the following hypothesis is proposed:

H9: Board meetings have an influence on earnings management.

3. Research Methodology

The population involved in the research is non-financial companies listed on the Indonesian Stock Exchange from 2014 to 2017. The samples are selected based on a purposive sampling technique by defining the sample criteria. The sample criteria that must be fulfilled are: (1) non-financial companies listed consistently on the Indonesian Stock Exchange from 2013 to 2017, (2) non-financial companies with a financial year ending on December 31st from 2013 to 2017, (3) non-financial companies using IDR currency (Rupiah) as the reporting currency from 2013 to 2017, (4) non-financial companies explaining the frequency of its’ directors meeting from 2014 to 2017, (5) non-financial companies consistently generating positive net income from 2014to 2017, (6) non-financial companies consistently publishing financial statements from 2013 to 2017 and (7) non- financial companies giving the information needed (gross PPE).

The accumulated research data will then be processed using the Statistical Package for Social Sciences (SPSS) version 23.0. The independent variables are firm size, firm leverage, firm age, audit quality, female directors, profitability, board size, audit committee size and board meeting. Whereas the dependent variable is earnings management. The hypothesis tests will be undertaken to obtain empirical evidence regarding the influence of each determinant.

3.1 Definition of Variables (Table 1)

Table 1. Definition of Variables

Variables Description Name Earnings Management Modified Jones Model (1995) DAC Firm Size Natural logarithm of total assets SIZE Firm Leverage Total Debts / Total Assets LEV Firm Age Log of the number of years since the firm’s foundation AGE Audit Quality Dummy Variable (1= Auditor is a big 4 firms, 0= otherwise) AQUAL Female Directors Number of female directors on boards FDIR Profitability Net Income / Total Assets ROA Board Size Total of board of directors BSIZE Audit Committee Size Total number of audit committee members ACSIZE Board Meeting Total number of boards of director meetings held in a year BMEET

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4. Results

The results for the descriptive statistics and hypothesis test (F Test and t-Test) are shown below (Table 2).

Table 2. Descriptive Statistics

N Minimum Maximum Mean Std. Deviation DAC 508 -.24469 .69319 .0000000 .09365928 FSIZE 508 24.56831380 33.32018390 28.70838711 1.565770220 FLEV 508 .0368057000 .9478959000 .4257842620 .1842105178 FAGE 508 .7781513000 2.123851600 1.519203352 .1984223541 AQUAL 508 .0000000000 1.000000000 .4350393701 .4962508337 FDIR 508 .0000000000 5.000000000 .6437007874 .8798756440 ROA 508 .0002418000 .5267036000 .0758031713 .0759667265 BSIZE 508 2.000000000 16.00000000 5.070866142 2.089444128 ACSIZE 508 1.000000000 6.000000000 3.078740157 .5041257664 BMEET 508 2.000000000 82.00000000 19.87204724 14.11831403 Valid N (listwise) 508

Source: SPSS 23.0 results from data processing

Table 3. F Test Result ANOVAa

Model Sum of Squares df Mean Square F Sig. 1 Regression .275 9 .031 3.646 .000b Residual 4.173 498 .008 Total 4.447 507 a. Dependent Variable: DAC b. Predictors: (Constant), BMEET, ROA, FDIR, FLEV, ACSIZE, AQUAL, FAGE, BSIZE, FSIZE

The F test results in Table 3 can be seen by observing the sig. column. The significance level used throughout this research is 0.05 (5%), whereby if sig. value < 0.05, it can be inferred that the regression model is feasible or fit to be used in this research. Since the sig. value is 0.000 (0.000 < 0.05), it can be inferred that the model is fit to be used in this research. (t Test Result Coefficients are provided in Table 4 below).

Table 4. t Test Result Coefficients

Unstandardized Coefficients Standardized Coefficients Model t Sig. B Std. Error Beta 1 (Constant) -.128 .099 -1.288 .198 FSIZE .004 .004 .068 1.143 .254 FLEV -.086 .023 -.170 -3.725 .000 FAGE .038 .024 .081 1.601 .110 AQUAL -.027 .010 -.142 -2.667 .008 FDIR .005 .005 .049 1.046 .296 ROA .137 .061 .111 2.235 .026 BSIZE -.003 .003 -.065 -1.134 .257 ACSIZE .001 .009 .005 .110 .912 BMEET 3.660E-6 .000 .001 .011 .991

Dependent Variable: DAC

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1) FSIZE has a positive coefficient value of 0.004 and sig. value of 0.254. This sig. value has exceeded the significance level (0.254 > 0.05). Therefore, it can be concluded that FSIZE has no influence on earnings management (DAC), meaning that H1 is rejected.

2) FLEV has a negative coefficient value of -0.086 and sig. value of 0.000. This sig. value has not exceeded the significance level (0.000 < 0.05). Therefore, it can be concluded that FLEV has influence on earnings management (DAC), meaning that H2 is accepted.

3) FAGE has a positive coefficient value of 0.038 and sig. value of 0.110. This sig. value has exceeded the significance level (0.110 > 0.05). Therefore, it can be concluded that FAGE has no influence on earnings management (DAC), meaning that H3 is rejected.

4) AQUAL has a negative coefficient value of -0.027 and sig. value of 0.008. This sig. value has not exceeded the significance level (0.008 < 0.05). Therefore, it can be concluded that AQUAL has influence on earnings management (DAC), meaning that H4 is accepted.

5) FDIR has a positive coefficient value of 0.005 and sig. value of 0.296. This sig. value has exceeded the significance level (0.296 > 0.05). Therefore, it can be concluded that FDIR has no influence on earnings management (DAC), meaning that H5 is rejected.

6) ROA has a positive coefficient value of 0.137 and sig. value of 0.026. This sig. value has not exceeded the significance level (0.026 < 0.05). Therefore, it can be concluded that ROA has influence on earnings management (DAC), meaning that H6 is accepted.

7) BSIZE has a negative coefficient value of -0.003 and sig. value of 0.257. This sig. value has exceeded the significance level (0.257 > 0.05). Therefore, it can be concluded that BSIZE has no influence on earnings management (DAC), meaning that H7 is rejected.

8) ACSIZE has a positive coefficient value of 0.001 and sig. value of 0.912. This sig. value has exceeded the significance level (0.912 > 0.05). Therefore, it can be concluded that ACSIZE has no influence on earnings management (DAC), meaning that H8 is rejected.

9) BMEET has a positive coefficient value of 0.00000366 and sig. value of 0.991. This sig. value has exceeded the significance level (0.991 > 0.05). Therefore, it can be concluded that BMEET has no influence on earnings management (DAC), meaning that H9 is rejected.

5. Discussion

The research outcome demonstrates the factors that influence on earnings management to achieve stable and predictable financial results. FSIZE is measured by calculating the natural logarithm of total assets. The results on the previous section suggest that FSIZE has no influence on earnings management, which indicates that whether the size of a company is big or small, it does not significantly affect the likelihood of doing earnings management. This result is consistent with Bassiouny et. al. (2016) and Saftiana et. al. (2017). FLEV has negative influence towards the practice of earnings management. Highly leveraged firms may give a good indication to external parties of its confidence in the ability of paying back all its’ liabilities as the use of high debt financing to finance assets poses a higher risk to the company. In addition, the use of debt helps firms to obtain tax shields which lead to lower practice in earnings management. This result also corresponds to prior research by Aygun et. al. (2014). FAGE has no influence on earnings management, which indicates that firms with longer operation periods do not necessarily mean that the engagement in earnings management will be lower. This result also corresponds to prior research by Bassiouny et. al. (2016). In addition, FDIR also has no influence on earnings management, which means that the existence of more or less female directors on a board may still allow the company to do earnings management. Meanwhile, AQUAL is measured using the dummy variable

1270 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online and has negative influence towards earnings management. The big four auditing firms are commonly reputable and to maintain the trust of external stakeholders, they need to be able to detect and report mistakes which are material in the financial statements. Therefore, the involvement of the big-four auditing firms helps to reduce earnings management. The result also corresponds to research by Soliman & Ragab (2014).

ROA has positive influence on earnings management. Profitability often become a measure that is used to evaluate the performance of a company’s manager. Higher profitability may result in managers trying to maximize their wealth and act opportunistically to get higher incentives in the form of bonuses, which therefore increases the motives in doing earnings management. This result is also consistent with research by Aygun et. al. (2014) and Arifin and Destriana (2016).

Whereas, BSIZE, ACSIZE and BMEET have no influence on earnings management which means that having a sufficient number of director on boards, sufficient audit committee members, and sufficient board meetings in a year are necessary but do not necessarily guarantee that each director or audit committee member will maximize their function in detecting earnings management (Soliman & Ragab, 2014).

6. Conclusion

This research intends to obtain empirical evidence regarding the influence of firm size, firm leverage, firm age, audit quality, female directors, profitability, board size, audit committee size and board meeting towards earnings management of non-financial companies listed on the Indonesian Stock Exchange from 2014 to 2017. The outcome of this research may be beneficial to several parties in understanding the determinants of earnings management. This involves increasing awareness for management in the engagement of earnings management, getting a clearer picture for investors regarding the determinants of earnings management and assess the likely risk to occur, and served as a source of reference for future researchers in conducting further exploration related to earnings management.

The conclusion that can be derived upon t-Test are: firm leverage and audit quality have a negative influence on earnings management which are consistent with Aygun et al. (2014) and Soliman and Ragab (2014). A higher leverage often allows companies to obtain a tax shield yielding to lower tax to be paid, which therefore limits manager’s opportunistic action and reduces the likely chance of doing earnings management. In addition, the involvement of big-four auditing firms provide higher audit quality as they need to maintain the trust of external stakeholders by reporting mistakes in the financial statement.

On the other hand, profitability has a positive influence on earnings management, which is in accordance to Aygun et al. (2014) and Arifin and Destriana (2016). This proves that higher profitability may boost manager’s opportunistic behavior through the maximization of wealth in the form of bonuses. In addition, t-Test also suggests that firm size, firm age, female directors, board size, audit committee size and board meeting have no influence on earnings management.

This research is distinguished from other researches’ work by adding variables which are not only focusing on corporate governance as one factor, but also involving several variables under board characteristics to help identify the determinants of earnings management. This research, however, still has limitations as it only examines accrual-earnings management. In addition, a modification of the independent variables as the determinants may also be considered. Therefore, an upgrade of real-earnings management may be considered and at the same time, future studies may include modifying the independent variables which are likely to have more impact on earnings management in Indonesia such as free cash flow.

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Novia WIJAYA ORCID ID: https://orcid.org/0000-0001-6004-0619

Kashan PIRZADA ORCID ID: https://orcid.org/0000-0003-1186-0631

Chelsea FANADY ORCID ID: https://orcid.org/0000-0002-1510-4035

This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/

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1274 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 http://doi.org/10.9770/jssi.2020.9.4(14)

ISSUES OF PECULIARITIES OF MILITARY EDUCATION ON DIFFERENT LEVELS: THE MODERN NOTION OF LEGAL PREPARATION FOR CADETS

Vladas Tumalavičius1,2, Alina Danilevica2, Irena Kokina3

1The General Jonas Žemaitis Military Academy of Lithuania, Šilo Str. 5A, Vilnius LT-10332, Lithuania 2Institute of Humanities and Social Sciences of Daugavpils University, Parades Str. 1, Daugavpils, LV-5401, Latvia 3Daugavpils University, Vienibas Str. 13, Daugavpils, LV-5401, Latvia

E-mails: [email protected]; [email protected]; [email protected]

Received 20 October 2019; accepted 20 April 2020; published 30 June 2020

Abstract. National security and sustainability are the main priority of any state. Therefore the Republic of Lithuania as well as any other state follows its National Security Strategy which establishes the interests of national security, directions of its evolution, the security and defence policy in general, means and types of risk factors and threats to the national security. This study investigates the issues of legal preparation in the military high school. The topical issues directly related to the national defence and security which arise in the run of the training course for the military, especially junior leaders at the institution of higher education in the sphere of providing them with the basic legal knowledge, are presented and examined in the article. In the process of training and upbringing of a junior leader more attention is paid to their professional skills and competencies, and a leader’s and subordinate’s personality, therefore, a system of legal preparation and training provided for students of this kind of educational institutions, its role and degree of influence on personal qualities of a future leader have not yet been studied and described in scientific publications. The above mentioned observations determined the rationale for choosing the topic for the research paper. Its relevance is without doubt. It has been concluded that a leader who is politically correct and competent in the legal sphere can ensure that the decisions made are well-reasoned, consistent and adequate, and they are aimed at the elimination of possible disagreements which might emerge in the sphere of human resource management, management of military units in the run of resolving their daily tasks, holding negotiations at any levels, as well as enhancement of the army’s defensive power in general.

Keywords: national security; military education; legal preparation; cadets; development; knowledge

Reference to this paper should be made as follows: Tumalavičius, V., Danileviča, A., Kokina, I. 2020. Issues of peculiarities of military education on different levels: the modern notion of legal preparation for cadets, Journal of Security and Sustainability Issues, 9(4), 1275-1282. http://doi.org/10.9770/jssi.2020.9.4(14)

JEL Classifications: K30, I2, I23, I29, Z18

Additional disciplines: law; educology; sociology, military security, national security

1. Introduction

Issues in the field of military security in particular military education at different times were raised in the discussions of various scientists (Tvaronavičienė 2018a; Tvaronavičienė 2018b; Tvaronavičienė et al. 2018; Jatautaite, Kazimienec 2018; Kokina 2016; Zahars, Stivrenieks 2016; Tumalavičius et al. 2016; Tumalavičius 2017, Laužikas, Miliūtė, 2019; Chehabeddine, Tvaronavičienė, 2020, Plėta et al., 2020 etc.), but the issue of providing legal knowledge to military people remains not more studied, therefore, in this discussion, an attempt will be made to analyze the need and progress in providing the legal basis for training leaders’ officers using the example of the General Jonas Žemaitis military academy of Lithuania. Nowadays there is an urgent necessity for strengthening the ties and relations between the society and army, which would encourage the youth’s better understanding of the concept of a legal state and society, rapidly changing global geopolitical JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online situation, changes and destabilizations of social processes in the modern society, since under the conditions of a rapid development of economy and globalization, some factors threaten the national security (Lietuvos Respublikos...1997), as well as significantly influence the internal environment at military educational institutions which, in fact, determines the readiness of a young person to choose a military career. In this case, a political and legal decision made by the state administration institutions of the highest level – which strategy of military training and upbringing of future officers we choose in order to provide and enhance the European Union (EU) security – is also important. Currently, there are several alternatives to this tendency: compulsory military service for young and healthy people in accordance with the Constitution of the Republic of Lithuania (1992), alternative service and voluntary military service on a contact basis (Lietuvos Respublikos...1996; Lietuvos Respublikos...1998).

The experiences of other states demonstrate that all the above mentioned types of military service and army organization exist, but in order to implement all these types, first of all it is essential to educate and train a military officer-leader. General Jonas Zemaitis Military Academy of Lithuania (Academy) is the main basis for the training and educating of military officers-leaders in Lithuania.

The Academy is a university whose mission and aim are by means of following the Lithuanian traditions and providing a qualitative academic and military education as well as professional knowledge and practical skills which are necessary for a junior officer of the Lithuanian military forces, to train a motivated military officer who is ready to manage the military units during war and peace time and who serves the Lithuanian state, by developing his intellect and leadership qualities (The General Jonas Žemaitis Military Academy of Lithuania Home Page, lka.lt). The cadets of the Academy alongside the general academic education are provided with the legal knowledge which they need for their future military service in the NATO and EU forces (Makštutis, 2006).

2. The significance and tasks of the cadets’ legal preparation

The groups of cadets studying at the Academy are not identical in their structure and they are of different levels. This difference might be revealed in a number of factors, such as motivation, age, life experience, the level of education obtained before the Academy, individual psychological characteristics of a cadet relevant for training at a high military educational institution, etc.

As the practice proves, all these factors influence the legal preparation and education of the cadets. Their striving for self-development and perfection in the legal sphere is determined by their behavior model and position for achieving this aim and the tasks set. Therefore, while organizing the study process in the sphere of cadets’ legal preparation, it is necessary to take into account a general professional orientation of academic education on the chosen specialities as well as the set tasks of military study disciplines for the cadets’s preparation at the Academy. Their creativity, activity and systematic approach in this sphere play an important role for the efficient acquisition of legal knowledge. Apparently, a teacher in the process of fulfilment of this task should form and later develop the necessity for cadets’ legal education and preparation, to render every assistance and motivate this striving (Malovikas, 2004).

It can be stated that determining the level of legal preparation of school graduates who enter the Academy and its analysis enable orientation whether this process is necessary for its implementation at the Academy activating internal directives and provisions. All this is related to the development of corresponding motivation and adequate positive attitude of school graduates towards the acquisition of as much legal knowledge as possible.

Long-term observations and their analysis show that the attitude and striving of the cadets from the Academy’s junior courses for the improvement of their legal knowledge are determined by the following factors: ► systematic, purposeful and methodic work, as well as their individual skills for the development and improvement of a personal legal culture; ► development of a stable interest for the improvement of individual personal qualities;

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► ability to organize the self-improvement in the legal sphere and implementation of a long-term perspective for professional military activity.

Formation of the need for legal development and preparation involves taking into consideration the necessity for the variety of relations between different elements of this process, as well as forecasting the changes which, finally, emerge in relation to such factors as: ► increase or decrease in the need for the development of legal knowledge of one cadet or the whole platoon; ► increase or decrease in the needs for legal development of personnel within the whole military element.

The emergence of the need for legal education and development is a complex process based on a variety of components. The following stages in the formation of emergence of the need for this process can be highlighted: ► the necessity for formation of the need for legal preparation in the cadets’ consciousness and its development; ► clearly stated necessity for the need for formation of the need for transformation into a motivation for legal education and preparation.

These stages characterize the emerging natural two-way relation between the need and activity, where the need at its initial stage is interpreted as a prerequisite for the start of the individual work on the development of a cadet’s personality towards this direction (Malovikas, 2002).

It is noticed that a lot of cadets know very well that in order to develop their personality they also need to develop and improve their legal knowledge, but not all of them have a clear understanding of the importance of this knowledge. The cadets were asked a question: “What personal qualities do you find important to develop and improve? “. Many of them said that they found it difficult to answer this question or did not provide an answer at all, and only a few of them mentioned – leadership, tenacity, persistence, resiliency, management skills, etc., including the improvement in the sphere of legal knowledge.

Analysis of the influence of the above mentioned factors showed that specification and purposeful formation of the need for legal education and preparation occupy a special place in the education of the junior class cadets. This is one of the most important directions within this process which encourages the achievement of the set goal.

The cadets’ interest to acquiring more legal knowledge is formed depending on their interest in their future occupation as the military, but it also has its own specific character. It has been determined that the higher the cadets’ interest is, the richer and more effective the process of development and improvement of their legal knowledge is, as well as the more active and more planned their involvement in this process is (Morozov, 2000).

The formation of intersest in legal education and its development in the process of the cadets’ academic education consists of the following elements (Puzinavičius, 2001): ► rational (which allows understanding the meaning and significance of this process); ► emotional (which encourages the cadets’ positive emotions, feelings of self-satisfaction and self-confidence).

Therefore, the cadets’ interest towards improvement of legal knowledge is generated in the process of development and enhancement of the above mentioned elements, causing a temporary interest in the beginning which later is transformed into a stable and long-term one.

The perception of the necessity for legal education by the cadets at the junior courses is revealed on the example of the performance efficiency by the cadets at the senior courses. At the same time this process acquires its own distinctive and individual peculiarities and becomes more sustainable in relation to external factors which influence it. So, the cadets’ legal development and education acquires new forms and their content becomes more varied.

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Monitoring of the processes of a university education and professional preparation of the Academy’s cadets shows that the improvement of the knowledge acquired by the cadets of senior courses begins already from the moment when they have any legal issues and practically resolve these issues, which provides them with the additional motivation for legal preparation and which is a new element in the management of this process. The process of observation has also showed that the growth rates of a higher activity in the cadets’ legal improvement in the process of their studies depend on its full-scale and comprehensive stimulation.

The motivation emerges here and influences the whole process, and it is determined as a significant and objective stimulus for the achieviement of this goal, encouraging a person to actively acts in self-improvement. Stimulation as an impulse encouraging the cadets to active work, is necessary for maintaining the need and necessity for the cadets’ legal education and preparation, as well as further development of their personal qualities in the process of establishing a positive motivation. A lot of educational and pedagogical methods and forms of study process are some particular objective and motivational means which influence the cadets’ motivation (Morozov, 2000).

3. Prospects of the processes of legal education and preparation

Peculiarity of the process of study and education, strict military discipline and manifestations of the legal culture of all participants of this process promote and positively influence the process of the cadets‘legal self- improvement. Nevertheless, in order to achieve this aim it is necessary to observe psychological, educational and pedagogical conditions for legal development and self-improvement. These conditions are (Puzinavičius, 2001): ► complete understanding and comprehension of all levels of meaning and aims of stimulation by teachers and leaders of platoons; ► wide use of possibilities for stimulation during the whole process of study and education; ► optimization of the processes of legal development and formation of corresponding individual criteria for the assessment of a personality.

The reason for stimulation of legal self-improvement of the cadets at senior courses is mainly their positive and stable attitude, understanding of the necessity for improvement and development of their theoretical knowledge and skills in this area, as well as the adequate awareness of the requirements to the choice of their future profession, improvement of the legal culture and personal qualities of a military officer. Stimulation of specific tasks of the process of legal preparation provided by the leaders and teachers is original and varied. In general, the tasks are aimed at a complex and stimulating development of legal improvement of the cadets.

One of the prerequisites of this influence is presentation and explanation to the cadets of the relevant requirements which promote the increase in the quality of university education, professional training and self-improvement process. The ability every time to present these requirements in an unusual, vivid and lively way is one of the success factors in the achievement of the set aim. Creation of relevant legal normative acts (orders, acts, provisions, instructions, rules, etc.) in the run of the training is also one of the most efficient means of this presentation. The assessment of the cadets’ individual work in this field will allow the teachers objectively seeing the efficiency of the process of legal education and self-preparation, as well as adequately to evaluate the internal legal culture of every cadet and identify a further direction for his legal development.

A complex, detailed and integral explanation and presentation of requirements for future graduates is also an extremely significant condition for successful legal education, preparation and self-improvement of the cadets. Therefore, teachers who require the relevant professional preparation also have a great potential for influence. The efficiency of this kind of a teacher’s influence on the formation of the study of the legal process will be higher if the requirements are higher. A cadet should not only understand the studied subjects but he has to possess excellent abilities to apply and impement theoretical knowledge acquired during the study process to his daily military service.

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Teachers should set the same requirements which encourage the interest and improvement in the sphere of legal knowledge to all cadets. Cadets’ legal preparation should be aimed at fulfilment of tasks in specific spheres of their activity: educational, cultural, and leisure. Therefore, a scientific approach, organization and planning in these spheres of their activity at the initial stages of training have a positive influence on the quality and efficiency of legal education, training and preparation at the later stages of their training, as the intensive development of cadets’ personal qualities is achieved by means of creation of internal and external conditions for their development (Puzinavičius, 2001).

Later on, new components of study process appear in the training activity of the cadets at senior stages – preparation and writing of written assignments, reports, course papers (projects), diploma work for Bachelor’s degree.

Therefore, at this stage, the cadets of senior courses already actively participate in the research activities. This participation provides the cadets with the opportunities for legal development. The cadets, while researching and analyzing scientific problems discussed in their course and diploma papers, have to apply their legal knowledge acquired in the process of training. The task of the advisors of course and diploma papers is to help the cadets not to be afraid of making mistakes and to encourage the cadets to make use of the legal knowledge they have acquired, as well as to expand their legal culture as they are future leaders. But at the same time it should be taken into consideration that some cadets participate in the research activity only because of the “assessment”. This kind of attitude towards research activity does not promote diligence and it does not have a due influence on their opportunities for legal improvement.

It can be stated that research work encourages legal development of cadets under the following conditions: ► active and creative attitude towards research work; ► striving for the improvement of already acquired knowledge and readiness to apply it; ► profound and high requirements towards research work set by advisors; ► tight relations between the undertaken research work and practical milirary activity applying legal knowledge for resolving the research problems.

In general, the legal improvement of the cadets at senior courses can be stimulated at the end of the process of formation of professional features while conducting a preliminary individual interview with the cadets. In the run of this interview the positive moments in their work are noted down, the downsides of their work are identified and the reasons for them are analysed, the ways for improvement are discussed. These individual interviews hugely affect the cadets’ subconsciousness, as they can be used by a teacher as a kind of pre-evaluation and help him to finalize a cadet’s final assessment.

The following stages of this individual interview can be singled out: ► a profound preparation for the interview which allows getting to know a cadet closely; ► a serious and objective assessment of a cadet’s achievements and flaws; ► amiability and sincerity of the interview.

The legal improvement of the cadets at senior courses is also possible if this activity is well-stimulated. This stimulation should be performed in two directions: ► creation of external conditions; ► impact on cadets’ internal personal orientations.

The external conditions here are the following: consistent and precise observation of the internal regulations and provisions of the Academy and military service; research and methodological and legal organization of the cadets’ working time and other activities; formation of an internal legal micro-climate; cadets’ involvement in activities on the application of their legal knowledge.

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The impact on cadets’ internal personal orientations appears in the formation of the psychological mood of a cadet towards his participation in application of his personal legal knowledge and its improvement.

Activation of improvement of the legal knowledge acquired by the cadets in the process of their university education and military and professional preparation requires: ► special preparedness of all participants of this process; ► use of psychological and pedagogical mechanisms for improvement and understanding of its core; ► ability to distinguish between the impact of subjective and objective factors; ► ability to apply forms and methods for knowledge improvement; ► ability to provide the cadets with the methodological help if necessary; ► ability to perform pedagogically founded control over the process of the cadets’ knowledge improvement and set requirements and recommendations for the enhancement of quality of their work; as well as the ability to set the example of the legal culture exposure.

Conclusions

Modern globalization processes, rapidly changing geopolicy, processes of regionalization and emerging threats require re-thinking military potentials in any state. Therefore, the views on military profession and all-around training for the military, structure and organization of the military forces are undergoing profound changes. In relation to this, summarizing the theoretical and practical outcomes of the research, it is possible to identify and present the following conclusions:

The cadets’ legal education is a significant element of the system of their military and professional preparation which is a purposeful and systematic pedagogical process whose aim is to form and develop the cadets’ readiness to apply the acquired knowledge to their professional activity and in this way to promote the growth of their personal legal culture.

The analysis of the cadets’ legal education shows that this process is a complex system which unites objective and subjective factors which are related to some elements constituting and enabling an integrated and continuing process by forming and developing the cadets’ personal leadership qualities which they need for provision of their future successful military service.

The cadets’ legal education is developed in order to resolve some dialectically connected tasks which reflect the main aspects of this process: – periodical review, update and practical application of legal knowledge; – development and expansion of already existing legal skills and knowledge; – improvement of the acquired legal development and preparation in order to competently resolve daily professional and common issues.

The cadets’ legal preparation, education and self-improvement should be performed continually in the run of the whole study process.

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Vladas TUMALAVIČIUS, Ph.D., the lecturer at the Department of Strategic Management of The General Jonas Žemaitis Military Academy of Lithuania and researcher at the Institute of Humanities and Social Sciences of Daugavpils University, Latvia. He has the status of Expert of the Latvian Council of Science in the fields of Law and of Economics and Entrepreneurship; Expert of the Foun- dation for Polish Science under Measure 4.4 of the Smart Growth Operational Programme 2014-2020 and Expert of Polish National Agency for Academic Exchange. Research interests: Legal Regulation of Public Safety and Administration; Issues of National, State and Regional Security and Sustainability. ORCID ID: https://orcid.org/0000-0002-0811-0074

Alina DANILEVIČA is Dr.oec, Researcher at the Institute of Humanities and Social Sciences of Daugavpils University, Latvia. She has the status of Expert of the Latvian Council of Science in the fields of Economics and Entrepreneurship, Sociology and Social Work. She is Expert of Polish National Agency for Academic Exchange and Expert of the Foundation for Polish Science under Measure 4.4 of the Smart Growth Operational Programme 2014-2020 and. Her research interests: regional economics, investments, sustainable development, investment climate (entrepreneurial environment). ORCID ID: https://orcid.org/0000-0002-2749-2725

Irēna KOKINA, Prof. Dr. psych., rector of Daugavpils University, Latvia. She has the status of Expert of the Latvian Council of Sci- ence in the fields of Psychology and of Economics and Entrepreneurship. Her research interests: sustainable development, issies of psychology and management. ORCID ID: https://orcid.org/0000-0001-6778-0783

This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/

1282 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 https://doi.org/10.9770/jssi.2020.9.4(15)

EXPECTATION GAP IN AUDITOR RESPONSIBILITIES: A CASE STUDY

Nguyen Thi Phuong Hong1, Dinh Tran Ngoc Huy2, Nguyen Thi Thuong3

1University of Economics Ho Chi Minh city, 59C Nguyen Dinh Chieu, Ward 6, District 3, HCM city, Vietnam 2Banking University of Ho Chi Minh City, Vietnam - International Unievrsity of Japan, Japan 3Banking University of Ho Chi Minh City, 56 Hoang Dieu 2, Linh Chieu, Thu Duc Viet Nam

E-mails: [email protected]; [email protected]; [email protected]

Received 16 October 2019; accepted 18 March 2020; published 30 June 2020

Abstract. The aim of this research is analyzing the audit expectation gap in Vietnam. The research result has identified that there are many differences between the auditors’ and the financial-statement users’ opinions about the auditors’ responsibilities. Most of research results about the auditors’ responsibilities show that the perception of financial-statement user regarding to auditors’ responsibilities has been higher than the auditors’, which is the reason for the wide audit expectation gap in Vietnam. Based on the research result, some reasons for the audit expectation gap are listed: the auditors have not fully performed their responsibilities based on the current regulations, the current standards on auditing have not been reasonable, and the most important reason is because the financial-statement users have high expectations (unrealistic expectations) of auditors’ responsibilities. Moreover, based on this research result, some related recommendations have been suggested and they are hoped to provide the useful references for the corporations, the government, auditors and fundraisers to enhance the quality of the financial statements and provide the useful information for the users.

Keywords: auditing; expectation gap; financial statements; auditors’ responsibilities

Reference to this paper should be made as follows: Hong, N.T.P., Thuong, N.T. 2020. expectation gap in auditor responsibilities: a case study. Journal of Security and Sustainability Issues, 9(4), 1283-1295. https://doi.org/10.9770/jssi.2020.9.4(15)

JEL Classifications: G00, G390

1. Introduction

The financial statements have the important role in the decision- making of internal and external users. For instance, the investors could use this information to decide if they want to buy, hold or sell stocks, or the credit officer would use this financial information for the loan decision, or the tax department could use it to examine if the companies have fulfilled their tax obligations, etc. Therefore, the companies have the important role in preparing the financial statements and the auditors, who give the assurance for this information, should improve the quality of their performance to provide the quality and useful financial statements for the user decision-making. The information in the financial statements has been influenced by not only the internal users as managers, Board of Directors, supervisory board, management board and internal auditors (Masiulevičius, Lakis, 2018; Tarasova et al., 2018; Nadhir et al., 2019; Kulustayeva et al., 2020; Caplinska, Tvaronavičienė, 2020; Al-Gamrh et al., 2018) but also the external users as governmental bodies (e.g. Serikova et al., 2020; Sasongko et al., 2019; Chehabeddine, Tvaronavičienė, 2020). This paper is devoted to a case study of Vietnam. Governments interest in this area are represented by such institutions as State Securities Commission of Viet- nam (SSC), The Ministry of Finance, Vietnam Association of Certified Public Accountants (VACPA), tax departments and The State Audit Office of Vietnam, especially the external auditors. Vietnamese government has recently issued some requirements regarding to auditors’ independence, as Vietnamese accounting standards, Law on Independent Audit and some related Decrees, with the focus on auditors’ responsibilities. JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online

It has been recently show that the quality of independence audit in Vietnam has become the society concern and one of the factors affecting this quality, based on the financial-statement users, is the auditors’ responsibilities. And one of the most important questions is whether the auditors and audit firms have the responsibilities for the financial statement’s material misstatement, and if so, the question is how influence it would affect and what their responsibilities for the investors and shareholders are. For the financial information transparency of the companies, especially the listed companies, the Ministry of Finance has to develop the auditing standards, the regulation regarding to the independence audit, especially the auditors’ responsibilities. For the best results, it has to be considered what the auditors’ opinions about their responsibilities are, the financial-statement users’ opinions about the auditors’ responsibilities are, and whether there are any differences between the opinions from these two parties. If so, what are the suggested recommendations to narrow the audit expectation gap?

For the reasons mentioned above, the “Audit expectation gap in auditor responsibilities empirical evidence in Vietnam” research is necessary in Vietnam. Because this crucial problem helps to stabilize and develop the stock exchange market in the process of regional and international economic integration of Vietnam. Moreover, this research result could be used as the reference for the corporations, the government, auditors, fundraisers to find the suitable solutions to enhance the financial statement quality and provide the useful information for users.

2. Research literature review

2.1. Literature review

2.1.1. The audit expectation gap between the audit results’ users and the auditors

The auditors’ responsibilities include the professional liability and legal liability. The professional liability focuses on the opinions about the reasonable and reliable of financial statements, and the other responsibilities are detecting the material misstatements and reporting to the managers about the misstatements detected by auditors in the audit process. Besides the professional liability, the auditors have the legal liability with the users of audit results as customers, lenders, investors and other stakeholders based on the regulations in one country. The legal liability of auditors is mainly from the negligence, when the auditors have not fully performed their responsibilities in the audit process and when the professional standards are not reasonable as requested. Around the world, in recent years, the criticism and the number of legal cases on the audit results created by auditors are increasing. This has shown that there is the conflict in the relationship between the society’s requirements and the perceived performance of auditors. The researchers provided the definition of “audit expectation gap”.

The high society’s expectations of the auditors have created the expectation gap between the auditors and the users of audit results on the audit function. The audit expectation gap identifies the different expectation of audit function between the auditors and society, particularly the financial statement users (Liggio, 1974; Cohen, 1978). Liggio (1974), the first researcher who originated the definition of audit expectation gap, has identified the audit expectation gap is the difference between the society’s and auditors’ expectations of the auditors’ performance. This is the society’s expectations and the auditors’ perceived performance (Shaikh & Talha, 2003). According to Cohen (1978), this gap is the difference of opinions between (a) what society perceived auditors’ responsibilities and (b) what the auditors perceived their own responsibilities. It has shown that there is the audit expectation gap between the requirements from the society and the auditors’ abilities to achieve that expectation.

Ajayi (2007) and Semiu & Johnson (2011) have described the audit expectation gap is when the society’s expectations of independence auditors’ roles and responsibilities is different from the roles and responsibilities of auditors based on the regulations and standards. Besides, there are many different opinions about the audit expectation gap. However, the current model described the audit expectation gap that was mostly used in many countries to examine the existence and reasons of the audit expectation gap is in the research of Porter (1993).

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Porter (1993) criticized that the definition of Liggio and Cohen on the audit expectation gap is so narrow. Therefore, Porter has introduced the model to analyze the audit expectation gap, which included two factors: the reasonableness gap, and the performance gap (see Figure 1).

Auditors’ Perceived Audit Expectation-Performance Society’s Expectation Performance of Auditors

Performance gap Reasonableness gap

Auditors’ Existing Duties Reasonably Expected of Auditors**

Deficient Deficient Uncreasonable Performance Standards Expectations

Figure 1. Audit expectation Gap

Source: Adopted from Porter (1993)

Based on this model, the reasonableness gap is the difference between “the society’s expectations of auditors and the duties reasonably expected of auditors” (Porter, 1993). This gap has always been existed because the auditors just have the responsibility to give the opinions whether the financial statements are reasonable and reliable, but the others think the auditors have to ensure the accuracy of financial statements, the companies do not have any frauds… when issuing the audit opinions (Humphrey, 1997). The auditors could not achieve this expectation due to the economic perspective and the inherent limitations of auditors (Vu Huu Duc et al., 2005, 44). The performance gap is the difference between “the duties reasonably expected of auditors and the auditor’s perceived performance” (Porter, 1993). This gap is divided into two parts: The deficient standards (reasonable standards and current standards): the gap between the responsibilities identified based on the law regulations and the professional standards; The deficient performance: is the gap between the expected standards the auditors have to comply when auditing and the actual expectations of auditors when performing these tasks.

According to Best et al. (2001), Fadzly & Ahmad (2004), the existence of audit expectation gap is the difference between the society’s expectations including the customers, banks, investors, … and the auditors of: (1) the actual or uncertain roles and responsibilities of auditors relating to the fraud prevention and detection, relating to the financial statements design; (2) the customer satisfaction of the services, (3) the difference between the expectations related to the audit purpose. Moreover, this gap is also the different expectations of auditors of standards and difference of standards compliance when auditing, the difference on the evaluation of misstatements of auditors and the financial-statement users, etc.

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2.1.2. The reasons of the audit expectation gap

The reasons of audit expectation gap have been researched for many years. According to Odia James & Ize- donmi (2010), some reasons leading to the audit expectation gap are listed below: The complexity of audit function; The non-innovative careers that could not response to the change of society; The subjectivity of auditors in audit process; The professional standards of auditors.

2.1.3 The existence of audit expectation gap

The initial researches on the audit expectation gap around the world mainly discovered the perception of audit result users about the auditors’ roles and responsibilities. Then, the others analyzed the existence of audit expectation gap, the reasons of this gap and the suggested recommendations to minimize. Although these researches used many different research tools and were conducted in different countries, the dominant way is using the questionnaire for the survey. Best et al. (2001) conducted the survey for the auditors and the main financial-statement users as banks and investors. The research divided the factors relating to audit expectation gap into three groups: the auditors’ responsibilities, the reliability and usefulness of audit reports. The results show that the audit expectation gap has existed in three perspectives and the largest difference between two groups in those three perspectives is the auditors’ perception of their responsibilities. This research result was same as the research of Dixon et al. (2006), which conducted in Egypt when conducting the survey through the questionnaire including 16 observable variables relating to three factors as mentioned above.

In fact, the auditors’ responsibilities and audit expectation gap have always been together. The society’s expectation gap has been over the limitation of audit function. The audit has always been challenged to respond this expectation because the audit procedures were conducted to ensure the company’s financial statements suitable for the standards, and the fraud prevention responsibilities should be the responsibilities of managers, because managers have legal liability for the reliability of financial statements (Martens & McEnore, 2001)

The auditors’ responsibilities relating to the fraud has always been the argument. The society expected the auditors must have the responsibilities to prevent or detect the fraud, and the society are not usually satisfied with this auditors’ responsibilities. The empirical researches in different countries around the world on the existence of audit expectation gap were based on the different perception of auditors and financial-statement users on the auditors’ responsibilities as banks, investors, students, etc. All of these researches have the same results of the existence of audit expectation gap.

The other remarkable research is the research of Martens and McEnroe (2001) on the auditors’ responsibilities. The research surveyed the participants that are investors and auditors. The result has shown that the investors had higher expectations more than the auditors on the different events and the assurance of auditors on the reporting, the internal control, fraud and illegal behaviors. Similar to the opinion of Martens and McEnroe et al. (2001), Fadzly et al. (2004) also identified the auditors’ responsibilities are one of the determinants influencing the expectation gap between auditors and investors. In this research, they constructed some differences in perception of these two participants on the auditors’ responsibilities, that are fraud prevention and detection, financial statement preparation, objectivity of audit, the internal control, the scope the auditors had the legal liability, the commitment of auditors and the failure in business of the company relating to fraud. The research also demonstrated that the information users believed the auditors have the responsibilities for all of these problems, the largest expectation gap is the opinions of the financial statements preparation. Both banks and investors expected the auditors would have the responsibilities on preparing the financial statements, whereas these responsibilities belong to the managers. Differently from the opinion of this research, Dixon et al. (2006), which conducted in Egypt, surveyed the perception of society and auditors on the auditors’ responsibilities as responsibilities of fraud prevention and detection, financial statements preparation, the objective audit process,

1286 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online the sufficient audit procedures performed. The result show that in Egypt, the society believed the manager’s responsibilities are only related to the financial statements preparation, and the others belong to auditors. There- fore, these above researches shown that the arguments focused on whether the responsibility of fraud prevention and detection are the auditors’, although many standards clearly identified the fraud prevention and detection responsibility was not the main responsibility of auditors. This one just advocated the responsibility to prepare the reliable and reasonable financial statements. However, the financial-statement users still believed this was the main responsibility of auditors and they expected the auditors had to fully perform this responsibility.

2.2. Conceptual theories

2.2.1. Agency theory

According to Jensen & Meckling (1976), the agency theory focuses on the relationship between the principals and the agents. While the principals would transfer some rights to the agents, the agents have to make decisions for the principal’s best interests. However, in reality, the agents have their own interest. This is the reason that lead to the agency conflict and the agency cost paid by the principals. There are two typical relationship for the agency theory: the shareholders (the owners) and the managers, the lenders and the creditors.The agency theory has the important role for this research, because the agency conflicts and the agency costs identify the important role and the necessity of the auditors to protect the interests of all related parties and minimize the agency costs. The professional assurance by the independent auditors in the financial statements make the financial information more reliable. In other words, the principals expect the audited financial statements are the assurance of financial information quality, so they could use this information to effectively monitor the agents. Moreover, besides the related parties in the agency relationship mentioned above, the trade partners, government, financial analysts… always need the reliable financial information. This would emphasize the importance of financial statement audit in reality.

2.2.2. The Role Theory

The role of financial statement audit and auditors are represented by the Role Theory. The auditors could be seen as the professional in the society system. As the professional, the auditors have to comply with the social rules, such as the law system as professional standards and other legal documents. Therefore, different groups (managers, shareholders, financial analysts, auditors, accountants, investors, etc.) are the rolesenders. They would have different expectations of auditors’ tasks. These expectations could be changed over time depending on the requirements on the auditor’s roles and the interactive among different interest groups in different time periods in society. Therefore, the auditors are placed in many different situations with many different roles and expectations in different time periods, so the expectation gap among the related parties of the auditors’ roles are always existed.

The different related interest groups always expect auditors in different specific roles, depending on their requirements and interests. These expectations are not homogeneous among the groups, and change over time, so the expectation gap of the auditors’ roles among the groups are existed in different specific time periods. The role conflict theory was developed by Rizzo et al. (1970), based on these assumptions: the auditors are required to monitor the customers’ financial statements and the society expects the auditors perform that duty reliably (Koo & Sim, 1999).

The auditors have the role conflict because the auditors have to perform all professional standards and legal documents relating to the tasks of independence auditors. Moreover, the auditors have to balance their own interest and their role as the “watch dog” for the best interest of the users and their clients (Alleyne & Devonish, 2006). Koo and Sim (1999) has identified that the reason for the role conflict is because of the expectation gap between the auditors and the users. The users expect the auditors act in the society’s best interests and detect the management frauds (Mills & Bettner, 1992). The role conflict exists when the auditors could not perform all the responsibilities the users expect.

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2.2.3. The Theory of Inspired Confidence

Based on this theory, the auditors’ functions in society are from the demand of professionals and independence opinions about the financial statements quality through the audit. This function was from the society’s belief in the effectiveness of the audit and auditors’ opinions. Therefore, this belief is the condition for the existence of auditing, if this belief is negatively influenced, this function has been gradually useless. Limperg (1932) has show that there are two situations that could make the society’s belief in auditors impaired. Firstly, it is when the social expectations of auditors and audit is too high, which is beyond the auditors’ abilities. The second situation is when the auditors did not perform their tasks and responsibilities effectively. Limperg (1932) identified that the social demand has been always changed because it depends on and is influenced by the change of the social awareness and environment. Limperg (1932) also emphasized that the auditors’ roles in the relationship with the financial- statement users, as the independence professional, are really important as the confidential agent for society. In conclusion, this theory of Limperb is based on the highest satisfaction level of the financial-statement users on the auditors’ tasks. To achieve this aim, the auditors have to fully perform their responsibilities to achieve the society’ expectations. However, the auditors’ tasks always have their specific limitations on resources and time, so if the expectation is too high, which is beyond the auditors’ abilities, it would also make this expectation impaired.

3. Research methodology

Qualitative analysis such as analytical, synthesis analysis are used. Generally speaking, quantitative method is mainly used in this study with statistics, T-test analysis of differences in opinion between auditors and users about auditor’s responsibilities. Finally, we use the results to make recommendations for both these enterprises, relevant organizations and government.

4. Research results

4.1. Empirical results

4.1.1. The research samples

This research surveys the opinions of auditors and audit result users on the auditors’ responsibilities in Vietnam, and the audit result users are surveyed in this research are accountants, bank officers and individual investors. Therefore, taken as a whole, there are all auditors, accountants, bank officers and individual investors in Viet- nam. To survey the opinions of auditor and users, have collected the information through a questionnaire. This questionnaire includes two parts, which are demographic questions and the questions about opinions of auditors’ responsibilities on financial statement audit that are based on the questionnaires in prior researches as Por- ter, B. A. (1993), Fadzly & Ahmad (2004), and are suitably adjusted to the research. The author has applied the random sampling techniques, there are 220 questionnaires that are sent directly or by email and there are 197 respondents (90%), all the answer sheets are qualified, including 62 men (40.26%) and 92 women (59.74%). According to the results in table 1 below, the survey is conducted based on four groups of participants, which are 60 auditors (30.46%), 62 accountants (31.47%), 40 bank officers (20.30%) and 35 individual investors (17.77%). According to the result in table 2 below, there are 143 participants having the accounting certificate (72.6%) and 54 participants not having one (27.4%).

Table 1. Statistics of the respondents based on the occupation

Respondents Number of respondents Percentage Auditors 60 30.46% Accountants 62 31.47% Bank officers 40 20.30% Investors 35 17.77% Total 197 100%

Source: Author’s computation from survey

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Table 2. Statistics of respondents based on the accounting certificate

Yes 143 72.6% Accounting certificate No 54 27.4% Total 197 100%

Source: Author’s computation from survey

4.1.2. Research results

Table 3. Evaluation of respondents on the responsibilities of auditors

Auditors Users Mean Rank Mean Rank The auditor is responsible for producing the financial statements 1.87 13 2.63 22 The auditor is responsible for conducting of 100% examination in audit procedure 1.53 22 3.5 15 The auditor is responsible for giving assurance that company is in good financial health 1.92 11 3.44 16 The auditor is responsible for maintaining accounting records by the management 1.8 17 2.81 20 The auditor is responsible for safeguarding the assets of the company 1.7 19 2.65 21 The auditor is responsible for preventing fraud and errors in the company 1.88 12 3.75 11 The auditor is responsible for giving assurance that company is well managed 1.85 14 3.12 19 The auditor is responsible for enforcing effectiveness of internal control on audit quality 1.82 16 3.21 17 The auditor is responsible for detecting illegal acts committed by the management 2.72 9 3.92 6 The auditor is responsible for reporting all detected frauds and thefts to the relevant 1.45 23 3.57 14 authority The auditor is responsible for detecting any deliberate distortion of financial information 1.85 15 4.15 2 The auditor is responsible for detecting all fraud and errors 1.67 20 3.92 7 The auditor must follow right procedures before authenticating financial statements 4.4 2 4.14 3 The auditor is responsible for certifying accuracy of financial reports 1.58 21 3.65 13 The auditor is responsible for certifying the truthfulness and reasonableness of financial 4.33 3 4.13 4 statements Auditors must conduct judgments in the selection of audit procedures 4.13 5 3.88 8 The auditor should be unbiased and objective while performing the engagement 4.73 1 4.31 1 The auditor is legally responsible only to the shareholders of the audited company 1.75 18 2 23 The auditor is responsible if the company goes bankrupt due to fraud 2.18 10 3.16 18 Auditors are liable for losses of interested parties if failed to disclose potential fraud in audit 3.22 8 3.69 12 report In general, there is the expectation gap between requirements of users of audited financial statement about the auditor’s responsibility must be achieved and responsibilities of auditors 4.17 4 3.96 5 according to current regulations. In general, there is the expectation gap between requirements of users of audited financial statement about the auditor’s responsibility according to the current standards and 4.02 6 3.8 10 reasonable standards In general, there is the expectation gap in requirements of users of audited financial 3.9 7 3.81 9 statement about the auditor’s responsibility due to failures when performing the audit

Source: Analysis from the author’s survey results

The results of Table 3 show that, considering the viewpoint of auditors and users of audit results separately, both auditors and users have the highest level of agreement that The auditor should be unbiased and objective while performing the engagement with the mean value are 4.73 and 4.31 respectively. The second highest level agreement of auditors and the third highest level agreement of users belongs to the opinion: The auditor must follow right procedures before authenticating financial statements with the mean value are 4.4 and 4.14 respectively. These results show that, both objects appreciate that auditors need to comply with the ethical principles stipulated in the professional ethics standards of auditors and perform appropriate audit procedures in accord-

1289 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online ance with current audit standards. However, users agree with the opinion: The auditor is responsible for detecting any deliberate distortion of financial information with the second highest level of consent (mean value is 4.15), meanwhile, the auditor’s level of consent for this responsibility is the 15th highest. Then, with the opinion: The auditor is responsible for certifying the truthfulness and reasonableness of financial statements, both groups have the same level of consent: the mean value of auditors is 4.33 (ranked 3rd), the mean value of users is 4.13 (ranked 4th). Other contents about the responsibilities of auditors are detailed in Table 4. The main object of this study is to consider whether to have differences in the viewpoints of auditors and users of audit results about the auditor’s responsibility in auditing financial statements or not. To analyze this result, we rely on the results of the data in Table 4 below. Based on Table 4, the researcher conducted a survey of the views of objects with 23 contents about the responsibilities of auditors in auditing financial statements, only 3/23 contents of survey show that there is no difference between these two objects with the value of Sig> 0.05. All of them are appreciated by both objects, thay are: The auditor is responsible for certifying the truthfulness and reasonableness of financial statements; Auditors must conduct judgments in the selection of audit procedures; and In general, there is the expectation gap in requirements of users of audited financial statement about the auditor’s responsibility due to failures when performing the audit. This is also consistent with previous studies mentioned above. All of the remaining 20 contents of the survey have differences in the opinion between the auditor and the user. They are contents marked (*). Specifically, the content with the biggest difference is that: The auditor is responsible for detecting any deliberate distortion of financial information, mean value of auditors is 1.85 but mean value of users is 4.15. Secondly, the content has the second largest difference is that: The auditor is responsible for detecting all fraud and errors. There is a difference between the two objects, auditors agree at a fairly low level with mean value is 1.67, while users agree at a high level with mean value is 3.92. Thirdly, there is a big difference in the viewpoints between the two objects about the content: The auditor is responsible for reporting all detected frauds and thefts to the relevant authority, auditors agree at a very low level with mean value is 1.45, while users agree at a high level with mean value is 3.57. In addition, there is also a difference in the viewpoints between two groups about: The auditor is responsible for certifying accuracy of financial reports. Different from some previous studies, in this study, the author intentionally included both contents: The auditor is responsible for certifying the truthfulness and reasonableness of financial statements and The auditor is responsible for certifying accuracy of financial reports. The results show that the user think that the auditor is not only responsible for verifying the truthfulness of the financial statements but also certifying the accuracy of the financial statements. The remaining contents have differences between the two objects but the difference is low. They are specifically presented in Table 4.

Table 4. T-Test analysis of differences in opinion between auditors and users about auditor’s responsibilities

Sig. Mean of Mean of Difference t the Auditor the User (2tailed) (I-J) (I) (J) The auditor is responsible for producing the financial statements* -4.404 0.000 1.87 2.63 -0.76 The auditor is responsible for conducting of 100% examination in audit -16.164 0.000 1.53 3.5 -1.97 procedure* The auditor is responsible for giving assurance that company is in good -8.751 0.000 1.92 3.44 -1.52 financial health* The auditor is responsible for maintaining accounting records by the -6.929 0.000 1.8 2.81 -1.01 management* The auditor is responsible for safeguarding the assets of the company* -6.515 0.000 1.7 2.65 -0.95 The auditor is responsible for preventing fraud and errors in the -10.187 0.000 1.88 3.75 -1.87 company* The auditor is responsible for giving assurance that company is well -8.203 0.000 1.85 3.12 -1.27 managed* The auditor is responsible for enforcing effectiveness of internal control -8.815 0.000 1.82 3.21 -1.39 on audit quality* The auditor is responsible for detecting illegal acts committed by the -7.620 0.000 2.72 3.92 -1.2 management* The auditor is responsible for reporting all detected frauds and thefts to -15.487 0.000 1.45 3.57 -2.12 the relevant authority*

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Sig. Mean of Mean of Difference t the Auditor the User (2tailed) (I-J) (I) (J) The auditor is responsible for detecting any deliberate distortion of -13.800 0.000 1.85 4.15 -2.3 financial information* The auditor is responsible for detecting all fraud and errors* -15.005 0.000 1.67 3.92 -2.25 The auditor must follow right procedures before authenticating financial 2.484 0.014 4.4 4.14 0.26 statements* The auditor is responsible for certifying accuracy of financial reports* -16.243 0.000 1.58 3.65 -2.07 The auditor is responsible for certifying the truthfulness and 1.568 0.119 4.33 4.13 0.2 reasonableness of financial statements Auditors must conduct judgments in the selection of audit procedures 1.789 0.075 4.13 3.88 0.25 The auditor should be unbiased and objective while performing the 4.564 0.000 4.73 4.31 0.42 engagement* The auditor is legally responsible only to the shareholders of the audited -2.566 0.011 1.75 2 -0.25 company* The auditor is responsible if the company goes bankrupt due to fraud* -6.131 0.000 2.18 3.16 -0.98 Auditors are liable for losses of interested parties if failed to disclose -2.945 0.004 3.22 3.69 -0.47 potential fraud in audit report* In general, there is the expectation gap between requirements of users of audited financial statement about the auditor’s responsibility must be 2.236 0.026 4.17 3.96 0.21 achieved and responsibilities of auditors according to current regulations* In general, there is the expectation gap between requirements of users of audited financial statement about the auditor’s responsibility according to 2.330 0.021 4.02 3.8 0.22 the current standards and reasonable standards* In general, there is the expectation gap in requirements of users of audited financial statement about the auditor’s responsibility due to failures when 0.881 0.379 3.9 3.81 0.09 performing the audit

(*)Significant difference at level Sig. <= 0,05

Source: Analysis from the author’s survey results

Table 5. T-Test analysis of differences in opinion between users with accounting qualifications and users without accounting qualifications about auditor’s responsibilities

Mean of Mean of Users Sig. Users without Difference t with Accounting (2tailed) Accounting (I-J) Qualifications (I) Qualifications (J) The auditor is responsible for producing the financial -4.379 0.000 2.18 2.96 -0.78 statements* The auditor is responsible for conducting of 100% -3.593 0.001 2.7 3.44 -0.74 examination in audit procedure* The auditor is responsible for giving assurance that -2.457 0.016 2.83 3.35 -0.52 company is in good financial health* The auditor is responsible for maintaining accounting -5.985 0.000 2.22 3.24 -1.02 records by the management* The auditor is responsible for safeguarding the assets of the -2.948 0.004 2.21 2.76 -0.55 company* The auditor is responsible for preventing fraud and errors in -5.260 0.000 2.9 3.94 -1.04 the company* The auditor is responsible for giving assurance that -2.486 0.014 2.59 3.09 -0.5 company is well managed* The auditor is responsible for enforcing effectiveness of -4.642 0.000 2.55 3.43 -0.88 internal control on audit quality* The auditor is responsible for detecting illegal acts -2.944 0.004 3.41 3.93 -0.52 committed by the management*

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Mean of Mean of Users Sig. Users without Difference t with Accounting (2tailed) Accounting (I-J) Qualifications (I) Qualifications (J) The auditor is responsible for reporting all detected frauds -4.086 0.000 2.67 3.59 -0.92 and thefts to the relevant authority* The auditor is responsible for detecting any deliberate -6.270 0.000 3.16 4.2 -1.04 distortion of financial information* The auditor is responsible for detecting all fraud and errors* -7.869 0.000 2.87 4.2 -1.33 The auditor must follow right procedures before 0.880 0.380 4.25 4.13 0.12 authenticating financial statements The auditor is responsible for certifying accuracy of -7.767 0.000 2.65 4 -1.35 financial reports* The auditor is responsible for certifying the truthfulness and 1.036 0.301 4.23 4.09 0.14 reasonableness of financial statements Auditors must conduct judgments in the selection of audit 0.845 0.399 3.99 3.87 0.12 procedures The auditor should be unbiased and objective while 1.342 0.181 4.48 4.31 0.17 performing the engagement The auditor is legally responsible only to the shareholders -2.305 0.022 1.86 2.09 -0.23 of the audited company* The auditor is responsible if the company goes bankrupt -4.026 0.000 2.66 3.41 -0.75 due to fraud* Auditors are liable for losses of interested parties if failed to -4.507 0.000 3.37 4.02 -0.65 disclose potential fraud in audit report* In general, there is the expectation gap between requirements of users of audited financial statement 2.125 0.035 4.08 3.87 0.21 about the auditor’s responsibility must be achieved and responsibilities of auditors according to current regulations* In general, there is the expectation gap between requirements of users of audited financial statement 0.411 0.681 3.87 3.83 0.04 about the auditor’s responsibility according to the current standards and reasonable standards In general, there is the expectation gap in requirements of users of audited financial statement about the auditor’s 0.783 0.434 3.86 3.78 0.08 responsibility due to failures when performing the audit

(*)Significant difference at level Sig. <= 0,05

Source: Analysis from the author’s survey results

Similar to the analysis in Table 4, the following analysis from the data in Table 5 is used to find differences in opinion about the responsibilities of auditors of users of financial statements specifically, between two smaller groups: users with accounting qualifications and users without accounting qualifications. In general, only 17/23 contents of survey show that there is a difference between users with accounting qualifications and users without accounting qualifications. 16/17 mean differences are negative, which means that the group of qualified users has a lower level of consent or gives disagreement to some content. The biggest difference belongs to: The auditor is responsible for certifying accuracy of financial reports. The group of qualified users disagrees with this opinion (mean value is 2.65<3) while users without accounting qualifications agree that the auditor must have this responsibility (mean value is 4> 3). The mean difference value in this content is the largest (-1.35). Another content also has similar results, qualified users disagree with the opinion: The auditor is responsible for detecting all fraud and errors (mean value is 2.87<3), however, users without accounting qualifications agree that detecting all fraud and errors is also the responsibility of the auditor (mean value is 4.2> 3), the mean difference value is – 1.33. With the same mean difference value is -1.04 and mean values approximately 3, both the group of users with accounting qualifications and users without accounting qualifications agree on two contents: The auditor is responsible for preventing fraud and errors in the company (mean values are 2.9 and 3.94) and The auditor is responsible for detecting any deliberate distortion of financial information (mean values are 3.16 and 4.2). There is a difference in opinion regarding the content: The auditor is responsible for

1292 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online maintaining accounting records by the management. Qualified users give neutral opinion (mean value is 2.22) but users without qualifications give consent (mean value is 3.24). The remaining contents with lower differences are specifically presented in Table 5 above.

5. Conclusions and recommendations

Based on the above results, it is shown that there is the existence of audit expectation gap of auditors’ responsibilities and the factors creating this gap is also similar to the ideas presented above: firstly, the performance gap exists because the audit companies and auditors have not fully performed their responsibilities based on the accounting standards and other standards when auditing the financial statements, and the other reason is because of the deficient standards, so they could not respond to the requirements of society; secondly, the reasonableness gap exists because of the requirements from audit result users that the auditors could not easily perform based on the result in table 4. To narrow the audit expectation gap of auditors’ responsibilities, the analysis of above reasons has the important role that could be the reference for the authors to suggest some suitable recommendations as below:

It is needed to enhance the external control for audit quality. The external control for audit quality of independent audit would help the audit companies improve their procedures, overcome some weaknesses by increasing the employee training and the service quality. Particularly, the government should intervene to complete the legal system of independent audit

The universities have to usually examine to improve the course program of auditing. When building the program for auditing courses, universities could invite some audit companies- the employers, so they could suggest some actual requirements of auditors in companies to assist the universities to build the suitable program that could prevent to waste the training time on the unnecessary subjects. Moreover, universities have to build the logical program from the numbers of subjects, subject progress, the teaching contents of every subjects to the result evaluation.

The audit companies should carefully examine and select the customers before signing the audit contract, and clearly identify the responsibilities of audit companies in contract. The audit companies and auditors have great responsibilities on the audit results. Therefore, to minimize the audit risk and legal risk, the auditors and audit companies just audit qualified customers who is suitable for the professional standards, and do not accept the unwarranted requirements from customers

The auditees should be responsible to select the auditees and suitable auditors, should not take account of audit fee as the basic to select the audit companies because as mentioned above, the low audit fee could not be enough for auditors to fully perform their responsibilities. Moreover, with large companies which have complicated business transactions, they need to hire the reputable companies that have many experienced auditors, and give them opportunities to perform their audit duties as well as report the documents as request.

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Nguyen Thi Phuong HONG ORCID: https://orcid.org/0000-0003-0304-5549

Nguyen Thi THUONG ORCID: https://orcid.org/0000-0002-9452-1119

This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/

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1296 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 https://doi.org/10.9770/jssi.2020.9.4(16)

IMPROVING QUALITY OF EDUCATION: ROLE OF HUMAN DEVELOPMENT, PUBLIC SPENDING ON EDUCATION AND TRAINED TEACHERS’ AVAILABILITY

Thanaporn Sriyakul1, Sudarat Rodboonsong2, Kittisak Jermsittiparsert3*

1Faculty of Business Administration, Mahanakorn University of Technology, Bangkok, Thailand 2Faculty of Humanities and Social Sciences, Uttaradit Rajabhat University, Uttaradit, Thailand 3Social Research Institute, Chulalongkorn University, Bangkok, Thailand

E-mails: [email protected]; [email protected]; 3*[email protected] (Corresponding author)

Received 22 May 2019; accepted 5 April 2020; published 30 June 2020

Abstract. Education is an inevitable aspect for any country and without it; no country can flourish and grow effectively. Therefore, the quality of education must not be compromised. As the impact of human development, public spending on education and trained teachers’ availability is being studied in context of quality of education, a whole study and research plan has been prepared by the author. Data collection process involves the gathering of data from Asian countries for 25 years from reliable data bases. After data collection, several tests and approaches were used for the analysis of data. LLC unit root test was applied for order of integration and stationarity of data, Kao cointegration test was applied to find out cointegrated and long run relationships between the variables and finally DOLS estimation approach was used to measure the relationship between the variables. According to the results of these tests, it has been found that the variables that have significant impact on quality of education include human development, public spending on education, trained teachers’ availability and literacy rate. In the last, several theoretical, practical and policy making implications have been discussed by the author. Different limitations have also been identified and future research recommendations have also been given for the assistance of other researchers.

Keywords: quality of education; human development; public spending on education; trained teachers’ availability; Asia

Reference to this paper should be made as follows: Sriyakul, T., Rodboonsong, S., Jermsittiparsert, K. 2020. Improving quality of education: role of human development, public spending on education and trained teachers’ availability. Journal of Security and Sustainability Issues, 9(4), 1297-1307. https://doi.org/10.9770/jssi.2020.9.4(16)

JEL Codes:

1. Introduction

In most countries, education is considered as a key aspect linked with economic growth. Education is considered as a main driver of human capital, as it assists in enhancing the productivity of labour, increasing efficiency and increasing the output of economy (Ahmed, Arshad, Mahmood, & Akhtar, 2017; Baltgailis, 2019; Laužikas, Miliūtė, 2020; Bombiak, 2020; Pangarso, Astuti, Raharjo, Afrianty, 2020).

According to Akareem and Hossain (2016), education is a key driving force behind economic development of any country. In almost all of Asian countries, it is believed that education results brining economic prosperity and growth. Due to this reason, it is important to design effective education policy and the key focus must be on teachers, investments and public expenditures (Zeichner & Bier, 2017; Girdzijauskaite, Radzeviciene, Jakuba- vicius, 2019; Hernández de Velazco, JRavina Ripoll, Chumaceiro Hernandez, 2020). JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online

Ansell (2015) stated that nowadays, both public as well as government give much importance to spending on education. People have started giving importance to getting education and there is a high pressure on management of educational institutions to keep the quality of education high (Zeichner & Bier, 2017).

In most of Asian countries, the quality of education is not that much high and there is a need of identifying those factors due to which quality of education gets reduced. The human resource plays a key role in education sector, so this study focuses on analysing the impact of human development and trained teachers on quality of education (Zein, 2016). In addition to this, another key factor which must be studied as a determinant of quality of education is public spending on education (Biersteker, Dawes, Hendricks, & Tredoux, 2016). It is not always possible to provide quality education to students through having highly skilled and talented teachers, but along with this, there is also a need of high spending from public on education. In order to get high quality education, it is the responsibility of general public to spend considerable amount of money on education of their children. When parents of students make payments and do some expenditure on their children’s education, then this helps in enhancing overall quality of education. When public spends on education, then the financial resources provided by them can be used to enhance the overall education system (Birchler & Michaelowa, 2016). Previously, there has been no study conducted to examine the combine effect on human development, trained teachers and public spending on quality of education in Asian context. Hence, the current study has been carried out to fill this gap through specifically focusing on Asian context. The study is focused on achieving following objectives; l To analyze the key influence of human development on quality of education. l To study the effect of availability of trained teachers on quality of education. l To examine the key impact of public spending on education on quality of education.

In order to ensure significant contribution towards economic growth, it is important for the government and management of educational institutions to provide high quality education to students. So, this research study is quite beneficial for Asian educational institutions in getting an understanding that how quality of education can be enhanced through giving importance to trained teachers and human capital. Along with this, general public can also understand that how they can get high quality education through giving importance to spending on education. As, no study has been carried out to analyse the relationship between effect of trained teachers’ availability, human development as well as public spending on education on quality of education. So, the present research has significant academic implications, in terms of adding value to the literature. The present research project has been divided in to five main chapters; introduction, literature review, methodology, results and analysis and conclusion.

2. Literature Review

Availability of Trained Teachers and Quality of Education

In an education sector, poor quality is resulted because of the presence of untrained as well as uncertified teachers. In Asian countries, there are less number of trained and qualified teachers, particularly in rural areas due to which students are not provided with quality education (Boccanfuso, Larouche, & Trandafir, 2015). Due to lack of availability of skilled and trained teachers, they do not become able to provide quality education to students. Besides this, untrained teachers also have low motivation level, and they do not fulfill their job responsibilities effectively and efficiently (Zaman, 2015). It is not possible to bring improvement in learning outcomes of students, without giving importance to inadequacies faced by teachers regarding their talent and skills. The training of teachers on regular basis is considered to be highly important, because it helps in enhancing skills and competencies of teachers. In the academic field, there is a need of learning new concepts and things on regular basis, which is not possible without trainings. Hence, trained teachers play an important in ensuring quality of education (Bui & Nguyen, 2016). It has been argued by (Dutta & Sahney, 2016) that it is not possible to achieve learning for all children without having professional and talented teachers. The teaching style is also linked highly with talents of teachers. Some teachers do not engage their students during the class and this most commonly results in low learning level of students (You & Morris, 2016). The successful learning environment re-

1298 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online quires trained teachers and for ensuring high quality of education, it is important to equip teachers with content knowledge as well as knowledge of learning-promoting teaching methods (Hanushek, 2016). It is important to revise teaching methods and make teachers completely trained. Being trained teachers, it is important for them to use innovative methods for enhancing overall quality of education (Tandon & Fukao, 2015). The success of education depends highly on teachers who are involved in providing education to students. Hence, it is important to have skilled and talented teachers, in order to provide quality education to students (Ganimian & Murnane, 2016). The skills and competencies of teachers depend on having opportunity of getting trainings on regular basis. The human development is crucial for successful provision of education to students. It is important to analyze the important role played by teachers in enhancing quality of education. It is not possible for an educational institution to provide quality education to teachers, if the teachers engaged in providing education to students are not properly trained. The training of teachers is considered to be highly important for ensuring success of educational institutions. The trained teachers play a key role in providing high quality education to students and they have the capability of making students capable of getting excel in their academic career and this in turn also makes them capable of excelling in professional career (Hakooma & Seshamani, 2017).

According to the research of Ifa and Guetat (2018), it has been found that teachers are an important facilitator of quality education in all educational institutions. As a result of expanding both primary and secondary level education, it has become highly important to attract and train highly talented teachers. The quality of education gets negatively influenced due to shortage of skilled and competent teachers, particularly in science and mathematics. Ip et al. (2016) claimed that one of the key challenges is that many teachers do not have required knowledge as well as professional environment for performing effectively and efficiently. The professionalism of teachers gets influenced through lack of teaching competencies as well as lack of availability of learning materials. Moreover, Kapur and Perry (2015) found that even if teachers have an ambition of teaching well, then they usually experience different personal limitations, like poor living conditions, due to which their performance at school gets reduced.

H1: There is a significant impact of availability of trained teachers on quality of education in Asia.

Human Development and Quality of Education

In the field of education, the human development is considered to be highly important. It is not possible for teachers to give their maximum input in enhancing quality of education, without giving importance to human development (Landry et al., 2017). Logli (2016) argued that when teachers are not provided with the chance of getting developed, then they most probably prefer to leave the profession. The development of teachers is considered to be highly important for ensuring increased learning of students. The human development of teachers gets affected through providing them training opportunities. According to Sulisworo, Nasir, and Maryani (2017), when teachers get training, then their capability gets enhanced and they prefer to continue this profession for longer time period. With the help of getting training and development opportunities, the skills and competencies of teachers get enhanced and they provide quality education to students. According to Masino and Niño-Zarazúa (2016) training of teachers is highly important in current environment, for coping with the changing demands of profession. Trained teachers get better position of educating the students. The knowledge of a teacher can be improved with the help of training. There can be no underestimation of development and growth of teachers. Training and development is highly important for development of students and this in turn has a positive effect on quality of education (Smith & Joshi, 2016). It is not possible to improve the quality of education system, without focusing on human development. It has been argued by (Mukminin, Rohayati, Putra, Habibi, & Aina, 2017) that teachers play an important role within the education system, that without teachers, it is not possible to successfully formulate and implement policies. Human development is important for ensuring high quality of education system. Moreover, (Mundle, 2017) claimed that training of teachers is highly important for those teachers who recently initiate their teaching profession. With the help of human development, the students’ learning gets significant enhanced. Students get the most benefit through the human development in the field of education. When teachers are not provided with training, then their skills and competencies level’ do not get enhanced and they do not become capable of bringing improvement in students’

1299 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online educational performance (Shimeles & Verdier‐Chouchane, 2016).

H2: There is a significant impact of human development on quality of education in Asia.

Public Spending on Education and Quality of Education

Public spending is something which is considered to be highly important for bringing improvement within the education sector. When general public spends money on education, then that money can be used within the education sector for the purpose of development (Nowak & Dahal, 2016). Even though, spending from government is also important, but along with this, there is also a responsibility of public to make financial contribution in order to enhance overall quality of education (Ogundari & Awokuse, 2018). In addition to this, Phan and Coxhead (2015) argued that public spending on education is important in order to increase the availability of resources. Financial support from general public is important because it can make the resources available, which are required for providing quality education to students.

H3: There is a significant impact of public spending on quality of education.

3. Methodology

Data

Being an important step in a research process, data has been collected by the author in a very careful manner. This data has been collected in context of Asian countries such as Japan, China, Indonesia, Vietnam, Hong Kong, Thailand, Singapore and Malaysia. The period for which data has been collected is 25 years. Reliable and authentic databases such as World Bank and Global Economy have been used by the author to ensure quality of data and its results. The variables for which data has been collected include quality of education, human development, public spending on education and trained teachers’ availability. Other than these variables, two control variables have also been used in this study i.e. literacy rate and population.

Model Specification

After the collection of data, the next step is to define the units of all the variables that have been involved in the study by the author. In the current study, we are investigating the impact of human development, public spending on education and trained teachers’ availability on the quality of education in Asian countries in the presence of two control variables i.e. literacy rate and population. The measurement units and notations of all the above-mentioned variables are given here. The quality of education (EDU) will be measured by the satisfaction level of students. Human development HD will be measured in terms of an index, called as human development index. Public spending on education PSE will be measured in terms of the percentage of spending by people. In the same way, the measurement units of trained teachers’ availability TTA are the percentage of total teachers. The first control variable, literacy rate LIT will be measured as the percentage of literate people in the country and finally the measurement units of population POP will be millions. In this way all the variables will be measured and by using them a regression equation has been developed by the author that is given below:

In this equation, EDU represents quality of education, HD shows the term of human development, PSE represents public spending on education, TTA shows trained teachers availability, LIT is the literacy rate, POP denotes population while is the term that represents error.

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Estimation Procedure

3.1.1 Panel Unit Root Test

In the estimation procedure, the first step is to recognize the order of integration of variables as well as the stationary and non-stationary state of the variables. Unit root tests are used for this purpose. The most commonly used unit root tests include ADF, DF, LLC, IPS etc. The importance of these tests is that they provide better and accurate results as compared to the traditional unit root tests (Levin, Lin, & Chu, 2002). They also overcome the size and power related issues of the traditional tests and provide normal and standard distribution of the collected data as well. It must be noted here that unit root tests are based upon the existence of two kinds of hypotheses. The null hypothesis suggests that unit root exists while the data is nonstationary. On the contrary, alternate hypothesis suggests that unit root does not exist while the data is stationary. The results of these tests are evaluated on the basis of acceptance and rejection of these hypotheses. The most important tests in this regard are Levis Lin Chu LLC and Im Pesaran Shin IPS tests. The basic difference among these tests is that LLC shows homogeneous autoregressive process while IPS shows heterogeneous autoregressive system. Based on the type of data collected, the author has employed LLC unit root test in this study, the equation of which is presented below:

Here is the difference that shows for ith country for the specific time period of t.

3.1.2. Panel Cointegration Test

After the order of integration and stationarity of the variables has been identified, the author will then apply cointegration tests to the collected data. The basic aim of this test is to find out any cointegrating as well as long run relationship between the variables. Kao and Pedroni are the two most commonly used tests of cointegration. These cointegration tests are further divided into two approaches called as within dimension approach and between dimension approach (Im, Pesaran, & Shin, 2003). The within dimension approach involves four types of test statistics i.e. v-statistic, rho-statistic, PP-statistic and ADF-statistic. In the very same fashion, between approach also involves three types of statistics i.e. rho-statistic, PP-statistic and ADF-statistic. It must be noted here that PP statistic is nonparametric while ADF statistic is parametric. Just like unit root tests, cointegration tests are also based on null and alternate hypothesis. The null hypothesis in this regard shows no cointegration while the alternate hypothesis shows the presence of cointegration. Based on the acceptance and rejection of these hypotheses, the long run equilibrium relationships can be identified and investigated. As the authors has selected Kao cointegration test to be used in this study, its equation is given as follows:

3.1.3. Coefficient Estimation Test

Once the order of integration and cointegration has been investigated in the variables, the author will then use the coefficient estimation techniques to measure the relationship between the variables. For this purpose, ordinary least square approach is usually used but OLS shows some issues such as serial correlation and existence of endogenous variable (Pedroni, 2001). These issues can be resolved by altering OLS and generating two forms from it i.e. dynamic OLS and fully modified OLS (DOLS and FMOLS). The results of these tests have certain coefficients of variables that represent the magnitude of the relationships existing between them. There are two specific conditions, which when fulfilled make these tests provide more accurate and authentic results. The first condition is that there must be only one cointegrating vector present among the variables of first order integration. The other condition in this regard is the there must be no cointegrating vector present

1301 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online among the explanatory variables. As the author has employed DOLS coefficient estimation test, its equation can be presented as follows:

In this equation, is the transformed variable of quality of education due to endogeneity correction while represents the serial correlation correction by FMOLS.

4. Empirical Analysis

Results of Panel Unit Root Test

As discussed in the earlier portion of this study, the first step is to find out the order of integration of the variables of the study. The author had applied LLC unit root test for this purpose and its results are presented in table 1 below. This table shows that there are two different sections for which the test has been applied separately. These sections include level and first difference. The level series shows that all the variables have accepted the null hypothesis but public spending on education as well as population has rejected the null hypothesis. This acceptance of null hypothesis by more variables indicated that in level series the data is nonstationary because the unit root is present. When the variables were first differenced, it can be seen in the table that all the variables have rejected the null hypothesis. This rejection of null hypothesis by all the variables indicates that the data in first difference series is stationary. This shifting from non-stationary to stationary data is based on the concept of first difference. The results got from this test can be concluded by stating that the data is nonstationary in level series while it becomes stationary in the first difference series.

Table 1. Panel Unit Root Test – Levin Lin Chu LLC

Variable Level 1st Difference -2.8363 -5.5231*** EDU (0.334) (0.002) -3.2846 -7.2468** HD (0.826) (0.013) -4.2864** -12.423*** PSE (0.042) (0.000) -2.0421 -11.421*** TTA (0.536) (0.000) -5.6342 -13.634** LIT (0.532) (0.004) -4.7424** -14.874*** POP (0.032) (0.000)

In this table, * represents that the rejection is one percent significant, ** shows that rejection is five percent significant, *** shows that rejection is ten percent significant

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Results of Panel Cointegration Test

After finding out the stationary and non-stationary state of the collected data, the author then applied Kao cointegration test to find out the cointegrating and long run relationship between the variables in the study. The results of Kao Cointegration test have been presented in the table 2. The results of tests in both within dimension and between dimension approach have been given in the table. It can be seen that in within approach, three out of four statistics have rejected the null hypothesis of no cointegration. In the same way, the between dimension approach shows that two out of three statistics have rejected the null hypothesis of no cointegration. When these results are compiled, it comes out that total of five statistics out of seven have rejected the null hypothesis. As the null hypothesis suggested the absence of cointegrated relationships between the variables, so from the results it can be concluded that cointegrated relationship is present among the variables that have been under study in this research. In addition to cointegrated relationship, the long run equilibrium relationship has also found to be present between these variables. An important point that must be noted here is that ADF (parametric) and PP (non-parametric) statistics have more significance in this context which further affirms the presence of significant relationship between the variables.

Table 2. The KAO Panel Cointegration Test

Alternative hypothesis: common AR coefs. (within-dimension) Weighted Statistic Prob. Statistic Prob. Panel v-Statistic -2.283472 0.7136 -5.283694 0.0000 Panel rho-Statistic 4.913768** 0.1638 4.162577 0.9932 Panel PP-Statistic -12.13879* 0.0000 -8.842638 0.0001 Panel ADF-Statistic -4.183691* 0.0003 -4.163768 0.0003

Alternative hypothesis: individual AR coefs. (between-dimension)

Statistic Prob. Group rho-Statistic 6.286489* 0.0000 Group PP-Statistic -21.13689 0.0000 Group ADF-Statistic -2.813691** 0.0431

In this table, * represents that the rejection is one percent significant, ** shows that rejection is five percent significant

Results of Coefficient Estimation Test

Once the order of integration and the long run relationships have been found out, the next step is to measure the relationship that is present among the variable. The author has used DOLS coefficient estimation technique for this purpose. The results of DOLS technique have been given in the table 3 of the study. It can be seen in the table that the impact of human development is significant on quality of education by 5 percent significance level. In other words, quality of education will rise by 22.9% with increase in one percent of human development. In the same way, the impact of public spending on education has also been found significant is supposed to increase the quality of education by 28.4% with one-unit increase. The third variable, trained teachers’ availability has also significant impact on quality of education and will raise it by 13.6% with one percent increase. Apart from these variables, the impact of control variable, literacy rate has also been found as significant. From these results, it can be concluded that human development, public spending on education, trained teachers’ availability and literacy rate have significant impacts on quality of education (see table 3).

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Table 3. DOLS Regression

Variable Coefficient Std. Error t-Statistic Prob. HD 0.227942** 0.2444 3.284689 0.0000 PSE 0.284797* 0.5634 4.283694 0.0004 TTA 0.136104** 0.1334 4.297247 0.0003 LIT 0.284697* 0.0032 1.497359 0.2774 POP 0.834968 0.3532 2.358799 0.0001 Constant 0.482319 0.6534 3.539739 0.0002 R-squared 0.284694 Adjusted R-squared 0.137684 F-statistic 32.28369 Prob(F-statistic) 0.000000 Durbin-Watson stat 2.247924

In this table, * represents one percent significance level, ** shows five percent significance level

5. Discussion and Conclusion

Discussion

The basic aim behind this study was to find out the impact of human development, public spending on education and trained teachers’ availability on quality of education in Asian countries. To achieve this aim, several hypotheses were developed and tested. The first hypothesis was that the human development has significant impact on quality of education. This hypothesis has been accepted by the results and is in accordance with the past study (Havighurst, 1953). The next hypothesis was that public spending on education has significant impact on quality of education. This hypothesis has also been accepted and this result is same as shown by the past study (Ablo & Reinikka, 1998). The last hypothesis was that the trained teachers’ availability has significant impact on quality of education. This final hypothesis has also been accepted by the author on the basis of the results of data analysis. This result is in concordance with a past study (Sindelar, Daunic, & Rennells, 2004). In the last, the impact of a control variable, literacy rate has also been found as significant in context of quality of education. This same result has been seen in a previous study (Kickbusch, 2001).

Conclusion

Being an important factor of the economic growth of a country, the importance of education has been increasing day by day. In the current study, the impact of human development, public spending on education and trained teachers’ ability is being studied on the quality of education of Asian countries. For this purpose, a research was designed, and data was collected from different Asian countries for 25 years. This data was subjected to different tests such as LLC unit root, Kao cointegration and DOLS estimation test. The results of these tests showed that the impact of human development, public spending on education and trained teachers’ availability is significant on quality of education. Similarly, the impact of control variable, literacy rate has also been found as significant. There are many theoretical, practical and policy making implications of this study.

Implications

Several theoretical, practical and policy making implications and benefits of this study have been identified. Firstly, it will provide enough literature and information about human development, public spending patterns on education and trained teachers’ ratio along with the quality of education. This will help them in their researches and studies. Apart from this, it will also provide guidance to the education department of the country to take certain actions to improve the quality of education in country, which is the need of the hour for almost every country in the world. Finally, it will also provide assistance to the policy making department of the gov-

1304 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online ernment in order to devise policies that are favorable for education in the country. This will increase the quality of education in the country that will have an ultimate impact on the growth of the country.

Limitations and Future Research Indications

Several limitations associated with this study have been discussed here. In addition, some future research indications and recommendations have also been given for the guidance of the future researchers. First of all, the sample size in this study is very small and it can be increased effectively by other researchers. The data has been collected from Asian countries. Other researchers may consider other countries or regions for data collection purpose. Moreover, the variables that are involved in this study are fixed which may be changed by the other researchers in their studies. The last point is that the future researchers may also apply tests other than those that have been used in this study. In this way, other and future researchers may improve the quality of their researches.

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Thanaporn SRIYAKUL holds Ph.D. in Social Sciences from Kasetsart University, Thailand. He is currently is an Assistant Professor of Management Department, Faculty of Business Administration, Mahanakorn University of Technology, Thailand. His areas of expertise are Politics, Public Administration, Public Policy, and Social Sciences Research.

Sudarat RODBOONSONG is the Dean Assistant for Research of the Faculty of Humanities and Social Sciences, Uttaradit Rajabhat University, Thailand. Her areas of expertise are Social Development, Community Studies, and Social and Cultural Change.

Kittisak JERMSITTIPARSERT holds Ph.D. in Social Sciences from Kasetsart University, Thailand. He currently is a Researcher at Chulalongkorn University Social Research Institute, a part-time Researcher at Ton Duc Thang University, and the Secretary General of Political Science Association of Kasetsart University. His areas of expertise are Political Science, Public and Business Administration, International Political Economy, and Interdisciplinary Research in Social Sciences.

This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/

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A STUDY ON FACTORS AFFECTING DECISION TO USE 4G SERVICES: A CASE STUDY

Tran Hung Nguyen1, Thu Hien Do Thi2, Thuy Hang Vu Thi3, Huyen Trang Tran Thi4, Duy Hai Le5, Minh Duc Nguyen 6

1,2,3,4,5Faculty of Economic Information System and Electronic Commerce, Thuongmai University, 79 Ho Tung Mau Road, Hanoi 100000, Vietnam

E-mails: [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]

Received 16 March 2019; accepted 18 April 2020; published 30 June 2020

Abstract. 4G has been developed in Vietnam for a long time with commitments to superior speed and interactions compared with 3G services from telecommunications service suppliers such as Viettel, VinaPhone, MobiFone, Gmobile. However, by now, the growth rate of 4G services in Vietnam still remains low and the services are not highly appreciated by users in comparison with some countries in the region and the world. It is therefore very necessary to identify factors affecting the decision to use 4G services. The article proposes a research model on factors affecting the decision to use 4G services of Vietnamese customers based on TAM model and previous research findings. The research model is set up to measure the factors affecting the decision to use 4G services of Vietnamese customers, so that suppliers can further develop their services to meet the demand of users and attract more customers. On the side of users, they can enjoy more conveniences that this advanced technology brings to their work, study and communication so as to raise their work performance and improve their quality of life.

Keywords: 4G services; affecting factors; decision to use 4G services; Vietnamese users

Reference to this paper should be made as follows: Nguyen, T.H., Thi, T.H.D., Thi, T.H.V., Thi, H.T.T., Le, D.H., Nguyen, M.D. 2020. A study on factors affecting decision to use 4G services: a case study, Journal of Security and Sustainability Issues, 9(3), 1309-1326. http://doi.org/10.9770/jssi.2020.9.4(17)

JEL Classifications: G00, G30

1. Introduction

4G is the following generation of the wireless mobile communications network with superior features over the previous generation of 3G. 4G Technology was first introduced in early 21st century to meet the demand for a speedy broadband and multimedia services, and 4G services are considered an extension of the 3G cellular mobile information services. 4G services are a kind of mobile multimedia services which provides customers with every-time, every-where connection, global mobility and specific services on the 4G platform.

1.1 Overview of 4G services

1.1.1 The concept of 4G

4G (fourth-generation) is the name given by IEEE (Institute of Electrical and Electronics Engineers) to convey the sense of “3G and more”. Different concepts of 4G have been introduced by various communications technology in the world. According to IEEE, 4G is the fourth wireless communications technology, which can transfer information at the maximum speed of up to 1-1.5 Gb/s in an optimum condition. International JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online

Telecommunication Union (ITU) defines 4G technology as the wireless technology which can allow users to access data at the speed of 100MB/s while they are moving and 1GB/s when they settle in a fixed location. The fourth-generation mobile technology (4G) is being further developed and it now allows data transmission in 2 ways: sound and images with giant data, which used to be impossible in the past. 4G mobile phones can receive data at the speed of 100 Megabyte/s while users are moving and 1Gb/s when they stand still, users can download and upload images with very high quality. 4G technology enables users to enjoy services that they like. Users can receive these services via personal computer connected with high-speed broadband. With 4G technology and at the maximum speed, users can download a movie in only 5.6 seconds and send 100 songs in just 2.4 seconds.

1.1.2. Features of 4G network

According to International Telecommunication Union (ITU), no matter whether the 4G systems use LTE Ad- vanced technology standardized by 3GPP or 802.11.16m technology standardized by IEEE, 4G services include the following features: providing mobile broadband solutions based on comprehensive and safe protocol for wireless modem of laptops, smartphones and other mobile devices; providing ultra-widebandInternet access, dialoguing via IP; providing games services and multi-media transmission to users. Specifically: + 4G services are services based on the Internet Protocol (IP) packed-switch network. Like 3G, 4G is protocol which allows sending and receiving data within packets. However, 4G is different from 3G in its operation modes. 4G is totally based on IP, which means that it uses Internet protocols even with dialogue data. Therefore, the chance that data is disordered when transmitting via different networks is really low, so 4G provides more constant experience along the real time for users. + 4G services can interact with current wireless standards. 4G allows data roaming with wireless local area network and can interact with digital video broadcasting systems. + The nominal speed is 100 Mbit/s when users are physically moving at a high speed and 1 Gbit/s when users and base transmission stations are at a fixed location. This guarantees that regardless of data volume, users can still maintain stable data transmission speed at almost all locations in almost all devices, including desktops, laptops or mobile phones. This enables them to do shopping and conduct transactions even when they are on the move. + 4G automatically shares and uses network resources to support users in each device. 4G network connections allow users to browse webs and broadcast HD videos on their mobile devices, which virtually turns smartphones into computers of the modern time. + The channel band can extend by 5 - 20 MHz and up to 40 MHz by option. + The maximum connection capacity is 15 bit /s/ Hz when downlink and 6.75 bit/s/Hz when uplink (which means 1 Gbit/s in downlink requires around 67 MHz broadband) + The normal network capacity reaches 3 bit/s/Hz/(device) in downlink and 2.25bit/s/Hz/(device) when used indoor. + 4G provide constant connection and global data roaming across various networks with smooth transmission. Its signals are better and more stable, which allows users to transmit data easily and constantly with considerably higher image and sound quality. + 4G can provide high-quality services with multi-media support to improve current applications such as mobile broadband access, video call, mobile TV as well as develop new applications such as high-definition TV (HDTV). + 4G services provide better privacy, information safety and security than 3G and Wifi. This helps users protect their personal information and prevent bad people from entering their devices.

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1.2. Overview of 4G supply and use in Vietnam

1.2.1. Overview of 4G supply in Vietnam

Although telecommunications network suppliers had piloted 4G many times in Vietnam, they did not receive permits from Ministry of Information and Communications to provide 4G servicesuntil 2017. With these permits, 4 network suppliers are entitled to develop 4G services in Vietnam, including Viettel, Mobifone, VNPT, Gmobile. It is noteworthy that all these suppliers are granted permits to exploit services at 1800 MHz band. In theory, the higher the band is, the wider the network area and the faster the speed is; as a result, this requires more base stations, so development costs increase remarkably. There are two reasons why Ministry of Infor- mation and Communications decided to choose this band for the permits it granted to 4G service developers:

Firstly, the selection of the 1800 MHZ band has proved efficient for the development of 4G when many other countries across the world have used it. Statistics from Global Mobile Suppliers Association (GSA) illustrates that 1.800 MHZ is currently evaluated as the best band for the development and commercialization of 4G LTE technology. Of the total 521 LTE networks, as many as 246 are developed on this band, which accounts for 47% of 4G networks in the world. According to GSA, LTE networks using 1800 MHz band, often known as LTE1800, are developed in 110 out of 170 countries in the world to commercialize 4G.

Secondly, 1800 MHz band is highly compatible with various devices. 60% of telecommunication devices in the world have functions which are compatible with 1800 MHz band. Specifically, 3,889 out of 6,504 devices can support and run on this band. This is the band that many network suppliers as well as producers have selected.

Upon receiving permits, Viettel became the first mobile network supplier to launch 4G services in Vietnam on 18 April 2017. Six months later, Viettel could build nearly 36,000 BTS 4G stations to fulfill its commitments of covering nearly entire area of Vietnam with 4G services. VinaPhoneand MobiFone, the other two leading mobile service suppliers, are rapidly building infrastructure to prepare for 4G. Under its ambitious plan, MobiFone will build 30,000 BTS stations to ensure 4G service quality. By October 2016, this supplier had set up 4,500 stations. Although analysts believed that Gmobile, another supplier with permits for 4G services like Viettel, VinaPhoneand MobiFone, would launch 4G services quickly to the market to gain a breakthrough, it still provides GPRS (2G) servicesby now. In the meantime, Vietnamobile believes that it will not be too late to launch 4G in two years. Although Vietnam started to apply 4G later than many other countries, including some in Africa, Vietnamobile still believes that this is still not the right time to launch 4G. To meet the urgent need for data, Viettel has recently supplemented nearly 10,000 BTS 4G stations on 21.00MHz band, increasing its number of base stations to 130,000, of which 50,000 are 4G stations. Viettel has also released 2G subscribers from 1800 MHz band to save the entire band for 4G. Upon completion, the total capacity of high-speed 4G network of Viettel will increase by 25% compared with present. For its part, VNPT is currently having over 76,000 BTS stations, of which 30,000 are 4G stations. The company is actively joining with some technology firms to experimentNB-IoT (technology developed for devices to connect with Internet of Things) on 900 MHz and 1800 MHz bands. 4G MobiFone network was introduced by MobiFone Telecom Group on 1 July 2017. After two years of operations, MobiFone had 4G network coverage area of 95% of the country. In Quarter 1, 2019 only, MobiFone built more than 4,500 4G stations. By the end of 2019, MobiFone expanded its network and increased the number of 4G stations to over 30,000, the company had 4G network coverage area of the entire country with high quality in some key markets. Thanks to continuous investments in and supplements to 4G infrastructure, network suppliers have gained considerable achievements when the quality of their 4G services has exceeded the standards set by Ministry of Information and Communications. The results of assessing the Internet connection (via 3G and 4G) in 6 provinces of Lang Son, Thai Nguyen, Quang Tri, Quang Binh, Ben Tre and Tien Giang released by Telecommunications Department in June 2018 reveal that all indicators of 4G services of 3 suppliers Viettel, VinaPhone, MobiFone exceeded the standards.

Statistics released by Telecommunications Department, Ministry of Information and Communications in the 4G LTE International Conference held by Vietnam Internet Association in coordination with International Data

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Group IDG in Hanoi on 27 July 2017 shows that currently Vietnam has approximately 60 million broadband subscribers, including 48 million broadband mobile subscribers. Six months after the introduction of 4G services, only 6.3 subscribers change to 4G simcards and at the moment, only 3.5 million subscribers are using 4G services. However, compared with some other countries in the world, the growth rate of 4G versus 3G is not really high.

Statistics released by Telecommunications Department also includes the results of assessing 4G service quality of suppliers based on 5 criteria: radio network availability; service success access ratio; average service access time; data transfer cut-off ratio and data transfer rate (upload/download speed and percentage of samples with download rate higher than or equal to minimum downlink rate in core areas). The Department conducted assessments on the quality of 4G services provided by Viettel from 8 to 16 June 2017 in Hanoi. The results of the 8-day checks reveal that the radio network availability of Viettel is 100%,data transfer cut-off ratio is 0.65%, minimum download speed is 34.9 Mbit/s and upload speed is 16.88 Mbit/s. The Department ran tests on services provided by MobiFone from 19 to 26 July in Hanoi. The results show that its radio network availability is 99.98%, service success access ratio is 100%, data transfer cut-off ratio is 0.74%, average service access time is 1.69 seconds, average download and upload speeds are 36.91Mbit/s and 19.28 Mbit/s respectively. Based on the results of the Department, it can be seen that Viettel is leading in radio network availability with the rate of 100% while MobiFone just reaches 99.98%. But the upload and download speeds of 4G network of MobiFone are higher than those of Viettel when Viettel only gains the speed of 34.9 Mbit/s and 16.88 Mbit/s respectively. Also in this conference, IDG uncovered its survey report on the satisfaction of consumers with 4G LTE in Vi- etnam conducted with 13,828 participants from 1 April to 1 July 2017. The report shows that 88% of 4G users live in Hanoi and Hochiminh City, 74% are students, small traders, housewives, 51% have income range from VND 5-10 million a month, 38% are aged 20 – 30.

Regarding their satisfaction with 4G, 56% of users working as freelancers and Uber / Grab drivers are satisfied with 4G stability, 7% say they are not satisfied with 4G services. About 4G costs, 79% of users believe it is necessary to have more promotional and marketing programs for 4G. As for purposes of using 4G, 29% of users inform that they use 4G for working, including making payments, doing business, advertising, conferencing, etc. while 56% say they use 4G for entertainment including surfing social network, watching movies and TV, listening to music, playing games, etc.

The report also indicates that of the three suppliers of 4G LTE services in Vietnam, 52% of users use 4G services of Viettel, 21% use 4G services of VinaPhone and 27% use 4G service of MobiFone. Among them, MobiFone is evaluated as a supplier with distinctive 4G service quality, VinaPhone is rated as a supplier with the best customer care services according to the survey conducted by IDG.

The 2017 survey of Buzzmetric (a site specializing in researching and analyzing social networks in Vietnam) conducted with the participation of 2,100 users about 4G service shows that only 32% of recipients say they have used and felt satisfied with 4G. The survey results also indicate that before using, only 8% of the total 2,100 people say they will not choose to use 4G but after experiencing the network, the percentage of users who are not satisfied rises to 35%, i.e. around 735 people in Vietnam are not satisfied with 4G network.

According to the report on the situation of 4G LTE in the global scale released by Open Signal (UK)in February 2018, the 4G coverage area of Vietnam is around medium compared to the world while its 4G speed ranks only after Singapore in ASEAN. The report also illustrates that the growth rate of 4G is high in developed countries and Vietnam has medium coverage area compared to other surveyed markets.

OpenSignal records the 4G coverage area of Vietnam at 71.26% of its geographical area, higher than some other big countries like Italy (69.66%), France (68.31%) or Germany (65.67%). About the 4G coverage area, South Korea tops the list with 97.49%, followed by Japan with 94.7%. In comparison with other countries in Southeast Asia (ASEAN), the 4G coverage area of Vietnam rank after Thailand, Singapore, Malaysia, Brunei and Indonesia.

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The average speed of Vietnam 4G network reaches 21.49 Mbps, higher than that of some Southeast Asian countries like Thailand, Malaysia, Brunei, Myanmar and Indonesia. In terms of 4G speed, Vietnam ranks only after Singapore, which has the highest 4G speed in the world with 44.31 Mbps. Another survey was conducted by IDG Vietnam and Digital Communications Association from 1 January to 20 March 2019 in different localities including 9 big cities and provinces of Hanoi, Hai Phong, Quang Ninh, Hochiminh city, Binh Duong, Vung Tau, Da Nang, Hue, Can Tho. 8 criteria were chosen for voting including: signal strength, coverage area, connection stability at peak time (Saturday, Sunday, holidays), quality-price equivalence, download speed, upload speed, speed of watching/downloading movies and frequently using social networks.

Under these 8 criteria, VinaPhone scores 90.0 points, highest among the suppliers; Viettel remains market leader in terms of coverage area and signal strength thanks to its massive 4G station system; MobiFone does not have equally large coverage area as the other two suppliers but has higher connection stability, especially in some key markets like Hanoi and Hochiminh city, MobiFone is the network with the highest 4G connection speed.

1.2.2. Overview of 4G use in Vietnam

In Vietnam at the moment, there are 3 companies developing and supplying 4G services, including Viettel, VinaPhoneand MobiFone. Vietnamobile and Gmobile are granted permits but have not yet supplied the services. Among these 3 suppliers, Viettel has the largest coverage area. The other two are providing 4G services in the oil-spilling mode, which means providing the services in cities first; in other words, they provide services upon market demand. As of May 2018, Vietnam had 76.8 million Internet users. For broadband access, there were 64.2 million users, including 51.2 million users of 3G and 13 million users of 4G. According to the report of the first half 2019 by Ministry of Information and Communications, as of June 2019, the number of mobile subscribers in Vietnam was 134.5 million, an increase of 112% year-on-year. Of these subscribers, the number of people using broadband devices (3G, 4G) was 51.128 million, the number of people using fixed phone was only 4.02 million. According to statistics of Telecommunications Department, Ministry of Information and Communications, by November 2019, Vietnam had 61.86 million subscribers (including 3G and 4G).

When launching 4G, service suppliers announced that the experimental data transfer rate could reach 200 – 250 Mbps. However, in reality, the actual speed that many users measure of 4G services is just around 20 – 30 Mbps, which is much lower than the original experimental speed. With mobile broadband, there are hundreds of data packages from these suppliers with prices ranging from several thousand to several hundred thousand Vietnam dong for 30 days of use. Some can be named such as MIMAX 70 of Viettel with 3GB data/month at the price of VND70,000, MAX of VinaPhone with 3.8GB/30 days at the price of VND70,000 or HD70 of MobiFone with 3.8GB/30 days at the price of VND70,000 among many others.

Besides, there are “combined” packages where network suppliers join hands with other service providers such as Facebook or YouTube to attract customers. These packages give more freedom of use to customers when they can consume 30 high-speed GB for 30 days at the price of around VND 300,000 provided by network companies. Another popular package is data SIM with 2BG of main data per day at the price of VND 90,000 a month. So it can be seen that 4G packages of Vietnam are quite attractive to 3G packages in terms of prices and diversity. But if compared with the average prices in the world, these packages are still high-priced and there are not yet unlimited packages for users to choose. Besides, the real value of “unlimited data” according to the advertisements of suppliers is not really reliable because upon the main data of the package runs out, although users can still stay connected, it takes almost a day to download the content they need. Even for the most basic demand such as Internet access, receiving emails, watching videos or popular applications such as Facebook, YouTube, OTT messengers, that users have to pay additional fees to get supplemented data or register new packages after just a few days of use is very common if they want to stay connected. Therefore, although 4G package prices are fairly cheap, connectivity and real speed remain big questions to users when they consider using 4G services in Vietnam.

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2. Literature review and research model

Hamed (2019) pointed that a great technology and application might be designed and developed but if people do not get involve and do not use it, the project is failed, thus, user acceptance is an undeniable key of any further implementation and development of any technology and application. In other words, in order to increase the level of technology usage and user adoption, the emphasis on factors that can influence on user acceptance should be raised. Laužikas & Miliūtė (2020) emphasized role of human resource management in performance of high-tech companies. Korneć (2020) indicated that stakeholders significantly affect smart solutions. Bat- kovskiy et al. (2019) draw attention to role of industry 4.0 in sustainable development processes. Shukla & Harma (2018) used Technology acceptance model (TAM) and extended the knowledge of consumer behaviour in emerging field of m-commerce, and practically, it will help the m-commerce practitioners to understand need of the consumer. Huy (2010) pointed that IT has certain impact on corporate governance in companies.

Then et al. (2019) mentioned that the addition of smart service belief factors as antecedents, as well as user experience type as a moderator, are crucial to expand the generalizability of TAM to the smart media service context.

From a customer experience management perspective, this study shows how to convert ad-supported users into new paid subscribers, while keeping existing subscribers by fulfilling their smart service requirements. TAM model is considered the most widely-used model to evaluate user acceptance for new technology services in the fields of information technology and telecommunications (Kuo & Yen, 2009; Shroff et. al, 2011; Melas et.al, 2011). TAM model, which was introduced and proved by Davis in 1989, includes the following variables: (1) External variables (exogenous variables), also known as the variables of previous tests: these variables affect Perceived Usefulness (PU) and Perceived Ease-of-Use (PEU) (2) Perceived Usefulness: is the belief of service users that the system will help raise their work performance (Davis, 1989). Users feel certain that the use of specialized systems will raise their efficiency/productivity of a specific task. Components constituting this variable include: +Communication: The importance of communication in operating an information system has been affirmed by many researchers. It is clear that without information, it is impossible to connect entities while with sufficient information, people working in different divisions in an organization can understand each other and work towards common goals. + System quality: Raising system quality will help exploit information system more effectively. + Information quality: The output quality of the information system: Reliable, Sufficient, Prompt. +Service quality: have assurance, reliability and response. (3)Perceived Ease-of-Use: is the level of ease that users expect to have when using a system, the perception of customers that using a specialized system or service does not require a lot of efforts. (4)Attitude to use: is defined as the positive or negative feelings about taking an action (Ajzen & Fisbein, 1975). It is the attitude towards using a system that is established by the trusts of its usefulness and ease. (5) Intention to use: is the perception of the trend of the ability to decide to use the system or service. Inten- tion to use is closely related to the real use. (6) Decision to use or using behavior: is the level of satisfaction and willingness to continue using or the level as well as frequency of using the service/system in reality.

TAM is a typical model to apply in the research of the use of a system because TAM is a model to measure and predict the use of an information system. Therefore, TAM model is suitable for the study of this article.

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Perceived Ease-of-Use

Exogenous Attitude Intention Decision to variables to use to use use

Perceived Usefulness

Figure 1. Technology Acceptance Model TAM

Source: Davis 1989

On the basis of TAM model by Davis (1989) and previous research findings, the authors propose some factors affecting the use of 4G services of users in Hanoi. Perceived Ease-of-Use is the belief of customers that using the service will bring them comforts (Ajzen et.al, 1985). 4G is a new service with many superior features which help to access the Internet faster than 3G and traditional ADSL services. Different research in the world has revealed that the perceived ease-of-use affects decision to use of customers via its effects on intention to use (Ven- katesh et. al, 2003; Klopping & Mickinney, 2004). Therefore, the authors propose the following hypothesis: H1: Perceived Ease-of-Use (SD) affects decision to use (QD)

Perceived usefulness is the perception of customers about the potential benefits that come from their decisions. This factor has been researched in many studies related to the application of new technology. It is affirmed in previous studies that the perception of usefulness has positive relations with targeting behavior (Taylor and Todd, 1995; Wang et. al, 2008; Koenig-Lewis et. al, 2010). H2: Perceived usefulness(HI) affects decision to use (QD)

Information quality is the belief of customers about the promptness and usefulness of the information system (Delone & Mclean, 1992). Service quality involves meeting customer expectations and satisfying their demand when they use the service. Previous studies demonstrate that information and service quality have influences on intention to use of customers (Delone & Mclean, 1992, 2003; Kim et.al, 2011). Information quality and service quality, via effects on intention to use, affect decision to use of customers. H3: Information quality (TT) affects decision to use (QD) H4: Service quality (DV) affects decision to use (QD)

Social impacts are generally understood as when the behavior of a person becomes the instruction and orientation for behavior of another person. Therefore, social impacts affect decision to use of individuals (Venkatesh et.al, 2003). H5: Social impacts (XH) affect decision to use (QD)

Prices are monetary representation of product values. They are the amount of money that needs to be paid for a product, service or asset. Prices affect decision to use via perceived value. Users are willing to pay reasonable prices for what they receive from service satisfaction (Polatoglu & Ekin, 2001). H6: Service prices (GC) affect decision to use (QD)

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Perceived ease-of-use H1

Perceived usefulness H2

Information quality H3 Decision to use Internet 4G services H4 Service quality H5

Social impacts H6

Service prices

Figure 2. Proposed research model

Source: Authors

Table 1. Measurements of proposed research model

Code Variables in the research model References SD Perceived Ease-of-Use(SD) SD1 Users perceive that they can use 4G service fluently Davis (1993) SD2 Users perceive that they can operate and communicate with 4G service easily SD3 Users can use 4G service without anyone instructing them Davis (1983); SD4 Users can use 4G services although they have never used them before Đào Trung Kiên (2015) SD5 Users can use 4G services very easily HI Perceived usefulness(HI) HI1 Using 4G services helps to accelerate Internet access rate Davis (1993); Taylor & HI2 4G services raise the Internet use effectiveness of users and can be used everytime, every where Todd (1995),Venkatesh (2000), Klopping HI3 Contents provided via 4G services are useful to users &Mekinnay (2004), HI4 Generally 4G services provide good values to users ĐàoTrung Kiên (2015) TT Information quality(TT) TT1 Information about 4G services from service suppliers is accurate TT2 Information about 4G services from service suppliers meet the demand Delone & McLean TT3 Information system about 4G services is fast and prompt (1992), Đào Trung Kiên (2015) Users can easily consult on and refer to information about 4G services invarious ways at anytime TT4 (24/7 call centres, websites, etc.) DV Service quality(DV) DV1 Service suppliers always supply 4G services rapidly DV2 Service suppliers realize their commitments to quality of the 4G services they supply Delone & McLean (1992), DV3 4G services are complete core services Đào Trung Kiên (2015) DV4 4G services meet the expectations and desires of users XH Social impacts(XH) XH1 Users think they should use 4G services like their friends and relatives XH2 That their relatives (family and friends) use 4G services affects their decision to use Taylor & Todd (1995), Venkatesh (2000), XH3 Users think that using 4G services helps them keep up with people around Đào Trung Kiên (2015) XH4 Users think that not using 4G services makes them lagged behind

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GC 4G Service prices(GC) GC1 Users think that the current fees of 4G services are reasonable GC2 Package fees and volumes of 4G services are compatible Polatoglu & Ekin (2001) GC3 Users think that the prices of 4G services when not registering packages of suppliers are reasonable GC4 Promotional and discount programs of network suppliers help users use 4G services more QD Decision to use(QD) QD1 Generally, the 4G services of suppliers make me feel satisfied QD2 Using 4G services is my right decision Venkatesh et al (2003) QD3 I feel interested when using 4G services for my activities QD4 I will continue to use 4G services in the coming time

Source: authors

4. Research method and results

4.1. Overview of research methods

Questionnaires: the research was conducted via a questionnaire with 5-point Likert scale. Convenience sampling was chosen to survey people using 4G services in Hanoi, Hochiminh city and Da Nang city. The authors use quantitative research method, specifically: - Research was conducted via citation review to select measurement scales and adjust scales to this particular research. - Data was collected by questionnaires, coded and processed by SPSS software to lay the foundation for the use of descriptive analysis, Cronbach’s Alpha test, Exploratory Factor Analysis (EFA), multiple regression analysis.

The minimum sample size for EFA analysis is n=5m, where m is the number of questions in the research. As for multipleregression analysis, the minimum sample size is n = 50 + 8m, where m is the number of independent factors (Tabachnicho Fidell, 1996). In our research model, there are 6 variables with 29 questions (observation variables), so the minimum sample size must be 145 questionnaires. However, to raise the reliability and remove unsuitable results, the researchers decided to use convenience sampling method with sample size of 250 questionnaires. 250 questionnaires were delivered to customers of 4G services using direct mailing via telephones and email based on the customer lists of Viettel; Mobile andVinaPhone.

In the following stage, questionnaires were collected, information was filtered. Of the 231 collected questionnaires, 214 were valid. For limited conditions, the researchers only employed 200 valid questionnaires to process via SPSS 20.0 software. The main indicators of the sample used for analysis are presented in Table 2.

Table 2. Research sample descriptions

Indicators Number Percentage Indicators Number Percentage Regions 4G service suppliers Hanoi 76 38% VinaPhone 69 34.5% Da Nang 53 26.5% Viettel 94 47% Hochiminh 71 35.5% MobiFone 37 18.5% Gender Qualification Under college 27 13.5% Male 87 43.5% College 61 30.5% University 73 36.5% Female 113 56.5% Post-graduation 39 19.5%

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Age groups Income (VND) Under 18 years old 32 16% Under 1 million/month 25 12.5% 18 – 22 years old 45 22.5% 1 – 5 million/month 37 18.5% 23 – 30 years old 74 37% 5 – 7million/month 37 18.5% 31 – 45years old 28 14% 7 – 10million/month 48 24% Over45 years old 21 10.5% Over 10million/month 53 26.5%

Source: authors

4.2. Research findings

4.2.1. Testing measurement reliability by Cronbach’s Alpha

Evaluating measurement scales is evaluating the suitability of the factors which are used in the measurement scales via Cronbach’ Alpha coefficients. The purpose of this step is to see what variables are suitable and what are not suitable before conducting EFA analysis, so that unsuitable variables can be removed. In this step, Cronbach’ Alpha should be > 0.6 (Nguyễn Đình Thọ, 2014), Corrected Item – Total Correlation< 0.3 (Nguyễn Đình Thọ, 2014).

Table 3. Reliability of measurement scales in the research model

Cronbach’s Cronbach’s Corrected Item – No. Variables Alpha if Item Alpha Total Correlation Deleted SD Perceived Ease-of-Use(SD) 0.867 SD1 Users perceive that they can use 4G service fluently 0.709 0.834 Users perceive that they can operate and communicate with 4G service SD2 0.673 0.843 easily SD3 Users can use 4G service without anyone instructing them 0.696 0.838 SD4 Users can use 4G services although they have never used them before 0.699 0.837 SD5 Users can use 4G services very easily 0.676 0.843 HI Perceived usefulness(HI) 0.669 HI1 Using 4G services helps to accelerate Internet access rate 0.540 0.543 4G services raise the Internet use effectiveness of users and can be used HI2 0.436 0.611 every time, every where HI3 Contents provided via 4G services are useful to users. 0.408 0.629 HI4 Generally 4G services provide good values to users 0.420 0.623 TT Information quality(TT) 0.586 TT1 Information about 4G services from service suppliers is accurate. 0.442 0.456 TT2 Information about 4G services from service suppliers meet the demand. 0.413 0.479 TT3 Information system about 4G services is fast and prompt. 0.433 0.463 Users can easily consult on and refer to information about 4G services in TT4 0.207 0.644 various ways at any time (24/7 call centres, websites, etc.) DV Service quality(DV) 0.621 DV1 Service suppliers always supply 4G services rapidly 0.460 0.504 Service suppliers realize their commitments to quality of the 4G services DV2 0.409 0.545 they supply. DV3 4G services are complete core services 0.381 0.565 DV4 4G services meet the expectations and desires of users. 0.352 0.584 XH Social impacts(XH) 0.713 XH1 Users think they should use 4G services like their friends and relatives. 0.445 0.682

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That their relatives (family and friends) use 4G services affects their XH2 0.516 0.642 decision to use. XH3 Users think that using 4G services helps them keep up with people around. 0.596 0.587 XH4 Users think that not using 4G services makes them lagged behind. 0.448 0.681 GC 4G Service prices4G (GC) 0.663 GC1 Users think that the current fees of 4G services are reasonable 0.374 0.640 GC2 Package fees and volumes of 4G services are compatible 0.468 0.581 Users think that the prices of 4G services when not registering packages of GC3 0.521 0.541 suppliers are reasonable Promotional and discount programs of network suppliers help users use 4G GC4 0.418 0.615 services more QD Decision to use(QD) 0.752 QD1 Generally, the 4G services of suppliers make me feel satisfied 0.572 0.681 QD2 Using 4G services is my right decision 0.548 0.695 QD3 I feel interested when using 4G services for my activities 0.549 0.695 QD4 I will continue to use 4G services in the coming time 0.525 0.707

Source: data analysis via SPSS

Table 3 presents the data analysis results when testing the reliability of measurement scales via Cronbach’s Alpha for variables SD, HI, TT, DV, XH, HV, QD. As can be seen from the table, SD has very high Cronbach’s Alphaof 0.867; XH and QD have Cronbach’s Alphaof 0.713 and 0.752respectively; HI, DV and GC have Cron- bach’s Alphaof 0.669; 0.621; 0.663 respectively – all are higher than 0.6. TT has Cronbach’s Alpha of 0.586 and Cronbach’s Alpha if Item Deleted of TT4 is 0.644, so TT4 is removed from the observation variables. Other variables haveCorrected Item – Total Correlation higher than 0.3. So only TT4 is deleted in EFA analysis.

4.2.2. EFA analysis results

Factor analysis is used to summarize data and shorten the collection of observation variables into the main factors used in the following analysis and tests. Factor loading is the criterion to ensure the practical significance of EFA: Factor loading > 0.3 is considered as the minimum level; Factor loading> 0.4 is considered as important; Factor loading> 0.5 is considered as having practical significance (Hair, J.F., Black, W.C., Babin, B.J., Ander- son, R.E. & Tatham, R,L, 2006). The conditions for exploratory factor analysis is: (1) (Factor loading) > 0.5; (2) KMO (Kaiser-Meyer-Olkin) coefficient ranges in [0.5; 1]; (3)Bartlett test has significant (Sig.) < 0.05; (4) (Percentage of variance) > 50% (Hair et al. 2006).

24 observation variables of 6 independent variables (after TT4 deleted) were inserted for EFA analysis with the results as follows:

Table 4. Analysis results of KMO and Bartlett’s Test

KMO and Bartlett’s Test Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .777 Bartlett’s Test of Sphericity Approx. Chi-Square 1353.978 df 276 Sig. .000

Source: data analysis via SPSS

Data analysis results in Table 4 reveal that KMO = 0.777 > 0,5andSig. = 0.000have significance, variables in the model are correlated. 24 variables were inserted for factor rotation of Varimax method. Data analysis results are presented in Table 5.

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Table 5. Results of Rotated Component Matrixa

Factor loading Observation variables 1 2 3 4 5 6 SD1 .850 SD4 .791 SD5 .782 SD3 .781 SD2 .738 XH3 .795 XH4 .733 XH2 .696 XH1 .640 GC4 .707 GC2 .655 GC3 .654 GC1 .582 HI1 .787 HI2 .740 HI4 .623 HI3 .550 DV1 .745 DV2 .653 DV3 .627 DV4 .606 TT3 .783 TT2 .693 TT1 .648 Total Variance Explained (%) 57.464 Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization. a. Rotation Converged in 6 iterations.

Source: data analysis via SPSS

Data analysis results in Table 5 show that all variables in the groups have factors loading > 0.5, thereby reaching reliability. Factors loading of observation variables are 0.5; Total Variance Explained divided into 6 groups with 24 variables could explain 58.184% of the variations of the model. As such, after EFA analysis, 24 observation variables and 6 independent variables are extracted.

4.2.3. Pearson test results

Based on the results of Cronbach’s Alpha test and EFA with TT4 deleted, representative factors are: SD = Mean (SD1, SD2, SD3, SD4, SD5); HI = Mean (HI1, HI2, HI3, HI4, HI5); DV = Mean (DV1, DV2, DV3, DV4); TT = Mean (TT1, TT2, TT3); XH = Mean (XH1, XH2, XH3, XH4); GC=Mean (GC1, GC2, GC3, GC4); QD = Mean (QD1, QD2, QD3, QD4)

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To test the linear relations between dependent and independent variables, it is necessary to run Pearson correlation test.

Table 6. Results of Pearson Correlation tests

QD SD HI TT DV XH GC Pearson Correlations 1 .432** .309** .314** .127** .288** .422** QD Sig. (2-tailed) ---- .000 .000 .000 .073 .000 .000 N 200 200 200 200 200 200 200

Source: data analysis via SPSS

As can be seen in the data analysis results in Table 6, Sig. of observation variables SD, HI, TT, XH, GC< 0.05, which means these independent variables are correlated to dependent variable QD. DV has Sig. at 0.073, higher than 0.05, which means DV does not have significant correlation with QD, therefore DV should be deleted from the model.

4.2.4. Multiple regression model results

Table 7. Model Summary

Model Summaryb Model R R2 Adjusted R2 Standard error of the estimate Durbin-Watson coefficient 1 .574a .330 .313 .41297 1.961 a. Predictors: (Constant), GC, XH, HI, TT, SD b. Dependent Variable: QD. Decision to use

Source: data analysis via SPSS

Adjusted R Squarereflects the level of influence of independent variables on dependent variables. In this case, 5 independent variables result in 31.3% of changes of dependent variables, the remaining changes come from exogenous variables and random errors. Durbin-Watsonis 1.961, within the range of 1 – 3, so according to the rule of thumb, there is no first-order autocorrelation.

• F Test: Table 8. Analysis results of ANOVAa

ANOVAa Model Sum of Squares df Mean Square F Sig. Regression 16.281 5 3.256 19.093 .000b 1 Residual 33.086 194 .171 Total 49.367 199 a. Dependent Variable: QD. Decision to use b. Predictors: (Constant); GC, XH, HI, TT, SD

Source: data analysis via SPSS

This step is used to test hypotheses of the suitability of the regression model to determine if it can be extended and applied for the whole via Sig. value (Sig. < 0.05) in ANOVAa.

Sig .of F test is 0.000 < 0.05. As such, this regression model has significance and the established linear regression model can be extended and applied for the whole.

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Table 9. Results of Correlation Coefficients

Coefficientsa Standardized Unstandardized Coefficients Collinearity Statistics Model Coefficients t Sig. B Std. Error Beta Tolerance VIF 1 (Constant) .496 .346 1.433 .153 SD .200 .049 .265 4.056 .000 .809 1.235 HI .143 .065 .138 2.209 .028 .882 1.134 TT .134 .070 .122 1.917 .057 .858 1.165 XH .153 .062 .152 2.472 .014 .911 1.098 GC .205 .064 .215 3.224 .001 .778 1.285 a. Dependent Variable: QD

Source: data analysis via SPSS

T test was conducted for each independent variable to see if these variables are significant viaSig . of each variable in the Coefficients Table. If Sig. is smaller than or equal to 0.05, the independent variable is significant; vice versa if Sig. is larger than 0.05, that variable is deleted. Therefore, according to the analysis results in Table 8, TT has Sig. = 0.57 >0.05, so TT was deleted from the model, SD, HI, XH, GC have Sig. <0.05, so they are significant. Therefore, hypotheses H1, H2, H5, H6 are accepted with reliability of 95%.

Multi linearity is tested via the values of Variance Inflation Factor (VIF). If VIF is higher than 10, multi linearity exists. With research projects which combine research model and Likert-scale questionnaires, VIF < 2 means there is no multi linearity between independent variables. Data analysis results in Table 8 shows that the VIF of SD, HI, XG, GC< 2, which means that there is no multi linearity between these dependent variables.

Among all regression coefficients, independent variable with the highest Beta coefficient has the biggest influences on the changes of dependent variables. So SD has the biggest influences on the changes of the dependent variable QD. The specific levels of influences of factors on QD are shown in the following equation:

QD = 0.265*SD + 0.138*HI + 0.152*XH + 0.215*GC

So SD, HI, XH, GC have positive effects on QD. When an independent variable increases by 1 unit while other independent variables in the model stay the same, dependent variable QD increases by 0.265; 0.138; 0.152; 0.215 units respectively.

4.2.5. Normal distribution and linear relation test results a. Normal distribution residual testing

Testing hypotheses of normal distribution of residuals: Based on the regression standardized residual diagram with Mean value nearly 0 and standardized deviation nearly 1, or standardized residual diagram Normal P-Plot with quantiles in residual distribution formed in a diagonal, it is possible to prove that normal distribution of residual hypothesis is not rejected.

Residuals may not follow normal distribution for different reasons: using the wrong model, variance is not constant, the number of residuals is not big enough for analysis, etc. So it is necessary to conduct different testing methods. The simplest testing method is to build regression standardized residual diagram as follows (Figure 1):

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Figure 1. Regression standardized residual diagram

Source: data analysis via SPSS

The diagram illustrates that the normal distribution bell curve overlays the frequency line. This curve has symmetrical form with the line of normal distribution. Mean is nearly 0, standard deviation is 0.970 – nearly 1, which shows that normal distribution residual is nearly normal. Therefore it can be concluded that normal distribution residual hypothesis is not rejected (see Figure 2).

Figure 2. Normal P-P Plot diagram

Source: data analysis via SPSS

With P-P Plot, quantiles in distribution residual focuses on the diagonal, so hypothesis of regression standardized residual is not rejected.

1323 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online b. Linear relation hypothesis testing

Scatter Plot diagram for standardized residual and standardized predicted values enables us to see if current data violate linear relation hypothesis. Values of Standardized Residual are presented on horizontal axis while Standardized Predicted Valuesare shown in vertical axis (see Figure 3).

Figure 3. Scatter Plot diagram for linear relation hypothesis testing

Source: data analysis via SPSS

If the diagrams show the distribution of residuals in the forms of Parabolic, Cubic, etc. rather than the line, data violate linear relation hypothesis. If the linear relation hypothesis is satisfied, residuals must scatter randomly in an area around abscissa line at 0. Particularly with the current data, standardized residuals focus around abscis- saline at 0, so the linear relation hypothesis is not violated.

Conclusion

The research has fulfilled the initially-set objectives: (1) Generalizing theoretical grounds of factors affecting intentions and behavior of using 4G services. (2) Identifying factors affecting decision to use 4G services of users in Hanoi, including 4 factors: Perceived Ease-of-Use, Perceived Usefulness, Social Impacts and Service prices. (3) Evaluating the importance levels of each factor affecting decision to use 4G services of users in Vietnam. (4) Identifying the inter-influences between factors affecting decision to use 4G services of users in Vietnam. (5) Suggesting solutions to develop 4G service markets and proposals to service suppliers to further develop 4G service market in Vietnam.

The research findings affirm that Perceived Ease-of-Use (SD), Social Impacts (XH), Perceived Usefulness (HI) and Service prices (GC) affect decision to use 4G services but their influences are of different levels. Particu- larly, Perceived Ease-of-Use (SD) has the strongest influence on decision to use 4G of users in Hanoi. That the two factors - Perceived Ease-of-Use (SD) and Perceived Usefulness (HI) - affect decision to use completely go in line with TAM model (Davis, 1989; Davis, 1993) Taylor & Todd (1995), Klopping and Makinney (2004) and previous studies. Social impacts (XH) is a factor with quite strong influences on decision to use. This consoli- dates hypothesis of Venkatesh et.al (2003) and goes in line with the research by Đào Trung Kiên (2015) about acceptance trend of Internet 3G. Quality prices (GC) is a new factor which is affirmed by this research to have influences on decision to use 4G services of Vietnamese users.

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Tran Hung NGUYEN ORCID: https://orcid.org/0000-0002-5777-9110

Thu Hien DO THI ORCID: https://orcid.org/0000-0002-9765-9754

Thuy Hang VU THI ORCID: https://orcid.org/0000-0002-8961-2059

Huyen Trang TRAN THI ORCID: https://orcid.org/0000-0003-2276-6966

Duy Hai LE ORCID: https://orcid.org/0000-0003-2487-0281

Minh Duc NGUYEN ORCID: https://orcid.org/0000-0002-6387-0420

This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/

1326 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 http://doi.org/10.9770/jssi.2020.9.4(18)

IMPACT OF DEMOGRAPHIC FACTORS ON RISK TOLERANCE

Firda Nosita¹*, Kashan Pirzada², Tina Lestari3, Rosadiro Cahyono4

1,3,4Sekolah Tinggi Ilmu Ekonomi Pancasetia, Jl. A. Yani KM. 5,5 Banjarmasin, 70248, Indonesia 2College of BusinessTunku Puteri Intan Safinaz School of Accountancy, Universiti Utara Malaysia, Kedah, Malaysia

Email: 1*[email protected] (Corresponding author)

Received 15 November 2019; accepted 10 April 2020; published 30 June 2020

Abstract. The Financial Services Authority of Indonesia (OJK) survey in 2016 has shown the financial literacy index in Indonesia was only about 21.8%. A lot of illegal investment in Indonesian society in recent years proves that the Indonesian people have not fully understood the benefits and risks of financial decision making. The research describes demographic factor and risk tolerance in the context of Indonesia’s society. The questionnaires distributed online and were obtained 850 respondents. To analyze the role of demographic factors on the willingness to take risks, we use Subjective Risk Tolerance, which is describing the respondent’s perception of risk. The result indicates that gender and age statistically insignificant in describing risk tolerance. Meanwhile, marital status, income, and education significantly important in determining risk tolerance. Gender equality in the working environment means women and men have an equal chance to get job and position in a company. This chance also means that women have a great chance to get more income and wealth than before. Marital status related to responsibility, the greater the responsibility assumes the smaller the level of risk tolerance. The better the knowledge, the better the understanding of the financial decision. Information processed and used to make a better decision. The result shows that in order to conduct an education program and increasing society’s knowledge, Government of the Republic of Indonesia, especially to The Indonesia Stock Exchange and Securities Firm should make attention to demographic factor and fit the investment product with investor’s profile.

Keywords: risk tolerance; risk aversion; demographic factor; Indonesia; capital market

Reference to this paper should be made as follows: Nosita, F., Pirzada, K., Lestari, T., Cahyono, R. 2020. Impact of demographic factors on risk tolerance. Journal of Security and Sutainability Issues, 9(4): 1327-1336, http://doi.org/10.9770/jssi.2020.9.4(18).

JEL Classifications: G11, G32, G41

1. Introduction

A lot of illegal investment in Indonesia was correlated with the low of financial literacy of Indonesian. Financial literacy is a crucial factor in order to make a financial decision. Based on survey of The Financial Service Au- thority of Indonesia on 2016, the index of financial literacy in Indonesia was only about 29,66%, and this means less literate. The Financial Service Authority of Indonesia (or Otoritas Jasa Keuangan/OJK) defined financial literacy as knowledge, interest, confidence and skill to manage their money. Financial literacy gives someone’s ability to choose and utilize financial products and services.

Personal factors such as knowledge, willingness, risk preferences, and personal factors also play a role in investment decisions on financial assets. Pålsson (1996) conducted a study of more than 7,000 households in 1985 and found that risk aversion was very large but not systematic correlated with age variables. Women are generally considered more risk-averse than men (Watson and McNaughton, 2007). Watson and McNaughton (2007) found that women choose a conservative investment strategy compared to men and that lower income (which influences the number of members contributing to pension funds) is a major contributor to the benefits of lower pension funds for women. JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online

In general, every investment that generates small returns will create a risk that is also small, and vice versa. As a consequence, when an investor chooses to face a smaller risk, he will get a smaller return. So it is important to know the individual risk preferences before deciding where their capital will be invested.

Based on the problem stated above, the research question are (1) Does the demographic factor such as gender, age, marital status, income and education determine the risk tolerance? (2) Does the risk tolerance in man differ from women?

2. Theoritical Background

Risk

Risk is often associated with uncertainty. Knight (in Holton, 2004) concludes that only measurable uncertainty defined as risk. Holton (2004) argues that the two components needed for a risk. Firstly, the uncertainty about the possible results and secondly is the result must be considered in terms of providing utilities. In term of financial discipline, risk is defined as the variability of actual returns on investment between expected returns. Risks are defined as deviations from the results that are received as expected (Hartono, 2015). While, Van Horne and Wachowics, Jr. (Hartono, 2015) defines risk as variability of actual returns to expected returns (Suryani, A. and Pirzada, 2018).

Risk Avoidance in Women

Byrnes, et al. (1999) explain differences in risk-taking between women and men, they show that women, on average, take less risk than men. For example, women are more likely to use seat belts when driving more than men and tend not to smoke (Hersch 1996). By using biological explanations, Zuckerman (Watson and McNaughton, 2007) explains that women and men differ in their chosen risk preferences. He explained that women produce more monoamine oxidase enzymes than men. This enzyme prevents the desire to search, thus limiting the level at which risk-taking occurs. Women adapt to risk intolerance because of their greater responsibility for reproduction and nurturing children, on the contrary, men are more willing to risk because of the ability (according to sociobiological theory) derived from success in risk competition (Wilson and Daly in Watson and McNaughton, 2007). Hersch (1996) concludes that longer women’s chances of life mean that women will benefit more from risk avoidance because they will face the consequences of negative outcomes for a longer time.

Sociocultural reasons for men who are more likely be risk-tolerant than women (Felton, et al., 2002). Slovic (Watson and McNaughton, 2007) underlines that children are suppressed during their childhood (through peers and social expectations) to behave according to their gender culture role, which will result in a higher tendency for men to take risks. Byrnes, et al. (1999) concludes that more restrictive parental monitoring in girls during childhood may explain the increased ability to risk rejection behavior later on. Interestingly, several studies have shown that social change - for example, feminist movements in the 1960s and 1970s resulted in stereotypical changes in women and women’s attitudes to risk. Research also shows that this change triggers a substantial increase in career women and women entrepreneurs (Master and Meier in Watson and McNaughton, 2007; Thandabhani, 2020).

Hinz et al.; Bajtelsmit and Vanderhei (in Watson and McNaughton, 2007) describe the choice of pension funds from investors in the United States and conclude that, with income and age control variables, women generally choose lower risk pension funds. Sundén and Surette (Watson and McNaughton, 2007) conclude that after marital status was added to their control variables, women still chose pension funds with lower risks. While Charness and Gneezy (2011) used several studies to prove the difference in the acceptance of risk between women and men. They conclude that there is very strong evidence that women invest less than men, therefore, financially more risk-averse than men.

Although the difference in wealth by sex is smaller, on average women still have lower levels of wealth than

1328 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online men (Bajtelsmit and Bernasek, 1996). A smaller level of income for women means that the resources available to save and invest are less than men. However, Hayhoe and Wilhelm’s research (Bajtelsmit and Bernasek, 1996) found that there were no significant differences between women and men in terms of income control.

Other Factors Role in Risk Avoidance

Financial risk tolerance is defined as the maximum amount of uncertainty that a person can receive when making financial decisions, which is almost taken in every part of economic and social life (Grable, 2000). Jaggia and Thosar (2000) sought an inverse relationship between age and risk taking. They found that individuals with longer investment time horizons tend to allocate more parts of their portfolios to risk assets, not because of time considerations, but because they tolerate risk more. Most investment practitioners suggest the principle of time diversification, which states that portfolio risk is reduced when extending the investment horizon (Jaggia and Thosar, 2000). However, some theorists argue that time diversification is a false theory. Some psychological studies prove the opposite relationship between age and risk recipients (Jaggia and Thosar, 2000). Individual wealth or income is the second factor that controls risk avoidance. High wealth and income encourage risk tolerance because the wealth of investors can receive better losses than individuals who have less wealth. Hinz et al. (1997) found that lower incomes tend to face higher risk avoidance. Benzion and Yagil (2003) find that the proportion of wealth invested in risk assets increases with increasing wealth. Someone who has greater wealth will be more tolerant of risk (Susanto, Pirzada, and Adrianne, 2019). Knowledge, gained through both experience and education, is the third factor that contributes to controlling risk aversion. Riley and Chow (1992) found that investors with relatively low education invest more conservatively, even when income is used as a control variable. Christelis et al. (2008) that the tendency of investment in the capital market was closely related to cognitive abilities, both capital market participation and indirect participation such as mutual funds and pension funds. Cognitive abilities include mathematical abilities, verbal skills and memory skills (Wati, Primiana, Pirzada and Sudarsono, 2019). Other factors that might affect risk avoidance are marital status. Daly and Wilson (2001) suggest that increased responsibilities along with marriage and children will make men more risk tolerant. Sundén and Surette (Watson and McNaughton, 2007) found that marriage would make women and men more risk averse to their retirement choices. Säve-Söderbergh (Watson and McNaughton, 2007) argues that marriage will encourage couples to invest in more risky assets because each person currently has a second income that can guarantee the losses they incur. They also proposed that marriage also affects the risk preferences of women and men differently. Hawley and Fujii (1993) used the logit model to prove the effect of individual characteristics on risk tolerance. The study included respondents aged 25-62 years. The factors of education, income and debt have a positive effect on risk tolerance. Married couples and households headed by a man are more tolerant of risk than households headed by a woman. While the age variable does not have a significant effect. Christiansen, et al. (2013) found that women increased part of the wealth invested in shares after marriage and dropped them after divorce, while men showed the opposite behavior. Hartog, et al. (2000) found that women avoid risk more than men. By comparing respondents’ job, they found that entrepreneurs were more willing to take risks than employees, while civil servants were more risk-averse than private sector employees. They also found that education and welfare negatively affected risk aversion. That is, the well- educated person tend to be risk tolerant. Whereas individual welfare associated with income, contributes negatively to risk avoidance, when a person achieves financial prosperity, they are more risk tolerant than the others. Hartog, et al. (2000) also found a positive relationship between age and risk avoidance, the elderly one are more likely risk-averse than younger. Faff,et al. (2008) also found that women tend to be more risk-averse than men. Whereas age has a nonlinear relationship with risk avoidance. In addition, wealth and income tend to have a relationship that is opposed to risk avoidance, which means that the greater a person’s wealth and income, the less risk aversion. Chiappori and Paiella (2011) also found that wealth has a negative effect on one’s risk avoidance. While, Wang and Hanna (1997) found that risk tolerance increases with age when other variables are controlled. That is, when age increases, risk tolerance decreases. By using students at Peking University as a sample, Ding, et al. (2010) asserted that women avoid risk more than men and avoidance of risk decreases as parents increase income. Dohmen, et al. (2011) used a survey to German people and found that the gender, age, height and background of parents significantly affected a person’s willingness to take risks. It is proven that women in Germany are more risk-averse than men and greater risk aversion increases with age. Meanwhile,

1329 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online family background in terms of parental education appears to play a role in determining attitudes towards risk, which shows a positive relationship between parental education and the willingness to take risks. Finally, he also found that someone who has a higher body is more risk tolerant.

3. Research Methodology

The questionnaires distributed online through Google forms. Data were obtained from 850 samples which gained from cluster sampling. By using data from the Central Bureau of Statictics of Indonesia (Badan Pusat Statistik Indonesia) on 2010, the percentage of the population in each zona is 79.8% for the West, 17.5% for the Central region and 2.7% for the East, table 1 represent the amount sample for each zona. For the purpose of this study, it was hypothesized that (a) women more risk-averse than men (b) risk avoidance would increase as age increases (c) marital status affects a person’s risk tolerance, (d) risk avoidance will decrease along with increased income, (e) the level of education will be related to risk avoidance (see table 1 and table 2).

Table 1. Number of Sample

Zone Percentage Sample Amount West 79.8 % 678 Central 17.5 % 150 East 2.7 % 22 Total 100 % 850

Source: data processing

Respondents were asked to fill out questionnaires containing statements about their willingness to take risks with various decision alternatives made using a Likert scale. Starting from Scale one, shows the reluctance to take risks up to five that describes a very high-risk tolerance. Statement regarding risk tolerance is divided into six statements that reflect a person’s perception of a condition related to decision making. This perception factor will capture several dimensions of investment such as perceptions about security, protection and perceptions about the definition of risk. The regression model as follows:

Where: SRT = Subjective Risk Tolerance, Gender = dummy variable for gender, 1 for male and 0 for woman Age = age group of respondents, codes 1 to 5 according to the age group MS / Marital Status = respondent’s marital status Inc / Income = income group of respondents, codes 1 to 5 according to the income group of respondents per month Edu / Education = Respondent’s Education Level, codes 1 to 4 according to the respondent’s last Education.

Table 2. Subjective Risk Tolerance Indicator

No Perception Indicators - Satisfied with the result, do not take an opportunity to get the potential higher return although have a 1 Safety greater chance - Do not do anything out of the ordinary to reduce risk - Transfer of risk to reduce losses 2 Hedging - More concerned about possible losses than possible profits 3 Risk Definition - Risk is loss

Source: data processing

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4. Result

Characteristics of respondents based on gender, age, marital status, income level, and education can be seen in the following table 3:

Table 3. Respondent’s Profile

Man Women Amount Percentage Amount Percentage Age ≤ 25 186 21,89 % 229 26,95 % 25 – 34 150 17,65 % 124 14,60 % 35 – 44 65 7,65 % 36 4,24 % 44 – 54 32 3,76 % 17 2 % ≥ 55 9 1,06 % 2 0,2 % Marital Status Single 245 28,82 % 270 31,77 % Married, no children 41 4,83 % 38 4,47 % Married with children 156 18,35 % 100 11,76 % Monthly ≤ Rp. 2.000.000 84 9,89 % 108 12,71 % Income Rp. 2.000.001 – Rp. 3.0000.000 64 7,52 % 57 6,70 % (Indonesia Rupiahs) Rp. 3.000.0001 – Rp. 4.000.000 47 5,53 % 58 6,82 % Rp. 4.000.001 – Rp. 5.000.000 90 10,59 % 79 9,30 % ≥ Rp. 5.000.001 157 18,47 % 106 12,47 % Education High School 72 8,47 % 42 4,93 % Diploma 33 3,89 % 25 2,94 % Bachelor’s degree 269 31,65 % 278 32,71 % Postgraduate 68 8 % 63 7,41 %

Source: data processing

The most respondents were single and passed bachelor’s degree. Regression results can be seen as follows (table 4):

Table 4. Regression Result

Coef t sig C 12.075 7.349 0.000 Gender -0.407 -1.279 0.201 Age 0.341 1.364 0.173 Marital Status -0.691 -2.735 0.006 Income 0.775 6.778 0.000 Education 0.510 2.493 0.013 R2 0.111 Adj R2 0.105

Source: Computed output (2019)

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5. Discussion

Table 4 shows that men and women have no differences in risk tolerance. This means that gender does not influence the risk avoidance of a person, both men and women and does not necessarily determine how risk tolerance they are. Feminist movements in the 1960s and 1970s resulted in women’s stereotypical changes and women’s attitudes to risk. Research also shows that this change triggers a substantial increase in women entrepreneurs and career women (Master and Meier in Watson and McNaughton, 2007). Based on the results of Grant Thorn- ton’s survey (cnnindonesia.com, 2016) concluded that Indonesia was ranked sixth as the country with the highest percentage that gave a high position in the company to women with a 36% share. Global trends show that developing countries are increasingly opening up opportunities for women to become leaders or occupy important positions in a company or organization. As a result, women also get income equal to their responsibilities and allow them to compete with men in generating wealth. The Central Bureau of Statictics of Indonesia (Badan Pusat Statistik / BPS, 2018) also noted that the percentage of formal workers for women continued to increase from 2015 to 2017, especially in the productive age. This is of course in line with the increasing capability of women with formal and non-formal education. It can be seen from table 3, the percentage of female respondents in this study had almost equally educated as men (especially in undergraduate and postgraduate degree), which proves that women’s capabilities are not inferior to men thus run the chance to get a career or a good job and give a high salary. High salaries or income can affect a person in making financial decisions. In accordance with the results of this study, the higher income, the more risk-tolerant they are. Table 4 shows that the age does not affect a person’s risk avoidance. The results of this study contradict to Lee and Hanna (in Adhikari and O’Leary, 2008) who found that a person’s risk tolerance decreases with age. In this study, they have the same view of risk. Hawley and Fujii (1993) also prove that age variables do not significantly influence risk aversion. Risk avoidance is not only influenced by a person’s age but can be related to the investment time horizon. If someone has a longer time to invest, he might be more tolerant of risk than someone who has a shorter time. The results of the study are also in line with Cornelis and Linawati (2015) who found that age does not have a significant influence on risk tolerance. The same investment opportunity and ease of access to information make everyone easily find information to be processed in the context of decision making. Information is crucial in the decision-making process in relation to risk avoidance. Increasingly fast, accurate and diverse information is a person’s capital to manage that information into a decision. Diversification is a way to manage or minimize risks. In addition, someone will diversify with the aim of maximizing returns. A young person will tend to diversify by looking for more diverse instruments with the aim of maximizing returns. Whereas an older person will also diversify to maintain the prosperity he has today. In addition, both young and old person will look for alternative investments that are appropriate to their character and goals. In this study, marital status has a significant negative effect on risk tolerance. This means that someone who is married and has children will be more risk-averse than someone who is married but does not have children, and someone who is not married is more risk-tolerant. This is in line with the results of research by Daly and Wilson (2001) concluding that responsibility increases along with marriage and having children, a man becomes more risk averse. In line with these findings, Sunden and Surette (in Adhikari and O’Leary, 2008) found that marriage makes a person, both men and women more risk-averse to their retirement plan choices. Jianakoplos and Bernasek (1998) found that the presence of children significantly increased the risk tolerance of married couples but decreased risk tolerance for single women (Arniati, Puspita, Amin and Pirzada 2019). This is reasonable, someone who is married has responsibility for his partner and will be more selective in making decisions, especially financial decisions. When married couples have children, they will be more concerned about risk and try to reduce risk by transferring risks, namely buying health insurance, education insurance and life insurance. The risk transfer is effort to reduce uncertainty in the future, where uncertainty is closely related to risk. Someone who is single may be more willing to take risks because of limited responsibility for themselves, especially if they have personal income that can be freely used to make investment decisions. A married person, especially who has a child will be very aware of the increase in living costs reflected in the inflation rate. Inflation will describe the costs of living such as health costs and education costs. Many married couples avoid the health, education and soul risks by transferring risk to insurance institutions. This shows that married couples and/or having children are more risk-averse and try to manage it by purchasing insurance. The survey results of the Financial Services Author- ity of Indonesia on 2013 and 2016 show that public literacy towards insurance institutions is far greater than

1332 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online the public literacy of the capital market. In 2013, the survey results showed that insurance literacy was 17.84% compared to capital market literacy which was only 3.79%. Despite experiencing an increase in 2016, capital market literacy is still relatively low, which is only 4.40%. The results of this survey emphasize that people are more aware and understand insurance products and may be related to their attitude to risk. Based on table 4, the income variable has a significant positive relationship to risk tolerance. This means that the greater a person’s income, the higher their tolerance for risk. Faff,et al. (2008) also found that wealth and income tend to have a relationship that is opposed to risk avoidance, which means that the greater a person’s wealth and income, the less risk aversion. Chiappori and Paiella (2011) found that a person’s relative risk avoidance is fixed and wealth has a negative effect on one’s risk avoidance. It is a common situation, someone with high income becomes more tolerant of risk because they assume risk is an opportunity to get returns on their financial decisions. A person with lower income will be more risk-averse because they assume that financial decisions do provide opportunities for returns, but must be considered carefully so as not to reduce their welfare, so they are more careful in making financial decisions. The results show that education influences a person’s risk avoidance. This emphasizes that the level of education of a person influences their attitude towards risk. The higher the level of education of a person, the more tolerant of risk. This is quite reasonable because education is a person’s capital in conducting analysis in relation to decision making. The higher a person’s education, the greater their knowledge and capability in processing information and making financial decisions. Lee and Hanna (in Adhikari and O’Leary, 2008) also found that risk tolerance increases with the level of one’s education. Someone with a higher education becomes more risk-tolerant and takes risks. This can be caused by the knowledge and level of analysis of someone who is more mature as his education. Riley and Chow (1992) found that investors with relatively low education invest more conservatively, even when income is used as a control variable. While investors who have relatively high education tend to be more aggressive or tolerant of risk.

Conclusions

We conclude that gender and age are not relevant to risk-aversion. Both man and women did not have any difference in risk tolerance. Old and young people is proven not to influence a person’s tendency to avoid or take risks. Meanwhile, marital status determines a person’s risk avoidance profile. The higher a person’s income, the greater the risk tolerance. Income is a person’s capital in making investment decisions. The assumption is that people who had good welfare tend to be more tolerant of risks, such as potential losses in investment. Con- versely, low income will trigger someone to be more careful in making investment decisions. Education is a factor that must be considered in disseminating information about investment products. Education is an important element in shaping a person’s logic or analysis in making financial or investment decisions. Education provides knowledge and if combined with skills will make a person become more confident in making investment decisions. Based on the results, The Indonesia Stock Exchange together with The Financial Services Authority of Indonesia (OJK) should pay attention to demographic factors when going to socialize the capital market. The Indonesian Stock Exchange and Securities Company may use a person’s risk profile to provide an understanding to the public about the appropriate product features, for example on the benefits and risks, rights and obligations, how to access and transaction mechanisms for financial products or investments in the capital market. The IDX and Securities Companies must adjust investment products offered with the characteristics of target investors. Target investors who have a low income, for example, can be given knowledge about investment products that tend to be safe such as mutual funds or bonds. This study did not, as yet, compare the risk tolerance of Indonesian society with neighboring countries such as Singapore or Malaysia in order to explain how risk tolerance affects a person’s confidence in investing in the capital market which differentiates their capital market literacy.

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Acknowledgements

We would like to thanks to The Ministry of Research, Technology, & Higher Education of The Republic of Indonesia for the Research Grant 2018 Period.

Firda NOSITA ORCID.ID: https://orcid.org/0000-0003-3173-1300

Kashan PIRZADA ORCID ID: https://orcid.org/0000-0003-1186-0631

Tina LESTARI ORCID ID: https://orcid.org/0000-0002-8551-0602

Rosadiro CAHYONO ORCID ID: https://orcid.org/0000-0002-2032-8121

This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/

1336 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 http://doi.org/10.9770/jssi.2020.9.4(19)

MANAGEMENT OF THE POLICE OFFICERS TRAINING SYSTEM AND THE EFFECTIVENESS OF INTERNAL SECURITY

Marlena Lorek1, Teresa Piecuch2, Jolanta Itrich-Drabarek3, Mirosław Minkina4

1,2 Rzeszów University of Technology, Aleja Powstańców Warszawy 12, 35-959 Rzeszów, Poland 3University of Warsaw, Krakowskie Przedmieście 26/28, 00-927 Warszawa, Poland 4 University of Natural Sciences and Humanities in Siedlce, Stanisława Konarskiego 2, 08-110 Siedlce, Poland

E-mails: [email protected], [email protected], [email protected], [email protected]

Received 18 November 2019; accepted 19 April 2020; published 30 June 2020

Abstract. Employee training is a systematic activity implemented in a hierarchical organization to which the police belong. It is therefore necessary to properly manage this system at the appropriate level, because it has a positive impact on the level of social security. Staff training and development are increasingly appreciated by organizations, especially those that implement a country’s security policy. The purpose of the study is to present the essence of training and improving Police employees, which in turn will allow to develop a model for such training and its management as one of the most important tasks of the personnel departments. Management in this area plays an important role in setting directions for the development of employees’ potential and effectively facilitates the introduction of any changes that will be reflected in the work effectively performed by officers.

Keywords: internal security; management; police; training policy; ethics

Reference to this paper should be made as follows: Lorek, M., Piecuch, T., Itrich-Drabarek, J., Minkina, M. 2020. Management of the police officers training system and the effectiveness of internal security,Journal of Security and Sustainability Issues, 9(4), 1337-1348. http://doi.org/10.9770/jssi.2020.9.4(19)

JEL Classifications: H53, M53

Additional disciplines: political sciences and administration.

1. Introduction

As indicated in the scientific literature, „the concept of capital refers to the permanent determinants of the selection and implementation of human activities. Capital is most often the product of previous activity, affecting the course of current activity. [...] Every capital is always created from scarcity („scarce inputs”) and is therefore in itself a kind of deficiency and the subject of entropy „ (Bańka 2006).

The beginning of the 21st century is the primacy of human capital. “Human capital is a resource of knowledge, skills, health and vital energy, contained in every person and in society as a whole, defining the ability to work, adapt to changes in the environment and create new solutions”(Domański 1993). The quality of the organization’s staff translates into the effectiveness of its operation.

The main purpose of this article is to show how important training for police officers is and whether raising professional qualifications increases quality during the performance of their professional duties. The object of research is the analysis of documentation prepared on the subject of training centers for the Polish Police as well as the training offer, which in turn is expected to affect the level of effective involvement of officers JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online in professional work. The main research problem is determining which trainings raise the competences of officers the most and whether trainings really have an impact on their involvement in professional work. In order to conduct research, the method used is the analysis of compact documentation on training in the Pol- ish Police.

2. Training - definitions, types

Training is a set of elements that affects intentional activities in an organization. Each organization strives to develop human capital, which allows it to acquire competences that will be necessary now or in the future for all employees of the entity (Mishchuk et al., 2016; Pocztowski 2003; Bilan et al., 2020; Laužikas, Miliūtė 2020, Bombiak 2020; Adeniran et al., 2020).

The knowledge we receive during the training is also a form of activity that is created in the organization, so that employees can better fulfill their duties (Bramley 2001). Training also means a continuous process of improving employees’ qualifications, knowledge and skills. The acquired knowledge should be well grounded, which will allow its use during any problem in the organization. Employee development is always based on innovation, acquisition of value and culture, which allows the extension of own intellectual competences (Zbiegień-Maciąg 1996). Organizations therefore want the training offer to be effective. This is due to the assumption that training is a process of raising the level of skills and professional development of employees, which contributes to the achievement of the organization’s goals.

Assessment of training needs - Who is to be trained? - What should he learn? - What does he already know?

Setting training goals - specific - measurable - achievable

Training evaluation planning Developing a training method -Have the goals been achieved - Content - Place -Has better results been achieved at work - Methods - Trainers

Training implementation

Training assessment

Modification of the training program based on its assessment

Figure 1. Elements of the employee training system

Source: Griffin 2007.

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The training organization process is the most important from the point of view of the effectiveness of the training system being implemented, because proper diagnosis of training needs will allow selection of the appropriate method and type of training (see Figure 1 above). Professionally selected training should be analyzed at the appropriate levels. The most important of them include: organization of the position in which the training is organized, and selection of employees (Lorek 2017).The results achieved during the training should be supplemented at various levels so that there are no gaps in the selection of training. Assessment of training effectiveness is a very important element in the training process, as it should be organized during and after the course cycle. Therefore, medium or long-term assessment in the workplace is necessary to determine whether the objectives set for the training have actually been achieved and what benefits the company investing in the training has achieved (Rae 1999).

Depending on the training objectives, they can be divided into three types (Kostera, Kownacki 1996): – preparatory and introductory training for work - passes professional knowledge, skills and behavior to recruited employees, – adaptation training - expands existing knowledge, skills and employee attitudes for the needs of the new job requirements, – change training - to change professional qualifications; here the employee receives a new profession or specialization.

The division of trainings by time allows to distinguish trainings: evening, weekend, one-day, several-day, more than a week.

The division of trainings by form separates: the course (most often about 20 people participate in it; the teacher wants to provide participants with knowledge based on the selection of appropriate methods), seminar (about 30-40 students participate in this form of classes; all of them share their experiences and the teacher is only the organizer), workshop (16 people participate in it; all participants develop some material under the tutor’s guidance), conference (meeting of specialists who share experiences - 50-100 people).

Open training takes place when recruitment is not restricted and many people can participate (Tyborowska 2006). Closed trainings are organized for selected participants. Participants must be invited to attend. Soft trainings are addressed to both managerial staff and lower-level employees. The main purpose of these exercises is to enrich team management skills. Whereas managers and senior management want to learn the secrets of personnel management. At this level, supervisors should focus on the process of motivating their subordinates to work. The task of these trainings is either to solve a specific problem that has arisen in a given company or to improve the skills of employees on whom the employer is particularly concerned. Hard training is knowledge training. This training does not focus on developing interpersonal skills. Participants in this type of course are on site at their workplace because they are usually organized at the workplace or at the company that organizes the training.

(see Figure 2 above) shows a general human resource development model in which the development strategy is an integral part of the enterprise strategy. The human resources development strategy defines the improvement of individual elements of this resource. The development process is constantly modified by comparing the desired and existing structure of human resources. It can be seen that the development contains elements established at the beginning of the strategy, as well as changes occurring during the implementation of strategic tasks (Pocztowski 2008).

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Eterprise strategy Human Resources Strategy

Profile of desirable Profile of existing human resources human resources

Comparative analysis Human resources development strategy

Human resources gap

Human resources development instruments

Development by enriching existing human resources Training and developing their potencial

Development by harmoning existing human Movement of employees resources and the conditions for their use

Development by shaping the conditions for Work structuring the use of human resources

Figure 2. Model of human resources development

Source: Pocztowski 2008.

In general, the training need is the area of employee competence requiring change or modification through training. Identifying training needs is to gather information necessary to determine real training needs. Taking into account their subject, they can have the character of current, adaptive and developmental needs (Król, Ludwiczyński 2007). In some cases training conducts via using knowledge management systems (Mishchuk et al., 2016). Its results are especially positive if they have links with human capital development estimation and remuneration (Bilan et al., 2017).

Identifying needs is also determining the gap in individual employee competences. This is very important because we can predict the future market requirements for staff competencies. In the era of technological progress and market development, we need to constantly supplement our knowledge and experience, because thanks to such efforts we will be competitive on the market. However, it is worth asking yourself who really needs education in the organizational unit, as this will allow you to quickly find and eliminate unnecessary training. The right form of training will meet the needs of both staff and supervisors (Ścibiorek 2010).

Current needs arise when an urgent situation disturbs the proper course of the system’s operation, which requires relatively quick training activities. Adjustment needs occur when the training enables employees to perform additional tasks in a given workplace. Development needs are carried out with a view to future vertical or horizontal staff movements. The most popular method of identifying training needs is effective management of employees’ competence portfolio and the entire system. Its correct and reliable application is synonymous with the consistency of training needs with the adopted general and personnel strategy of the enterprise as well as its organizational and training culture, as well as the proper determination of training needs both in terms of the holistic work system and in relation to individual employees (Szałkowski et al. 1996). The study of training needs includes determining the target group of training, i.e. people who are to participate in it. It is important to discuss what to do first: identify training needs or define a target group. Both of these activities are intertwined with each other. As a result, a proper examination of training needs should give an answer to which employees should be trained, and at a later stage also make it possible to determine what their personal expectations regarding future education are.

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Determining whether the Determining training needs Accurate identification of identified problems can be from the point of view of problems in the enterprise solved by training the company’s goals

Determining the training Determining the training Further stages of running needs of individual target group and its the training project participants training needs

Figure 3. Order of proceedings

Source: Bramley 2001.

When designing the training program and selecting the methodology, knowledge about the stages of human learning is necessary. Without knowledge of this process, it will be difficult to construct a suitable program and choose the methodology used (case studies, games, role plays, etc.; (see Figure 3 above), where order of proceedings is presented). Of course, this knowledge should be acquired primarily by a trainer, but it will also facilitate the work of the training project manager. In practice, it is possible to distinguish four main stages that reduce knowledge not only to the information possessed by the participant after the training, but also to the ability to use it and the acquired attitudes and learned behaviors. Everything is done according to the diagram in (see Figure 4 above).

Unawareness of Awareness of competence Awareness of competence Unawareness of incompetence incompetence

Figure 4. Ladder of competences

Source: Rae 1999.

The special type of organization that will be analyzed in this study is the Police.

3. Police training system and the effectiveness of its officers in the field of internal security

The Ordinance of the Minister of the Interior and Administration of 19 June 2007 on detailed conditions for vocational training and professional development in the Police sets out the types of vocational training and professional development, forms, conditions and mode of their completion, as well as the organization and manner of conducting training and supervision over their implementation. Currently, the only compulsory training in the Police is basic vocational training. In addition, there is a guided self-education system in which, in particularly justified cases, training can be conducted with the consent of the Chief Police Commander.

Basic vocational training is conducted according to a uniform program preparing police officers to perform official tasks in positions requiring basic vocational qualifications. It applies to all newly admitted policemen irrespective of education, but the ordinance does not indicate the duration of this training or the division into stages. For policemen in the candidate service basic training is conducted in the field of preparation for administrative and orderly activities, while for policemen who have completed the candidate’s service basic vocational training is carried out in the scope complementing the differences between the training they received in OPP and basic vocational training (for newly admitted policemen).

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The regulation also introduces an additional provision informing that a police officer after the candidate’s service is directed to this training no later than within 4 months from the date of his admission to service. If the interval between the end of the candidate’s service and admission to the service is more than a year, the police officer must undergo all basic vocational training. There is no longer any qualification upgrading of compulsory specialist trainings, although the name itself (probably misleading) has remained and specifies training in the framework of vocational training implemented centrally.

Vocational training for university graduates is conducted for police officers in permanent service according to a uniform program preparing them for performing official tasks in positions where higher professional qualifications are required. A police officer who meets all of the following conditions may be referred to such training: – has higher education with a master’s degree or another equivalent degree, – submitted a written report on this matter, – he is provided with an official post immediately after the end of the training, in which higher professional qualifications are required, or he is serving in an official post for which a police full-time rank in the corps of Police officers has been determined, – at the latest on the day of completing the training, he / she will meet the requirement in the field of service experience, on which the appointment or appointment to an official position depends.

A six-grade scale of grades is maintained at all trainings. However, if it results from the training program or requires it by the nature of the knowledge or skills taught, a two-level grading scale with a generalized ‘passed’ or ‘failed’ entry can be used to assess the degree of knowledge acquisition or mastery. The regulation also regulates the deadlines for passing credits and examinations. Corrective credit is made within 2-7 days from the date of the first credit, but at the student’s request a time limit shorter than 2 days may be set.

Activities in the field of training and professional development of policemen are implemented on the basis of many legal acts, of which the most important are: – the Act of April 6, 1990 on the Police, – regulation of the Minister of the Interior and Administration of 19 June 2007 on detailed conditions for vocational training and professional development in the Police, – order No. 1041 KGP of 28 September 2007 on the detailed principles of organization and scope of operation of police commands, commissariats and other organizational units of the Police, – decision No. 863 KGP of december 5, 2007 on the development, introduction, amendment and repeal of vocational training programs and curricula, – decision No. 48 KGP of 17 February 2011 on the list of specialized course programs constituting training programs.

In the light of national law, the police training system has two levels and includes: – basic vocational training, – vocational training for university graduates.

The classic forms of raising an officer’s professional qualifications are: – basic training, – training to expand officers’ knowledge and skills, – planning individual or group careers, – desire for professional development through numerous trainings, – increasing the potential of knowledge during professional development, – positive impact of training to greater motivation of the entrusted goals (Jurgilewicz 2017).

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The (see Figure 5 above) below shows the applicable system of police training and professional development.

ENDING THE SERVICE

“OFFICER” EXAM

VOCATIONAL TRAINING FOR HIGHER EDUCATIONAL GRADUATES (for candidates with at least a master’s degree or equivalent) or COMPLETION OF POLICE HIGHER SCHOOL (entitling to take the “officer’s” exam)

The appointment or appointment to an official position depends on the policeman’s IXED SERVICE education, obtaining specific professional qualifications, as well as the length of service in the Police. PROFESSIONAL EXPERIENCE PROFESSIONAL

Performing official tasks in positions where basic professional qualifications are required

PROFESSIONAL ADAPTATION IN OPP (51 days, 37 services)

BASIC VOCATIONAL TRAINING MANDATORY - uniform (SZP - 127 training days) - supplementary (SZPU - 92 training days)

RECEPTION FOR SERVICE SERVICE* PREPARATORY

COMMON PROCEDURE FOR SELECTION FOR SERVICE IN POLICE, COVERING: knowledge test, physical fitness test, psychological test checking procedure, interview, medical commission

LEGEND: - professional development as a continuos process - 3 years with the option of shortening or exempting from preparatory service (Article 29 of the Police Act)

Figure 5. Model of vocational education in the Police

Source: http://www.policja.pl/ftp/pliki/strategia_szkolnictwa_policyjnego_na_lata_2007-2009.pdf

The principles of organizing the Police and the scope of activities of Police organizational units and units, including those relevant to training matters, regulate: – the Act of April 6, 1990 on the Police,, – Order No. 1041 KGP of September 28, 2007 on the detailed principles of organization and scope of operation of police commands, commissariats and other organizational units.

Tasks in the area of training and professional development are implemented by: the Police Headquarters, Police College in Szczytno, police schools and provincial (capital) Police headquarters and their subordinate units and organizational units, including the Police Training Center in Łódź.

The (see Figure 6 above) shows the location of training units in Poland, including five Police Schools and one training center in Łódź.

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Figure 6. Location of Police training units

Source: own study.

The concept of training effectiveness can be defined as the systemic gathering of information and formulation of a value judgment about all elements of the officers’ training system. The funds allocated to training officers constitute an investment for the Police and, more broadly, the entire state. The purpose of training effectiveness evaluation is to obtain information on whether the training has delivered the previously anticipated results. First of all, you should check whether it has brought benefits. The assessment is done by gathering information on the results of the training and comparing them with the goals that were set before the training. This allows you to identify program weaknesses. In this context, assessing the effectiveness of training is very important because it allows you to state: – what is the effectiveness of the examined program in achieving the set goals, – to what extent did he meet the expectations of the police and officers, – did officers expand their qualification potential, – whether the transfer of new knowledge was carried out and whether as a result of this transfer the expected changes took place, which subsequently had a positive impact on the effectiveness of police resources management, – whether the training program has met its goals, – detecting strengths and weaknesses of the training, – has the appropriate program, content, methods been selected, – whether the training successfully met the expectations and needs of the participants, – which training participants benefited most or least from the training program.

The need for training is beyond doubt. The legitimacy of investing in this sphere is appreciated both by those who decide to allocate considerable funds for such a purpose, as well as those who undergo training processes. In order to take full advantage of the opportunities and opportunities arising from it, it should be remembered that the training and training of officers is a process that must consist of effectively functioning subsystems, none of these elements can be underestimated. Training goals and needs should be clearly defined so as not to miss the possibility of assessing the effectiveness of these activities (which should confirm their sense) and the assessment must take into account the largest possible spectrum of impacts at all levels of benefit. Policemen who have completed the candidate’s service have the opportunity to undergo basic vocational training to complement the curriculum differences between their previous training in the candidate service and uniform (full)

1344 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online basic training, but due to the professionalization of the armed forces, in particular in connection with suspen- sion from On January 1, 2009, the duty to undergo basic military service, on March 9, 2011, the last edition of the training in question ended.

Table 1. Types of basic vocational training

Duration Name of the training Legal basis (training days) Basic vocational training (SZP) Decision No. 821 KGP from November 19, 2007 124 Amendment: Decision No. 9 KGP of January 11, 2010 Amendment: Decision No. 347 KGP November 5, 2012 Basic vocational training for policemen, graduates of selected Decision No. 348 KGP from November 22, 2010 92 fields of study and people who pass a knowledge test covering Amendment: Decision No. 224 KGP of June 27, 2011. the content of education selected from the vocational training of policemen (SZPU) Basic vocational training for policemen who have completed the Decision No. 17 KGP of 11 January 2008 77 candidate service (SZPPK)

Source: own study.

Basic vocational training (see Table 1 above) can be provided by all Police training units (except for SZPU training, which cannot be implemented by the TSO in Łódź).

At the same time, regionalization, i.e. the allocation of garrisons to training units, is a major threat to the proper planning of the implementation of basic vocational training. Although basic vocational training is carried out by all Police training units, their limited training capabilities, uneven distribution across Poland and the size of individual garrisons mean that police are directed to undergo basic training to remote training units. In particular, this applies to the southern garrisons, within which only one training unit is located - SP in Katowice, currently with 740 training places. The most optimal training options are shown in the (see Figure 7 above).

Figure 7. Optimal training opportunities

Source: own study.

The (see Figure 7 above) below shows the maximum training needs.The maximum possibilities indicated by the training units will allow to obtain the following number of graduates per year: – basic vocational training (SZP) - 7607, – basic vocational training for policemen, graduates of selected fields of study and people who pass a knowl-

1345 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online edge test covering the content of education selected from the vocational training of policemen (SZPU) - 368, – vocational training for university graduates (SASW) - 1800, – specialized courses - 15966.

Figure 8. Maximum training opportunities

Source: own study.

Work in the Police is very difficult and requires full dedication from officers, because any shortcomings can have an impact and significance for the society and the fate of the policeman himself. It is associated with a very high risk, which is why police officers should be appreciated by their superiors all the time, because this is of great psychological importance to them and motivates them to perform their tasks more effectively. Despite the technological development, the most important capital for every organization is a human being, therefore it is necessary to create a management system that will motivate everyone to work and guarantee that they stay in the given position as long as possible and trigger thinking among officers that they are the most important link in the development of the Police. The key issue in the process of creating such a system is to adapt trainees’ expectations to all incentive systems.

Despite the fact that the Police is a public administration body that is responsible for the protection of public security and order, it must have an appropriate standard of human resource management in order to properly implement its tasks. Properly selected trainings allow training of police personnel. Each officer who undergoes appropriate training tailored to his requirements, acquires new skills that help him in getting to work and dealing with all situations encountered in the course of his service.

The analyzes showed what training policy looks like in police structures. All decisions related to the selection of the training offer for individual units are made very prudently and with great precision. Officers are appointed to them who should be included in selected trainings at a given moment. The selection of officers is conducted in great detail, because it involves very large financial outlays for all training for officers. The tasks that the Act imposes on the Police and other ordinances are extremely difficult to perform. Well-trained and motivated officers perform their tasks well, which ensures proper security for citizens. Through their tasks and the efficiency of their performance, the Police build their image in society as a professional and trustworthy citizen institution.

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References:

Adeniran, A.O., Hamid, M.J., Noor, H.M. (2020). Impact of information technology on strategic management in the banking sector of Iraq. Insights into Regional Development, 2(2), 592-601. https://doi.org/10.9770/IRD.2020.2.2(7)

Bańka, A. (2006). Career capital - conditions, development and adaptation to organizational and structural changes in the labor market [in] Z. Ratajczak, A. Bańka, E. Turska (red.), Contemporary psychology of work and organization, Katowice University of Silesia Pub- lishing House.

Bilan, Y., Mishchuk, H., Roshchyk, I. & Kmecova I. (2020). Analysis of Intellectual Potential and its Impact on the Social and Economic Development of European Countries. Journal of Competitiveness, 1, 22-38. https://doi.org/10.7441/joc.2020.01.02

Bilan, Y., Mishchuk, H., & Dzhyhar, T. (2017). Human capital factors and remuneration: analysis of relations, modelling of influence. Business: Theory and Practice, 18, 208 - 214. https://doi.org/10.3846/btp.2017.022

Bombiak, E. (2020). Advances in the implementation of the model of sustainable human resource management: Polish companies‘ experiences. Entrepreneurship and Sustainability Issues, 7(3), 1667-1687. https://doi.org/10.9770/jesi.2020.7.3(16)

Bramley, P. (2001). Training effectiveness assessment. Kraków: Publishing house ABC.

Domański, S.R. (1993). Human capital and economic growth. Warszawa: Publishing house PWN.

Griffin, R.W. (2007). Fundamentals of organization management. Warszawa: Publishing house PWN.

Jurgilewicz, M. (2017). The role of entities authorized to use or use means of direct coercion and firearms in the protection of public safety and order. Siedlce: Publishing house UPH.

Kostera, M., Kownacki S. (1996). Management of social potential of the organization. Career planning. Warszawa: Publishing house PWN.

Król, H., Ludwiczyński, A. (2007). Human resource Management. Creating the human capital of the organization. Warszawa: Publishing house PWN.

Lorek, M. (2017). Motivating in the Polish Police. Rzeszów: Publishing house of the Rzeszów University of Technology.

Mishchuk, H., Bilan, Y., & Pavlushenko, L. (2016). Knowledge management systems: issues in enterprise human capital management implementation in transition economy. Polish Journal of Management Studies, 14(1), 163-173. https://doi.org10.17512/pjms.2016.14.1.15

Pocztowski A. (2003). Human resource Management. Strategies - processes – methods. Warszawa: Publishing house PWN.

Pocztowski A. (2008). Human resource management. Kraków: Publishing house Antykwa.

Rae L. (1999). Training planning and design. Kraków: Publishing house ABC.

Ścibiorek Z. (2010). Investing in Staff. Toruń: Publishing house Adam Marszałek.

Szałkowski A., Miś A., Piechnik-Kurdziel A. (1996). Introduction to personnel management. Kraków: Publishing house AE.

Tyborowska J. (2006). Personnel Management. A must for human resources departments. Warszawa: Publishing house C. H. Beck.

Zbiegień-Maciąg L. (1996). Personnel marketing, or how to manage an employee in a company. Warszawa: Business Press.

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Marlena LOREK is a professor at the Department of Security Sciences at the Faculty of Management of Rzeszów University of Technol- ogy. Author of studies on inter alia management and internal security. ORCID ID: 0000-0002-6814-8162

Teresa PIECUCH is a professor at the Department of Entrepreneurship, Management and Eco-innovation at the Faculty of Management of the Rzeszów University of Technology. Author of studies on, among others, management and entrepreneurship. ORCID ID: 0000-0003-2656-662X

Jolanta ITRICH-DRABAREK is a professor at the Institute of Political Sciences of the Faculty of Political Sciences and International Studies of the University of Warsaw. Author of studies on, among others, personnel management in public administration as well as the professional ethics of state officials. ORCID ID: 0000-0001-7509-3561

Mirosław MINKINA is a professor at the Institute of Social and Security Sciences of the University of Natural Sciences and Humanities in Siedlce. Author of research on, among others special services, state security. ORCID ID: 0000-0002-2391-314X

1348 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 http://doi.org/10.9770/jssi.2020.9.4(20)

THE RELATIONSHIP BETWEEN SUPPLY CHAIN MANAGEMENT AND ORGANIZATION PERFORMANCE: A CASE STUDY

Boonthai Keawkunti1*, Chaithanaskorn Phawitpiriyakliti2, Chompoo Saisama3, Watcharin Sangma4

1,2,3,4College of Innovation Management, Suan Sunandha Rajabhat University, Bangkok, Thailand

E-mails: [email protected]; [email protected]; [email protected]; [email protected]

Received 18 November 2019; accepted 12 April 2020; published 30 June 2020

Abstract. The objective of the study is to examine the mediating impact of competitive advantage on the relationship of supply chain management (SCM) practices and firm performance of the pharmaceutical industry of Thailand. For this purpose, the questionnaires were distributed among the 1400 supply chain manager which yield a 40% response rate. Based on SEM analysis, it is found that customer relationship (CR), time to market (TM), postponement (POS) have a significant association with the firm performance. While, supplier partnership (SP), information quality (IQ), information sharing (IS) have an insignificant association with the firm performance. On the other hand, it is found POS, CR, IQ, IS, SP have also a significant association with the competitive advantage, whereas, POS is not having a significant association with the competitive advantage. In addition, the mediating effect shows that competitive advantage has a partial mediating among all of the SCM practices and firm performance of the pharmaceutical industry of Thailand. These findings show that competitive advantage is considered to be a significant mediator in the relationship of relationship of SCM practices and firm performance of the pharmaceutical industry of Thailand. The current added a body of literature in the form of empirical findings which could become an area of interest for the future research. The research is also beneficial for the supply chain managers to know about the importance of SCM practices to improve the firm performance through the competitive advantage. The research limitations and future directions are also discussed at the end of the study.

Keywords: supply chain management practices; competitive advantage; firm performance; pharmaceutical industry; Thailand

Reference to this paper should be made as follows: Keawkunti, B., Phawitpiriyakliti, C., Saisama, C., Sangma, W. 2020. the relationship between supply chain management and organization performance: a case study, Journal of Security and Sustainability Issues, 9(4), 1349-1361. http://doi.org/10.9770/jssi.2020.9.4(20)

JEL Codes: O32

1. Introduction

The need for effective SCM practices is increasing with time due to market globalization, and intensified competition situation exists in the market (Chetthamrongchai & Jermsittiparsert, 2019; Jermsittiparsert, Namdej, & Sriyakul, 2019; Somjai & Jermsittiparsert, 2019). These challenges force the organizations that they escalate their processes in a way that products are available at the right place within the right time and bearing very low cost that leads the organization towards the high profitability. This motive cannot be achieved without effective SCM practices. Thus, the practicing and understanding of SCM now become a vital prerequisite that helps the organization in staying alive in the global competition and enhance organizational performance by generating high profitability (Govindan, Mangla, & Luthra, 2017; Niño-Amézquita, Legotin, Barbakov, 2017). The effective practices of SCM not only enhance the performance of the individual entity but also enhance the performance of all organization associated with the supply chain (Gupta & Singh, 2015). Consequently, the SCM refers to the coordination that has strategic nature between the trading partners that achieve the dual goal of SCM: to enhance the individual performance of the entity and to enhance the performance of all the associated companies with supply chain. The SCM now becomes an effective competitive tool that eliminate JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online information flows from supply chain and make them able to compete the rivals (Mollel, 2015). Therefore, the attention of business managers, consultants and academicians have increased towards the concept of SCM. In addition, almost all of the organizations have now realized that SCM is an effective tool in building a sustainable competitive advantage for the products in the global market (Mollel, 2015).

The growing importance of SCM with respect to increasing competition and globalization creates an opportunity that this area should be investigated further. Although, several previous studies have been undertaken on the concept of SCM in different perspectives including; management information system, logistics and transportation, organization theory and operations management. Moreover, several theories were also used to explore the SCM concept in different perspectives, namely; competitive strategies, resource-based theory, industrial organization and cost analysis theory (Govindan et al., 2017).. However, the growing reputation of supply chain in the performance of the entities are still gaining the attention of the new researchers on the concept of SCM practices. Moreover, the concept of SCM is based upon two separate paths, namely; transportation and logistics management and supply management. As for as supply management is a concern, it involves the purchasing of goods and supplies them in a very low handling cost by applying the Just in time (JIT) technique. While transportation and logistics management mean the supply of the goods at the right place within the right time that increase the effectiveness of the overall supply chain, these two factors are necessary for the improvement of individual firm performance and performance of the whole supply chain. Based on all the above evidence, this study is also evaluating the firm performance with the help of SCM practices that provide a competitive advantage to the organization (Mollel, 2015).

The complexity and evolutionary nature of SCM are also the reasons for the attraction of researchers toward the practices of SCM. The focus of most of the previous studies had only on the upstream and the downstream side of SCM practices regarding the selection of supplier. The previous studies on the selection of the suppliers are supplier involvement, manufacturing performance, supplier selection, influence of alliances of suppliers, supplier performance and supplier orientation management (Walker & Jones, 2012). The role of the supplier on buyer and supplier relationship, supplier responsiveness and supplier attitude investigated only on the supplier side. Moreover, some of the studies deals with downward linkage among retailer and manufacturers and few studies consider both downward and upward sides of that relationship with the help supply chain simultaneously. However, several studies are available on the practices of the supply chain, both upwards and downwards streams. Moreover, the linking activities were detracted, and less attention had been paid with reference to SCM practices. Moreover, the previous studies have major focus on the developed economies but has a little attention on the developing economy, especially on the pharmaceutical industry of Thailand. Thus, based on this, the current study examined the role of SCM practices on competitive advantage and organizational performance on the food industry of Thailand.

SCM is one of the major tools that improve the firm performance. The pharmaceutical industry of Thailand is also a growing industry in the country. The involvement of SCM practices in this industry can also increase its performance and give them a competitive edge among other industries in the country (Alvarado & Kotzab, 2001). The improvement in the performance of the pharmaceutical industry due to the effective supply chain from 2009 to 2015. The figure 1 shows that the growth of the companies increased from 0% to 8% and average growth rate is 2% due to the supply chain. Moreover, the operating margin of the companies also increased from 0.01 to 0.17 and the average increase in operating margin was 0.1. In addition, inventory turnover also increased from 5 to 7 units due to the supply chain and the average increase in the turnover was seven units. Furthermore, return on capital and book value were also increased due to the effective supply chain implemented in the companies.

Based on the previous discussions, the aim of the study is to investigate the mediating impact of competitive advantage on the relationship of supply chain management practices and firm performance of pharmaceutical industry of Thailand. The current study was divided into the following sections, introduction, literature review, research methodology, analysis and findings, at last conclusions, limitations and future directions.

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2. Literature Review and hypothesis development

This section provides a review of the literature regarding the previous studies on the topic of SCM, competitive advantages and firm performance. This section is divided into subparts; the first part describes the SCM practices, the second part describes competitive advantage, the third part of the section provides the knowledge about organization performance and the rest of the sections show the literature of past studies on the relationships between the variables under study.

SCM Practices

SCM practices are the activities that are undertaken by the firms to increase the effectiveness of their supply chain. Moreover, (Zare Mehrjerdi 2009) further mentioned that the SCM practices include supplier partnership, continues the flow of the process, cycle time compression, and sharing technology information. Further- more, (Alvarado and Kotzab 2001) described in their study that the SCM practices include the core competencies, effective internal-organizational system, and understanding the supply chain practices. In addition, SCM practices also include the supply chain integration, JIT capabilities, information sharing and characteristics of the supply chain. (Chen & Paulraj, 2004). Additionally, agreed goals, risk and reward sharing, sharing information, cooperation and long term relation with partners are the major practices of the supply chain (Chen & Paulraj, 2004).

The SCM practices has been comprises internal and external practices of the firms that are used to make the supply chain within the organizations more sustainable with respect to three dimensions of the sustainability (Morali & Searcy, 2013). The firms which has good practiced about the sustainable supply chain are able to enhance their sustainable competences. Various scholars have been done a various research on the SCM practices. Nonetheless, a little attention has been reviewed in the extant literature on SSCM practices and case analysis has been used to discussed about the practices through diversified industries and has been explored the practices in the manufacturing industries (Verma, 2014).

Furthermore, several researcher has been used the qualitative method for analysis to investigate the combination of SCM and the best practices (Esfahbodi, Zhang, & Watson, 2016; Paulraj, Lado, & Chen, 2008). In addition, (Paulraj et al. 2008) further categorized the SSCM practices into three perspectives that are “strategic orientation, collaboration, supply chain continuity, risk management and pro- activity”. Whereas, Paulraj, Chen, and Blome (2017), further identified SSCM into four dimensions which are process design, product design, and sustainable association with the customer as well as suppliers. Likewise, (Esfahbodi et al. 2016) have also focused on four areas which are, “sustainable design, sustainable distribution, sustainable production and investment in the SSCM practices”. Nevertheless, SSCM practices which are discussed in the extant literature streams has the inconsistent findings and also there is little attention on the combined effect of SSCM practices. Therefore, current research has been endeavored to implement the SSCM practices. For this purpose, in the current study has been proposed a five SSCM practices dimensions which are taken about the core practices into the account which are entirely based previous literature stream.

Competitive advantage

Competitive advantage is the ability of the organization to compete in the market with its competitors. Moreo- ver, the competitive advantage also refers to the extent of the defensible position under the competition over the competitors. In addition, also refers that the capability of the company that allows to differentiate it from the competitors in the market (Mentzer, Min, & Zacharia, 2000). Furthermore, (Pfeffer, 1994; Pfeffer & Villeneuve, 1994; Tay, Rahman, Aziz, & Sidek, 2015; Walker & Jones, 2012) found in their study that the capabilities that provide the competitive advantage to the company include; premium price, dependable delivery, customer quality, production innovation and competitive pricing. The firm that has above-mentioned capabilities is considered that the firm has a a competitive advantage over its rivals in the market.

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Firm performance

Organizational performance is defined as the ability of the organization that achieves the market- oriented and financial goals of the organization. The short-term goals of the implementation of SCM practices are to enhance the productivity, cycle time and inventory of the firm (Podsakoff & MacKenzie, 1997). In addition, the long-term goals of the implementation of practices of SCM are to enhance the profits, market share and investment of the company and all the other entities of supply chain. “Financial metrics” are considered as a vital tool of comparing and measuring organizational behavior over time (Dess & Robinson Jr, 1984). The effective supply chain leads to increase the organizational performance by providing a competitive advantage to the firm. Most of the previous studies used the financial as well as market criteria to measure the organizational performance variable of the study.

SCM practices and firm performance

Several studies examine the capabilities of SCM practices with reference to organizational performance, and this section of the study provides a review of previous literature on the relationship between SCM practices and organizational performance. A study by (M. Lo 2013) conducted on the supply chain of several industries in Hong Kong and Taiwan. They found that the organizational performance in term of customer satisfaction, strategies of supplier participation and reduction in the cost of products are influenced by the effective supply chain practices. They also revealed that effective SCM practices are a necessary element for the improvement of organizational performance of Hong Kong and Taiwan. Moreover, (Wook Kim 2006) conducted the study on firms and explained that SCM practices are the vital tool for the logistics performance. In addition, effective SCM practices are not only influenced the market performance of the firm but also have influenced the financial performance of the firm positivity. Furthermore, (Germain, Claycomb, and Dröge 2018) conducted the study on the variability of SCM process to check the level of inconsistency regarding the impact of SCM practices and revealed that variability in the process of SCM could improve the financial performance of the firm. Based on all studies mentioned above, this study develops the following hypothesis:

H1: Customer Relationship has a significant association with the firm performance of pharmaceutical industry of Thailand.

H2: Supplier’s Partnership has a significant association with the firm performance of pharmaceutical industry of Thailand.

H3: Information quality has a significant association with the firm performance of pharmaceutical industry of Thailand.

H4: Information system has a significant association with the firm performance of pharmaceutical industry of Thailand.

H5: Postponement has a significant association with the firm performance of pharmaceutical industry of Thailand.

H6: Time to market has a significant association with the firm performance of pharmaceutical industry of Thailand.

SCM and competitive advantage

The SCM practices enable that create a competitive advantage for the firm in the market. In addition, (Liao, Hu, & Ding, 2017) conducted the study on sustainable practices of the supply chain by using secondary data and indicated that sustainable practices of SCM could create a competitive advantage for the firm. Moreover, (Wu, Tseng, Chiu, and Lim 2017) mentioned that the topic of competitive advantage with practices of SCM was ignored by previous studies. They also indicated that competitive advantage could be achieved through the effective practices of the supply chain. Similarly, a study conducted by (Ploenhad, Laoprawatchai, Thongrawd, and Jermsittiparsert 2019) on the industry and indicated that positive practices SCM could be able to bring

1352 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online the competitive advantage for the SCM implemented firmly. Based on all studies mentioned above, this study develops the following hypothesis:

H7: Customer Relationship has a significant association with the competitive advantage of pharmaceutical industry of Thailand.

H8: Supplier’s Partnership has a significant association with the competitive advantage of pharmaceutical industry of Thailand.

H9: Information quality has a significant association with the competitive advantage of pharmaceutical industry of Thailand.

H10: Information system has a significant association with the competitive advantage of pharmaceutical industry of Thailand.

H11: Postponement has a significant association with the competitive advantage of pharmaceutical industry of Thailand.

H12: Time to market has a significant association with the competitive advantage of pharmaceutical industry of Thailand.

Competitive Advantage and Organizational Performance

Several studies examine the capabilities of competitive advantage with reference to the organizational performance and provides the review of previous literature on the relationship of “competitive advantage” and organizational performance. Moreover, conducted the study on food firms and revealed that the competitive advantage creates the extra demand for the products that enhance the performance of the organization (Rah- man & Hamid, 2019). Similarly, a study conducted by (Akhir, Ahmad, Ahmad, and Hashim 2018); (Kasasbeh, Harada, & Noor, 2017) on the manufacturing companies of Australia. They indicted in their study that growing competition in the market is required to take the competitive advantage on the rivals exist in the market. This competitive advantage can lead the organization to improved financial performance. In addition, (Kumar and Pansari 2016) and (Ashrafi and Mueller 2015) analyzed in their study that any type of competitive advantage can improve the process of the business that can lead the business towards high performance. Based on all studies mentioned above, this study develops the following hypothesis:

H14: Competitive advantage has a significant association with the firm performance.

Mediating Role of Competitive Advantage on the Relationship of SCM Practices and Organizational Performance

The effective practices of SCM can create a competitive advantage for the firm, and this advantage improved the performance of the firm. A study by (Uca, Çemberci, Civelek, and Yılmaz 2017) and (Cao and Zhang 2011) found that the supply chain improves the collaboration between the firm and its suppliers, that create collaboration advantage for the firm that helps the organization to improve its performance. Similarly, (Escorcia- Caballero, Moreno-Luzon, & Chams-Anturi, 2019) investigated a study and indicated in his study that SCM practices increase the internal and external integration, and this competitive advantage can increase the firm performance. Moreover, the practices of supply chain enhance the relationship with suppliers, vendors and customer. This competitive advantage also increases the performance of the firm (Ploenhad et al., 2019). Based on all the studies mentioned above, this study develops the following hypothesis:

H14: Competitive advantage has mediated the relationship of Customer Relationship and firm performance of the pharmaceutical industry of Thailand.

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H15: Competitive advantage has mediated the relationship of Supplier’s Partnership and firm performance of the pharmaceutical industry of Thailand.

H14: Competitive advantage has mediated the relationship of information quality and firm performance of the pharmaceutical industry of Thailand.

H14: Competitive advantage has mediated the relationship of information sharing and firm performance of the pharmaceutical industry of Thailand.

H14: Competitive advantage has mediated the relationship of postponement and firm performance of the pharmaceutical industry of Thailand.

H14: Competitive advantage has mediated the relationship of Time to market and firm performance of the pharmaceutical industry of Thailand.

Based on previous literature review and hypothesis development section, the research framework of the study is formulated in the Figure 1

Competitive advantage Price/COST Customer Relationship Quality Product Innovation

Supplier’s Partnership

Information Quality

Information Sharing Firm Performance

Postponement

Time to Market

3. Research Methodology

Primary data were collected through a questionnaire for analysis. The list of the respondent was collected from the “Department of pharmaceutical Industrial Work Thailand”, respondents were the managers of the supply chain working in the pharmaceutical industry of Thailand. However, the companies who have not the separate department of SCM, they data were collected form the top-level executives or production mangers who know the practices of SCM. At the first stage, 1,400 respondents were selected and send them the questionnaire for data requirement. Only 586 questionnaires were returned from the respondents out of them 26 responses were not meet the satisfactory criteria and excluded from the analysis. Thus, only 560 valid responses were remained for analysis that was approximately 40% response rate. Furthermore, many of the questions in the survey were changed according to the environment and nature of the study and its scope. Five points Likert scale was used to answer the questions (from 1 for strongly disagree to 5 for strongly agree) (Ahmad, Bin Mohammad, & Nordin, 2019).

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Research Instrument

SCM practices have five dimensions, the first dimension is strategic supplier partnership (SSP) that have six items, customer relationship (CR) is the second dimension that has five items, information sharing (IS) is the third dimension that has six items, information quality (IQ) is the fourth dimension that has five items and Postponement (POS) is the last dimension that has three items. In addition, competitive advantage also has five dimensions, the first dimension is price/cost (P/C) that have two items, quality (Q) is the second dimension that has four items, delivery dependability (DD) is the third dimension that has three items, product innovation (PI) is the fourth dimension that has three items and time to market (TM) is the last dimension that has four items. Finally, organizational performance is the one- dimensional variable that has seven items.

Data Collection Procedure

An email sent to the supply chain managers and other top-level managers where the separate SCM department did not exist, to obtain the consent regarding data collection. Total 1,400 questionnaires were sent to the managers after getting consent from them, but only 586 responses were returned. Moreover, 26 responses out of 586 were not up to the standard and eliminated from the analysis. Finally, 560 valid responses were selected for analysis purpose.

Analysis of the study

The analysis of the study is consisting of two section one is measurement model and other one is structural model.

Measurement Model

This study used the PLS-SEM to investigate the relationships among under study variables. The validity of the items and constructs must be check before to test the relationships between variables. There are four criteria to check the convergent validity of the items (Hair, Hollingsworth, Randolph, & Chong, 2017); the first criteria is outer loadings that should be greater than 0.50. According to the results of this study, the outer loadings of almost all items are greater than 0.05 that means no problem with convergent validity. The second criteria are Cronbach’s Alpha that should be greater than 0.07, and the results show that the value of Cronbach’s Alpha is more than the limit that means no issue with convergent validity. The third criteria are composite reliability (CR) that should be greater than 0.07, and the results show that the value of CR is more than the limit, that means no issue with convergent validity. The last criteria are Average Variance Extracted (AVE) that should be greater than 0.05, and the results show that the value of AVE is more than the limit that means no issue with convergent validity (Hair et al., 2017; Henseler, Ringle, & Sarstedt, 2015). In addition, the validity of the model could also be assessed by the discriminant validity of the model. The discriminant validity of model could be assessed by following three areas, for instance, fornell lacker, HTMT, and cross loading. In the fornell lacker the diagonal value should be greater than from other value and for HTMT the construct association should be less than from 0.90 (Henseler et al., 2015) (See table 1, table 2, table 3, figure 2).

Table 1. Measurement Model Results

1st Order Constructs 2nd Order Constructs Items Loadings Alpha CR AVE Firm Performance FP1 0.814 0.907 0.931 0.729 FP2 0.888 FP3 0.853 FP4 0.895 FP5 0.816 Customer Relationship CR1 0.826 0.905 0.934 0.78 CR2 0.909 CR3 0.92 CR5 0.875

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Supplier Partnership SP1 0.783 0.869 0.902 0.607 SP2 0.849 SP3 0.756 SP4 0.734 SP5 0.723 Information Quality IQ1 0.856 0.908 0.935 0.784 IQ2 0.916 IQ4 0.885 IQ5 0.883 Information Sharing IS1 0.82 0.869 0.911 0.718 IS2 0.864 IS4 0.82 IS5 0.884 Postponement POS1 0.882 0.844 0.906 0.763 POS2 0.862 POS3 0.875 Time to Market TM1 0.945 0.942 0.958 0.851 TM2 0.92 TM3 0.915 TM4 0.91 Price / Cost PC1 0.958 0.915 0.959 0.922 PC2 0.962 Product Innovation PI2 0.823 0.57 0.823 0.699 PI3 0.849 Quality Q1 0.872 0.908 0.936 0.785 Q2 0.93 Q3 0.915 Q4 0.824 Competitive Advantage IM 0.247 0.892 0.852 0.675 PC 0.733 PI 0.842 Q 0.851

Note: CR- Customer Relationship, TM- Time to Market, IQ-information quality, IS-information sharing, FP-firm performance, POS- Postponement, TM-Time to Market, PC- Price / Cost, PI- Product Innovation, Q- Quality, CA-competitive advantage, SP- supplier partnership.

Table 2. Discernment Validity: Fornell Lacker

CR TM IQ IS FP PC PI POS Q SP CR 0.808 TM 0.071 0.760 IQ 0.562 0.119 0.90 IS 0.796 0.056 0.589 0.95 FP 0.511 0.164 0.533 0.499 0.86 PC 0.275 0.032 0.41 0.416 0.557 0.845 PI 0.476 0.104 0.715 0.578 1.026 1.079 0.865 POS 0.693 0.087 0.698 0.704 0.579 0.49 0.748 0.90 Q 0.511 0.177 0.46 0.495 0.836 0.482 0.846 0.607 0.780 SP 0.334 0.076 0.579 0.469 0.615 0.751 0.451 0.483 0.513 0,790

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Table 3. Discernment Validity (HTMT)

CR TM IQ IS OP PC PI POS Q SP CR TM 0.071 IQ 0.562 0.119 IS 0.796 0.056 0.589 OP 0.511 0.164 0.533 0.499 PC 0.275 0.032 0.41 0.416 0.557 PI 0.476 0.104 0.715 0.578 1.026 1.079 POS 0.693 0.087 0.698 0.704 0.579 0.49 0.748 Q 0.511 0.177 0.46 0.495 0.836 0.482 0.806 0.607 SP 0.334 0.076 0.579 0.469 0.615 0.751 0.487 0.483 0.513

Structural Model of the Study

The SEM analysis of the study shows that customer relationship (CR), Postponement (POS), time to market (TM) have positive and significant relationship with the firm performance, while supplier partnership (SP), information quality (IQ), information system (IS) have insignificant association with the FP. On the other hand, the key findings show that CR, TM, SP, IQ, and IS have positive and significant association with the competitive advantage. However, POS has a negative and insignificant association with the CA. Moreover, the indirect effect of the study show that CA is partially mediates among all the supply chain management practices (POS, IQ, TM, IS, CR, SP) and FP. These findings indicate that CA is considered to be a significant mediating variable which could help to enhance the FP of pharmaceutical industry of Thailand. This shows that supply chain management practices (SCMP) through the CA could increase the FP of the pharmaceutical industry of Thailand. All of the results of the findings are depicted in following Table 4.

Table 4. Direct and Indirect Effect of the Model

Beta SD Statistics P Values Results CR-> FP 0.202 0.075 2.698 0.007 supported SP> FP 0.043 0.079 0.546 0.586 Not supported IQ ->FP -0.172 0.177 0.969 0.333 Not supported IS->FP 0.054 0.112 0.483 0.629 Not supported POS->FP 0.259 0.067 3.878 0.000 supported TM->FP 0.242 0.08 3.022 0.003 supported CR-> CA -0.153 0.07 2.19 0.029 supported SP> CA 0.281 0.056 5.025 0.00 supported IQ ->CA 0.203 0.064 3.172 0.002 supported IS->CA -0.137 0.067 2.043 0.042 supported POS->CA -0.055 0.082 0.672 0.502 Not supported TM->CA 0.281 0.084 3.325 0.001 supported CR-> CA-> FP 0.249 0.071 3.518 0.000 supported SP> CA-> FP 0.244 0.086 2.835 0.005 supported IQ ->CA-> FP -0.178 0.075 2.375 0.018 Supported IS->CA-> FP 0.281 0.055 5.113 0.000 supported POS->CA-> FP 0.218 0.072 3.022 0.003 supported TM->CA-> FP -0.15 0.065 2.304 0.022 supported

Note: CR- Customer Relationship, TM- Time to Market, IQ-information quality, IS-information sharing, FP-firm performance, POS- Postponement, TM-Time to Market, CA-competitive advantage, p<0.05

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Figure 2. Structural model of the study

Conclusion and Discussion

This last section of the study provides a discussion regarding the results that are mentioned above in the study. Moreover, it also provides the comparison of current study results with the results of past studies, and finally, it presents the conclusion, the suggestion to future researchers and limitations of the study. Increase the performance of an organization is the prime goal of every personal in the world. The focus of the organization is only on the enhance the performance by applying different strategies and tools in the business processes. Supply chain practices the major tool that boosts up the process of the business in a way that it enhances the capacity of the firm to perform better and generate more profit for the business. This study also investigated the SCM practices impact on the performance of the business with the mediating role of competitive advantage. The results revealed that longitudinal in nature. Thus, this study is highly recommended to the future research that the incorporate the above-mentioned gaps and explore this area in a different perspective who found that supply chain gains the competitive advantage that achieves the high-performance goal of the firm. Finally, this study concluded that effective practices of SCM could increase organization performance and also brings a competitive advantage for the firm. In addition, competitive advantage has a positive association with organizational performance. Moreover, it also concluded that SCM practices bring the competitive advantage that leads the companies

1358 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online towards high financial and market performance. Thus, the competitive advantage mediates the relationship between the practices of SCM and organizational performance.

This study has several limitations that are the gaps for future researchers. This study uses only one factor to measure the performance of the firm. There are several factors are also existing that influenced the performance of the firm. The scope of the study is very limited, only one industry is used for the analysis and ignored the other important industry. Moreover, this study focusses only one country and ignored the cross-country analysis. In addition, the study was consisting of cross-sectional research design in which collect a data at one time, therefore a future research could be done which is longitudinal in nature.

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Wu, K.-J., Tseng, M.-L., Chiu, A. S., & Lim, M. K. (2017). Achieving competitive advantage through supply chain agility under uncertainty: A novel multi-criteria decision-making structure. International Journal of Production Economics, 190, 96-107. https://doi. org/10.1016/j.ijpe.2016.08.027

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Boonthai KEAWKUNTI is a Lecturer of Innovative Management Program, College of Innovation Management, Suan Sunandha Ra- jabhat University, Thailand. His research areas are Business Administration, Innovation Management, and Leadership.

Chaithanaskorn PHAWITPIRIYAKLITI is an Assistant Professor of Professional Football Management Program, College of Inno- vation Management, Suan Sunandha Rajabhat University, Thailand. His research areas are Innovation Management, Digital Marketing, and Sport Management.

Chompoo SAISAMA is a Lecturer of e-Sport Management Program, College of Innovation Management, Suan Sunandha Rajabhat University, Thailand. Her research areas are Innovation Management, e-Sport Management and Marketing.

Watcharin SANGMA is a Lecturer of Innovative Management Program, College of Innovation Management, Suan Sunandha Rajabhat University, Thailand. His research areas are Innovation Management, Industrial Management, and Materials Handling Technology. ORCID ID: orcid.org/0000-0002-9667-3730

This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/

1361 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online

1362 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 http://doi.org/10.9770/jssi.2020.9.4(21)

UNDERSTANDING SOCIAL MEDIA EFFECTS ACROSS DIFFERENT PARTIES’ INTERACTIONS

Somdech Rungsrisawat1, Thitinan Chankoson2

1Suan Sunandha Rajabhat University, Bangkok, Thailand 2Faculty of Business Administration for Society, Srinakharinwirot University, Bangkok, Thailand

E-mails: [email protected]; [email protected]

Received 10 June 2019; accepted 21 Aril 2020; published 30 June 2020

Abstract. This study examined the contagion effects of social media on different parties, such as producers, retailers, and consumer. Further, we empirically investigate the contagion effects of the social media and their ultimate impact on multiple performance measures. The findings give new insights into the contagion effects of social media usage across the distribution channel and important social influence mechanisms that enhance these effects. In line with the hypothesis, efficient use of social media contributes to retailer and brand performance, and consumer–retailer loyalty. In light with the advancement of technologies and growth in social media applications, this study provides a framework to promote usage by supply channel, which ultimately influences performance-related outcomes.

Keywords: social media, retailer, contagion, purchaser - provider association, association trading

Reference to this paper should be made as follows: Rungsrisawat, S., Chankoson. T. 2020. Understanding social media effects across different parties’ interactions, Journal of Security and Sustainability Issues, 9(4), 1363-1377. http://doi.org/10.9770/jssi.2020.9.4(21)

JEL Codes: O31, O35

1. Introduction

In recent years, social media evolves the trading framework and reexamine the traders’ interaction with each other through the medium of supplying and coordination with their clients (Jermsittiparsert, Sutduean, & Sriyakul, 2018, 2019; Yunus, Susilo, Riyadi, Indrasari, Putranto, 2019; Ajina, 2019; Rasul, Hoque, Arefin, 2020). Global survey shows that among 7.676 billion populations 4.388 billion peoples are internet users and 3.484 billion peoples using social media and they are active social media users. In Thailand, among total population of 69.24 million, approximately 57.00 million are internet users and 51.00 million are active social media users (statista digital report 2019). With this incredibly growth of social media users, companies and enterprises consolidate social media implications for marketing strategies. Clients spent time on web-based communities or networks to connect peoples, share data, and search new services. Recently, Lazada Thailand was found one of the favorite websites for the online shoppers with around 32.84 million people visit the website, where as Jib has been visited by 2.52 million people (satista survey report). In 2018, E-commerce growth rate of Thailand has increased by 14% and that rate is expected to touch 20% in the current year (EDTA, Electronic Transactions Development Agency report). Nowadays, online clients connect reseller on web-based networks and resellers and brands are fully utilizing the advantageous factor by promoting their services and products and to make strong coordination with their clients. Web based networks modified the way for the interaction of sales person and clients, incremented engagement through web based network release productive outcomes for marketing and sales firms if sale person use this facility in appropriate way (Agnihotri et al., 2016). In conformity by Thailand Marketing Research Society, 71% of smartphone Thai users purchase online, which is an average of two times in a month, and 90% are expected to purchase through internet in the future.Web based networks utilization has growing across busi- JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online ness to customer (B2C) mechanism and performing much visible to business to business (B2B) forums. Around 93% B2B sales person facilitate by utilization of social media to communicate with their clients (Holden-Bache., 2011), each firm using on average twenty web based accounts for their connection with their clients, their business partners, users and shareholders. Web based networks resources are growing as an attractive part of B2B marketing for personal communication and coordination in business (Karjaluoto et al., 2015). As company hope to shape powerful relations to their clients in aggressive business area, facilitation of web based media network resources effectively impact company execution by client commitment (Trainor, 2012). Beyond the global and immensely increased concerns in web-based media, empirical study took place only in its inception, specifically B2B context. The purpose of this study is to examine the utilization of web-based medium by seller, resellers and clients. A person exhibit contagion effect on each other by web-based ties and interactions (VanderWeele, 2011). First, we construct a powerful logical base related to social media by creating and authenticating social media measurement at three extents. Second, we evaluate social media effectiveness for improving business execution. Further, we investigate factors that may improve conveyance of social media among the medium levels. Thus, this study gives insight to officials and scholars about social media absorption. So, we provide our logical structure and hypothesis, and after that we provide the outcomes of two investigations. Our primary investigation presents to organize social media utilization measurements, then in further investigation, data has been collected at different levels from market employees of a brand, reseller medium partner of the brand and clients who relate to those resellers.so we evaluate results, and conclude significant recommendations for scholars and officials.

2. Literature Review

Contagion theory

The word ‘contagion’ itself describe as the infection which spread rapidly through contamination. The contagion theory of mutual attitudes can be explained upon the idea that state of minds and thoughts become contagious under specific group of people (Thaker et al., 2020). The contagion theory is strongly related to a writer named Gustave Lebon. The concept that sentimental state can rapidly spread among peoples without their knowledge is referred as emotional contagion. Social contagion may refer as the rapid spread and dispersion of opinion across a group of people and the consequence of these opinions together on single person attitude (Anglin et al., 2018). Social contagion take place when individual exchange their reviews after communicating other individual or group of people (Khoiruddin & Wijayanto, 2017). Web based social communication through social media, attains high importance and has been investigated widely (Berger, 2014). The consumer plays significant role because they influence other user opinions. This cause a rapid spread of facts across different networks as stated by social contagion theory in marketing investigation studies (Yuen et al., 2018). McFarland et al. (2008) highlighted that supply chain of transmission is comprised by three types of imitation adapted from (Grewal & Dharwadkar 2002) which are reflexive imitation, normative imitation and compliant imitation. In reflexive imitation, a firm practice are similar to the past practices of opponents (Major et al., 2016). It can also be happened when companies see similarities because mutual identities establish mutual impression of competitive situations. Compliant imitation can be defined as the imitation generated when a company react to inter- department reliance and is productively influence by the coherency proposed from interdependence in B2B communication. The imitation arises by effective socialization and communication between similar competitors in an organizational environment is referred as normative imitation. Reflexive imitation happened when a firm try to follow their competitor past strategies for success. Normally reseller seek seller to find out the best possibilities to publicize seller brand. Those brands have an important role to their own identity. Seller concentrates on creating identification mechanism to encourage the presentation of the brand across the medium. Mostly of these mechanisms may contain web-based efforts. Reseller tries to follow this mechanism in the supply chain for their growth increment. Finally, we recommend that in seller-reseller communication contagion is basically conducted by reflexive imitation. As we studied before, normative imitation is directed by dedicated communication and mutual understanding. For clients, who related to any group particularly are origin of dignity, honor, satisfaction and commitment. In addition, clients look for active resellers and brands that they own as enlarge- ment of their own identities, especially for frequent buyers. So, we concluded that normative imitation increases contagion influence of web-based media utilization from reseller to client (see figure 1).

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social media utilization

Figure 1. Hypothesis Impact

This study finds that social media promote two-way communications (i.e. upstream and downstream). This communication normally started by one belongs to upstream medium, web-based media is beneficial for two- way communication. The contagion effect of web-based media by this communication is, participants belongs to upstream medium may change the manner of communication with participants belong to downstream medium, so the outcome carry reflexive imitation and normative imitation.

Ha (1): the rate of social media utilization of reseller increases when seller salesperson social media utilization increased.

Ha (2): the rate of social media utilization of client increases when reseller social media utilization increased.

Moderating effects

Behavioral contagion may refer as to support group communication that may assist activity alterations, high vigilance and state matching (Massen et al., 2016). It has been strongly recognized that if firms can conduct their marketing executions to enhance client behavior and goals, it will influence buyer’s attitude (Evanschitzky et al., 2017). So, we evaluate three factors of social affection, these are client contact intensity, brand repute and work ambidexterity. It may help social media enhancement across mediums. The client contact intensity can be defined as the amount of time, channel participant spent with their client. It possesses strong communication and socialization, so provide interaction and awareness among participant of respective medium. Companies with high degree of client contact provide a higher degree of creative corporation energy and, as a result, possibilities for achievement increases (Kipfelsberger et al., 2018). Brand repute may define as the amount to which

1365 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online participants belongs to upstream medium are recognized as persistent, honest and reliable. Reseller and seller repute supposed to be enhanced and reduce the relational value and impact across medium members. Work ambidexterity comprises of company’s capability to both examine and exploit service-related facilities. With more utilization of service dominant marketing, the ability of company to impact with medium participants increases. So, we evaluated that all the three disciplines moderate the contagion effect of web-based media utilization among mediums, in the way that the relation strengthen when each discipline is greater instead of lesser.

Client contact Intensity

Client contact can be explained as the extent to which employees have the chances to face, coordinate and interact with clients (Kipfelsberger et al., 2018). Client contact intensity can be examined by upstream medium participants (for example, seller or reseller) about the intensity of contact with downstream medium participants. Thus, we suggest that the resultant relationship by greater degree of contacts is considered to be strong tie relationship.Tie strength refers to the capacity or affection of relationship among users in web-based media (Gong et al., 2018). In case of interpersonal communication, strong tie refers to close friends attaining higher level of communication (Wang et al., 2016). Structure with strong ties thus undergoes more frequent information flow, as reliability becomes a basis for information and intelligence interchange, in addition to taking risk. Therefore, we conclude

Hb (1): The rate of client communication moderates the relationship among seller and reseller web-based media utilization, in the way that, when rate of client communication is high the relationship become strong.

Hb (2): The rate of client communication moderates the relationship among reseller and client web-based media utilization, in the way that, when rate of client communication is high the relationship become strong.

Brand Repute

Companies struggle for brand reputation because they know that with strong repute among their items or products can believe increase sale’s rate, in this way being more influential than others (Loureiro & Kaufmann, 2016). According to (Hemsley et al., 2016), the role of brand repute is very significant in order to identify client satisfaction for various failures. The fact that brand repute may protect the unfavorable results of service failure recommends that client may like to provide one more opportunity to the brand with good repute. Resellers and clients supposed to have those items which support brand repute beneficially. These demanded resources encourage the possibility of reseller achievement and support client a way to manage their own concepts. There are so many possibilities, a reseller ‘s brand is an operation of the seller brands it offers to its clients. Thus, brand repute is highly significant not only for client in managing their concepts as well as for the reseller in shaping its individuality as an appropriate source of supported products. Thus, we propagate that the reflexive and normative impacts that supports extend of web base media among different mediums will be powerful when seller and resellers exhibit supportable repute.

Hc (1): repute of seller’s brand (in a view of reseller) alters the relationship among seller and reseller social media utilization, in the way that when brand repute is favorable the relationship strength will high.

Hc (2): repute of reseller’s brand (in a view of client) alters the relationship among seller and reseller social media utilization, in the way that when brand repute is favorable the relationship strength will high.

Service ambidexterity

The idea behind ambidexterity can be defined as an organization capability to varying and sometime competitive, strategic goals simultaneously (Hahn et al., 2016). Organizational ambidexterity defines as the capability of an organization to explore and exploit at a same time to compete in grown technologies and businesses where performance, command and gradual progress are awarded and to compete in grown technologies and

1366 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online businesses where elasticity, independence, and testing are required (O’Reilly & Tushman, 2013). We enhance the idea of ambidexterity attitude to relationship growth in the seller-reseller-client trine, particularly as it is associated to supply and betterment of service. Seller investigates opportunities to empower their relationship with reseller while at the same time exploiting their current relationship with reseller and constantly seeking for latest opportunities. Reseller on the other hand exploits strength in their current policies and relationships with old clients, and also seeking for latest opportunities. These qualities of seller and reseller strengthen ties and support web-based learning, in addition they help in the dispersion of concepts and relatable attitudes among participants of channel. Especially, seller and reseller that trying to evaluate requirements and satisfy clients through exploration and exploitation effectively increase the relationship dimensions that impact echoic absorption of web-based media for improving seller-reseller and reseller-client interaction.

Hd (1): seller service ambidexterity directs the relationship among seller and reseller social media utilization, in the way that when ambidexterity is constructive the relationship strength increases.

Hd (2): Reseller service ambidexterity directs the relationship among client and reseller social media utilization, in the way that when ambidexterity is constructive the relationship strength increases.

3. Association Trading

Social media utilization, loyalty, and performance

Social media utilization across firms has increased immensely. Firms, these days are constructing and managing web based public pages to enhance their social network importance, increase organizational concerns, and develop communication with web based users (Parveen et al., 2015). By increased utilization of social media, it must be investigated; either this addition is influencing efficiency related results such as dedication and sale at brand or shop level.

Loyalty is a significant idea connected with redundant buying behavior and more client spend (Srivastava & Kaul, 2016). Client and reseller loyalty propagate when a reseller continuously provides excellent value that is appeared in the client attitude for buying products. Now a day, reseller utilized web base mediums to collect client details and reviews which enable reseller to rapidly adapt to modify client interests or to react to their service failures. Clients now looking for absolute undergo and in result loyalty increased, with resellers who utilize social media. While client utilize web-based media to involve with resellers, it supposed to empower the communication and build a must customized mutual relationship.

Further, a web base medium allows firms to interact on increased personal level. Reseller may involve client through direct communication, respond quickly to dissatisfaction, and provide client with latest offerings.

H(e): Increment in client’s social media utilization will increase client and reseller loyalty.

Retailer social media usage and performance

Organizations with stronger interactions can enhance performance by efficient center development, inter-organization practices, information interchange, product alteration, team efficiencies, facts evaluation, and seller relations (Palmatier et al., 2006). On the basis of incremented rate of social media utilization, it is obvious that resellers are rapidly integrating the use of web-based communication networks into their marketing interaction approach. Many of them realize that social communication is about connecting user having similar interests (Kunz & Hackworth, 2011). Reseller utilize web-based networks to involve and communicate with their client, sellers can facilitate social media for more mutual links with resellers. Seller may also utilize social networks to tell occurrences, stimulations, customization, advancements, and organizational happenings. As we investigate before, an anticipated contagion effect through entire supply chain, Ha (1): the rate of social media utilization of reseller increases when seller salesperson social media utilization increased. The increment in contagion ef-

1367 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online fect influences the reseller web network utilization in a way that, it can engage most of the seller’s views into its interaction with clients through social media. In response, sale person publicizes seller brand and reseller publicize the seller brand. With more utilization of web base media by reseller not only brand performance increases but also promote reseller performance. So, we evaluate

Hf (1): with the rate of utilization of social media increases by reseller, brand performance under reseller also increases

Hf (2): with the rate of utilization of social media increases by reseller, sale performance of reseller also increases

Client–reseller loyalty and performance

Study reveals that over cross are of industries, the more a firm keeps a loyal client, the more benefit that client generates (Griffin et al., 2002). Client loyalty is one of the greatest invisible strength than a firm can have (Cossío et al., 2016). According to our past research, client loyalty can be calculated by their attitudes to buy products. Higher loyalty refers to the client’s high tendency for buying continuity, which effectively increase the company efficiency or performance. Loyal clients of reseller purchase more products and more interested to know about new customizations and products, also suggest a reseller to other peoples. In case, where client is loyal to a particular reseller, they often go to reseller and choose reseller among its competitors (Evanschitzky et al., 2012).

Hg: client – reseller loyalty improves (1) seller brand sale performance and (2) reseller sales performance

Study 1: Social media scale development

4. Methodology

Construct definition and domain

To construct a miser scale, substitute of the complete range of web based media utilization manner, we pursue standard scale development process recommended by Nunnally (1978). First, we construct a detail of items that catches extent of social media utilization. Using client-facing technology measurement as a model, we construct details of behaviors appropriate for identifying different web-based media utilization behaviors. To know these behaviors, we request 12 managers of retail outlets in Thailand and 12 business to business sales people in Thailand to write the web based media behaviors or practices they involve in, to enhance their business, containing particular, and activities related to job instead of individual socializing activities. Almost all participants specify that they are using more than one account, one account related to business objectives and other account for personal activities.

Further, we request members to create a detail list of social media utilization behaviors they are involve in. After that we matched the details generated by managers and sales persons with the details of behaviors investigated before, for example client relation management technologies, WOM activities etc. we later add a list of items to show behaviors that we identified in the past studies and had not been mentioned by our participants. In the end, we added some activities considered by famous press. Finally, our list comprises of 31 activities.

Item generation and refinement

We proposed detail list of modules to a board of 15 educational members, professional in the area and common clients, who recommended some more modules, suggest deletion of some modules, and correct the structure of many modules. It also has discussed, that either particular web-based media applications should include, or just keep the measurements wide. According to the members of panel and sponsoring firm related to study 2

1368 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online suggested to eliminate all particular application names, by only keeping Facebook and Twitter. The addition of those two applications enhances the measurements broadly, so that they can be configured for future study. The utilization of different levels of supply chain also examined. The further conversations indicate us to use unique wording and modules for the measurements, depends on the supply chain varying levels. This variation facilitates to adapt the nature of Business to Business relationship at the seller extent and business to client relationship at reseller extent. The reseller measures also portray client measures (because resellers are client of the seller) but alter it by deleting particular business promotions products to reach our 10-item client measures.

Scale construction and reliability

Further we design a 13 item seller measures to a sample of 106 business to business salespersons, to construct credibility information and examine the primary measurements. Members focused on particular business relationships and the supported function of web base media, to make sure that persons interviewed did not write their personal web media utilizations in their responses. After that we managed the 13-item measures to a sample of 107 retailer store managers and 10 measures to 97 clients for similar task. A person responds on a seven point range with evaluation criteria “never/very often” to show their involvement in particular web based media relevant activity. The modules than further examined utilizing principal components analysis with Varimax rotation. Every primary solution evaluated in an individual factor with an inherent value greater than 1, and more than 70%of the difference was described by an individual factor for each sample. Thus, the primary module set shows a great representation of a social media utilization measures. The credibility values are α=0.97 for the seller measures, α=0.98 for the reseller measures, and α=0.96 for the client measures.

Validity

We continue with our measurements validation by examining for discriminant and norm logical validity. We utilize multiple modules measures for two constructs from research to develop an informal structure and outcome shows that both calculations support acceptable credibility in the seller, reseller and client subsamples (friendship (Grayson, 2007): α=.78, .73, and .79; communication (Anderson et al., 1987): α=.95, .96, and .96, respectively). We utilize structural equation modeling to examine entire fit of social media utilization measures for every single sample in the existence of other structures. According to evaluated fit, all models are acceptable. For example, from the seller confirmatory factor analyses (CFA), we discover χ2=412.9 (166) (p<0.01; χ2/df=2.52) confirmatory fit index (CFI)=.91, incremental fit index (IFI)=.91, and square root mean residual (SRMR)=.08. The fit from the CFAs for the Reseller (χ2=512.9(163); p<0.01; χ2/df=3.12; CFI=.91, IFI=.91, SRMR=.07) and client (χ2=232.5 (115); p<0.01; χ2/df=2.05; CFI=.92, IFI=.92, SRMR=.07) were likewise good.To investigate, either the social media measures linked analytically to those factors, we evaluate the connection among variables. For every sample, social media is connected considerably important to friendship and communication. Particularly, friendship indicate social media utilization (Seller β=0.402, t=4.289, p<0.01; reseller β=0.475, t=4.710, p<0.01; client β=0.435, t=4.516, p<0.01). In the same way, social media indicate communication (Seller β=0.231, t=2.312, p<0.05; reseller β=.245, t=2.415, p<0.05; client β=0.263, t=2.489, p<0.01). With the outcome recommend norm logical validity, we move further to multi-level framework.

Study 2: Multilevel framework

5. Sample

For further study, we consider 3-level data collection, gather from seller sales person, managers of retail store, and clients as shown in Figure 2. The central supplier firm in Thailand is well recognized firm. We calculate a usual Thailand retail framework, in which the brand manufacturers utilize business to business salesperson to visit retail outlets and publicize its products. The reseller efficiency is an operation of the brand’s sales, along with the entire stock of products available in the store. We circulated survey questions to 25 salespersons in one division of the firm and all 25 salespersons responded. To examine the cross-level hypothesis of social media utilization and suggested contacts, we accommodate with the expert association of the particular retail class and

1369 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online communicated 300 Thai retailers. We found 143 beneficial responses. We further contact leading magazine related to this retail class to invite 10,500 subscribers and ask them to fill the survey for our investigation. After deleting incomplete responses, we received 443 client responses, which facilitate several responses per store. Client response demographic sections on age, gender, qualification and income were matched to archival details. Client sample statics matching (sample versus population) were age 44-65, (27.6%/25.9%), female (55.1%/56.9%), college education (58.0%/61.1%), and annual household income $200,000 or over /39.2%). See figure 2.

Seller sales person Seller sales N=25 person

Archival Archival

store 5client\reselle store performance performance Reseller Reseller Reseller Archival store Retail outlet Archival store performance N=143 performance

Client Client Client Client Client Client 4client\reselle

Client Client Client Reseller Client N=443

Figure 2

Measures

The latent calculations in this paper driven from past developed multi-item range, except for web based media utilization in the supply chain. The scale range for social media defines same loading to those in the preliminary test. Social media utilization credibility (seller ((α=.90), reseller (α=.91), and client (α=.96)) levels were acceptable. The means, standard deviations, and latent construct correlations across levels are presented in Table 1

Table 1. Correlation at reseller level one two three four five six seven eight nine Ten

Reseller social media 1.00 Service ambidexterity 0.299** 1.00 Seller brand reputation 0.315** -0.05 1.00 Reseller reputation 0.277*** 0.479** 0.023 1.00 Client contact -0.25 -0.028 0.186* -.087 1.00 Client social media 0.076 -0.169* 0.023 -.113 0.133 1.00

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Client-reseller loyalty 0.079 -0.004 -0.033 0.158 0.007 0.257** 1.00 Seller brand sale priority 0.185 -0.052 0.048 0.130 -0.215 0.156 0.192* 1.00 Reseller sale efficiency 0.260** 0.104 0.134 0.144 0.060 0.164* 0.229** 0.322** 1.00 Retail store size 0.076 0.096 -0.012 -0.073 0.079 0.048 0.063 -0.022 0.015 1.00 Correlation is important at the 0.051 level **Correlation is important at the 0.02 level (2-tailed)

To identify reputation at the seller extent, we utilize 5-module brand reputation range created by (Veloutsou & Moutinho 2009). We utilize same 5-module reputation range for reseller. We then combined the scores to evaluate the communication with social media utilization by channel partner.The service ambidexterity calculation comprises of 4 –items measure from (Lubatkin et al., 2006) as enhance by (Yu et al. 2010) and (Collier & Sher- rell 2010). For client-reseller loyalty, we utilize 6-item range created by (Palmatier et al. 2007a) and (Palmatier et al. 2007b) focused towards reseller and combined according to the procedure we explained before. Client communication at the reseller extent was calculated as the average value of time the respondent spent with clients, similar to the calculations used to evaluate the amount of communication among virtual team members. We asked retail managers about the amount of time they spent with client. For the seller extent, the leading firm facilitate the actual amount of time spent with every single account contain data gathered via client relationship management tracking system. At the end, for brand performance, we examine total amount of sale of the brand in the retail outlet and reseller sales efficiency was evaluated as entire store sale.

Analytical strategy

With clients nested within reseller and reseller nested within salesperson, this model properly notices the dependence between observations. Before evaluation of hypothesized observations, it is necessary to analyze difference within and among units, to provide a base for later study. First, we examine a list of baseline models that contain dependent variable only (i.e. social media utilization as a result). Considering social media utilization at reseller extent in the baseline model, we identify high variation among groups. Particularly, 53% of variance in social media utilization present within resellers and 49% among seller salesperson. For second baseline model, we consider social media utilization at client level as dependent factor for measure and again, we see variance in result. Primary evaluations show that retails store directly impact web-based media attitudes of the client. To facilitate our first hypothesis, we found out the influence of social media utilization from seller to the retail store (Ha (1)) and connection from the retail store to the client (Ha (2)). Client utilization of web-based media is directed by reseller web-based media utilization. Many clients appear to track retail stores for product and service details. In the same way, evaluation recommends that retail stores are following social media utilization of the seller salesperson. Considering the moderating effects of three factors, our evaluation revealed that, both, reputation and ambidexterity, are constructively moderated the social media utilization in the supply chain at lower level. Although, client communication did not define the same importance as a moderator in relationship. After examining, how seller and reseller effect social media utilization by their client, we also need to evaluate if this utilization affects performance (Table 2 and Table 3). At the end part of our evaluation, we study relevant results of social media utilization. We added store size as a covariate. First of all, the client utilization of social media directly affects its loyalty to the retail store. Further social media affects both brand and store performance. Last, as we seeking for more loyal clients to purchase more from the brand and the total retail store offeringTable 4

6. Discussion

Recent study reveals that, client utilization of connected devices is delivering huge amount of data about client, their actions, and their environment, which we collaboratively label as customer intelligence (Cooke & Zubcsek, 2017). Client expects communication through their personal networks but also with their business colleagues. Therefore, we can determine that, this utilization of social media is not ignorable. The turn in client prospect, challenges organization in all over supply chain to create and deploy new services that enhance client- organization communication. So, evaluated facts revealed, that efficiently managing client relationships and

1371 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online services at the same time can significantly impact performance for all participants of the supply chain network. By creating social media utilization measurement range, we evaluated the impact of the social media utilization through the channel, with the basics of contagion theory and relationship marketing. For this investigation, we create and verify comprehensive measures of social media utilization for several members in the channel (seller representative, reseller, and client). The enhancement and empirical verification of these ranges offers a beginning point for future study and evaluation. Our methodology parallels past researches by focusing on the importance of adoption in the technology utilizing procedure. By upgrading three unusual scales, we got the nuance at every single level in supply chain-especially, social media participation for business against client. With our broad acceptance measurement structure, we hope that these measurements will remain appropriate for future study. In the end, we enhance a model of social media through contagion theory which we will discuss later (table 2, table 3, table 4).

Table 2. seller impact on reseller’s social media utilization

Hierarchical Results Fixed effect Coefficient SE t- ratio p-value Seller impact on reseller social media utilization evaluations Brand repute 0.721 0.16 4.03 0.02*** Service ambidexterity 0.165 0.16 0.96 0.32 Seller social media utilization 0.245 0.11 2.34 0.04** Client interaction 0.026 0.02 2.38 0.03** Seller to reseller model communication impacts Brand repute 0.544 0.25 2.11 0.06** Service ambidexterity 0.047 0.13 0.33 0.76 Seller social media utilization 0.1001 0.12 0.75 0.44 Client interaction 0.062 0.03 1.76 0.09 Social media utilization x client interaction -0.002 0.02 -0.98 0.33 Social media utilization x service ambidexterity 0.261 0.08 2.75 0.02*** Social media utilization x brand repute 0.362 0.13 2.35 0.04**

Table 3. Reseller impact on client social media utilization

Hierarchical Results Fixed effect Coefficient SE t- ratio p-value Reseller impact on client social media utilization evaluations Reseller social media utilization 0.177 0.08 1.97 0.06** Reseller repute -0.061 0.08 -0.66 0.52 Service ambidexterity -0.178 0.08 -2.05 0.03** Client interaction 0.183 0.11 1.44 0.17 Seller to reseller model communication impacts Reseller social media utilization 0.208 0.07 2.35 0.04** Reseller repute 0.113 0.07 1.23 0.24 Service ambidexterity 0.-0.096 0.09 -1.12 0.28 Client interaction 0.188 0.13 1.58 0.11 Social media utilization x client interaction -0.162 0.02 -1.52 0.14 Social media utilization x retail repute 0.196 0.08 2.15 0.05*** Social media utilization x service ambidexterity 0.258 0.12 2.42 0.03**

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Table 4. Hypothesized Relation

β t-ratio p-value H(e) Client social media utilization ---- Client reseller loyalty 0.121** 2.52 0.01 service ambidexterity ---- Client reseller loyalty -0.070 Ns Client interaction ---- Client reseller loyalty -0.019 Ns Reseller repute ---- Client reseller loyalty 0.224* 2.42 Retail store size ---- Client reseller loyalty 0.074 Ns Hf(1) Reseller social media utilization ---- Seller brand sale priority 0.181* 1.96 0.04 Hg(1) Client reseller loyalty ---- Seller brand sale priority 0.163* 1.97 0.04 service ambidexterity ---- Seller brand sale priority -0.165 ns Client interaction ---- Seller brand sale priority -0.211* -2.60 0.03 Seller brand repute ---- Seller brand sale priority 0.023 ns Reseller repute ---- Seller brand sale priority 0.115 ns Retail store size ---- Seller brand sale priority -0.006 ns Hg(2) Client reseller loyalty ---- Reseller sales efficiency 0.159* 1.96 0.04 Hf(2) Reseller social media utilization ---- Reseller sales efficiency 0.173* 2.1 0.03 service ambidexterity ---- Reseller sales efficiency 0.066 ns Client interaction ---- Reseller sales efficiency 0.127 ns Reseller repute ---- Reseller sales efficiency 0.016 ns Retail store size ---- Reseller sales efficiency -0.012 ns Seller brand performance ---- Reseller sales efficiency 0.285** 3.56 0.01 Standardized parameter estimation *important at p<0.05 level, **important at p<0.01 level

Contagion theory

Our investigation offers primary support for the contagion influence of social media utilization among retailers and clients. Therefore, we examine statistical verification of a relationship and hit the hidden importance of the social media utilization impacts through the supply chain. Thus, we hope that these evaluations enhance contagion across supply chain levels, and it will be beneficial for further investigations and study. Social media may support as a medium for several marketing activities consisting client relationship management, client service, purchaser research, sales enhancement, paid marketing channels, and branding. Despite the objective, details about the brand must be relevant to the client if you want the client to involve with a brand in his or her own relevant possibilities (Ashley & Tuten, 2015). WOM is a latest wave which has altered the marketing perspective for many organizations after the appearance and expansion of internet technologies (Pandey et al., 2017). Busi- nesses today, create and encourage sustained relationship with client, for WOM marketing. To attain desirable outcomes, organization must view, that how the utilization of social media in upstream impact downstream in the supply chain. By our investigations, we found out that, reseller and client are appropriate to mimic upstream social media utilization behaviors only when they sure about the brand good reputation. For reseller, the impact is more prominent to the amount that a weak seller reputation produces a lower tendency for the reseller to imi- tate seller social media utilization. Therefore, we recommend, reseller must protect their own identity, and try to keep their self away from those sellers who are exhibiting bad reputation. So, organizations with brands of good repute consider being able to exploit their social media utilization to enhance their downstream relationship. Our evaluation propagates that seller service ambidexterity increase the possibilities of social media utilization among several level of supply channel. We explain ambidextrous activities in a way of seller’s capability to involve in behaviors at a same time that both exploit current service and find out the possibilities through which strong amount of client contentment can be achieved. After study, we have found that, low service ambidexterity develop state that it suppresses contagion effect between seller and reseller, and also inverse them in a way that reseller rate of imitation become very low to seller behavior. Our multilevel evaluation of contagion theory and social impact influence exhibit interesting outcomes. Although, we assemble the seller data details from

1373 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online an organization whose items establish high-level buyers for few clients. This high amount of engagement may enhance their propensity to involve with reseller and seller through social media. Thus, we suggest, future study should evaluate social media utilization in firms constitutes low involvement buying. It is significant to examine that there may be a reverse casual sequence exist within our study, since social media comprises a two-way connection. Thus, we motivate explorers to consider this issue further in the future.

Relationship marketing

This study evaluated the positive impacts of client social media utilization on retailer’s loyalty. Internet technologies make organizations capable to provide immediate updates and details on services and products, which support organization marketing. In addition, by utilization of social media, an individual can communicate to other people as well as people connect through the supply chain. From this view, social media can be represented as an immediate extension of the producer and retailer. Therefore, we suggest that the loyalty level increases when the social media interaction increases.

The impact of social media utilization at client level reaches beyond reseller loyalty. We found out that brand and store performance highly affected. The contagion impact of social media utilization emphasizes the significance of utilization between different levels as well as at the same level in supply chain. Almost every organization today emphasizes social media utilization, so, it is essential to consider its performance consequences, which support large-scale opportunities for future research of these relationships.

Managerial implications

The advertising and marketing strategies has changed significantly that conventional approaches are not enough. As clients undergo growing varied communication channels, communication has become divided and unreliable. Social media provides seller-reseller coordinators, a facility to communicate fast and efficiently. It further facilitates communication with brand and business. The social media utilization is not only for client; it is highly valuable in the business to business environment. It is suggested to understand the effect of social media on developing communication with client from reseller perspective, and also promoting the seller brand across the supply chain. Seller who utilize social media for brand marketing and promotion and interact with resellers, support social media utilization at reseller level, which shows a positive effect on reseller and brand performance. For the reseller, social media supply interaction for seller and client at a same time. So, the reseller can facilitate client with latest information, whenever seller delivered it. The increase amount of communication of client with the reseller and brand, the client loyalty with reseller increases and results in effective performance for reseller and brand simultaneously. Moderating influences also exhibit interesting evaluation for seller and reseller. We examine the value of brand repute at brand and reseller extent, because it highly influences social media utilization across the supply chain. Mangers need to be aware of rand equity while setting ROI projections for a social media. Our study and evaluation support the real-life implication of our structure. Our research also underlined the significance of service ambidexterity in several relationships of supply chain. Organizations needs to continuously survey the environment for latest possibilities. The more efficiently reseller and seller developing ambidexterity, the more effective social media becomes as an interaction and marketing tool. We believe that this investigation served as a powerful beginning for future study and research.

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Somdech RUNGSRISAWAT is an Associate Professor in Communication and the Vice President for Academic Affairs of Suan Su- nandha Rajabhat University, Thailand. His research areas are Communication Arts, Business Administration, and Interdisciplinary Research for Social Sciences.

Thitinan CHANKOSON is an Assistant Professor of Business Administration at the Faculty of Business Administration for Society, Srinakharinwirot University, Thailand. His research areas are International Business Management, Service Business Management, and Supply Chain Management. ORCID ID: orcid.org/0000-0002-9667-3730

This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/

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1378 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 http://doi.org/10.9770/jssi.2020.9.4(22)

ENGAGEMENT WITH ONLINE MEDIA

Somdech Rungsrisawat1, Thitinan Chankoson2

1Suan Sunandha Rajabhat University, Bangkok, Thailand 2Faculty of Business Administration for Society, Srinakharinwirot University, Bangkok, Thailand

E-mail: [email protected]; [email protected]

Received 20 June 2019; accepted 28 April 2020; published 30 June 2020

Abstract. Engagement in an online activity is hard to sustain. Online engagement comprises a wide range of domains, and substantial classifications change in accordance with context and desired objectives (Looyestyn et al., 2017). The concept of engagement is obvious and involves cognitive and emotional concentration that may not describe all social media utilization (Smith & Gallicano, 2015). Engagement has appeared as an important idea for news agencies. Thus, this study explained media engagement, to know the extent of client experiences via web-based media, propagate engagement designs and experiences. Our research comprises of quantitative and qualitative approaches to describe the web-based engagement as a set of experience. It describes, engagement can be explained in two significant forms (those are, individual engagement and public-collaborative engagement) for advertising firms and show their expected legitimacy by demonstration that these two are connected via readership.

Keywords: viewers; engagement; experience; readership

Reference to this paper should be made as follows: Rungsrisawat, S., Chankoson, T. 2020. Engagement with online media, Journal of Security and Sustainability Issues, 9(4), 1379-1391. http://doi.org/10.9770/jssi.2020.9.4(22)

1. Introduction: media engagement and experiences

Digitalization changes daily lives. There is a lot of attention to positive and negative effects of on-line activities (Štefko, Bačík, Fedorko, Oleárová, Rigelský, 2019; Pogodina, Aleksakhina, Burenin, Polianova, Yunusov, 2019; Vlasov, Shakhnov, Filin, Krivoshein, 2019; Vasilev, Gapsalamov, Akhmetshin, Bochkareva, Yumashev, Anisimova, 2020; Tesařová, Krmela, Šimberová, 2020; Andriushchenko, Buriachenko, Rozhko, Lavruk, Skok, Hlushchenko, Muzychka, Slavina, Buchynska, Kondarevych, 2020; Buchynska, Kondarevych, 2020; Plėta, Tvaronavičienė, Della Casa, 2020).In past years, the newspaper industry undergoes important loss of revenues, mainly in print advertising. The increased interest in the online marketing has been unable to fulfill this loss (Sridhar, S., & Sriram, S. (2015). Mass media (like TV, newspaper, radio, and the internet) can effectively modify our values, way of life, and also it is capable of directing viewer interest and trends (Jermsittiparsert, Sriyakul, & Pamornmast, 2013; Kejriwal & Chakravorty, 2014). As described by (Bangkokpost), Digital advertisement in Thailand for the year 2019 should reach 124 billion baht (baht is Thailand’s official currency) making growth of 4.8%. In Thailand, web networking is a basic provider of internet marketing, responsible for 14.5% out of total 124-billion-baht ad market. The major difference among online advertising and print advertising is scope of advertisement. Internet based advertising can reach consumer worldwide. This reveals that online advertising can effectively reach a greater number of consumers at any place and allow small businesses to grow far outside the local area. Most of journalist experts and scholars have recently discussed that newsroom adopt viewers engagement as one of their major interest (Nelson, J. L. (2018). During the past few decades, with the emergence of online advertisement the newspaper circulation and print advertisement fell un- derneath. Newsrooms were discussing about the suitable ways to develop and retain readership, and advertisers JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online are considering the possibility to monetize the readership. These concerns are important in view of journalism, and we consider these concerns as the questions of engagement. For this research, engagement can be described as the common experiences about viewer’s via media brand. Experience is firmly related to the learning concept because experience can be considered as the origin of knowledge that is taught (Barron et al., (2015). In this study, we describe that how a brand enables users to have different experiences. It has been investigated that understanding develop by a firm is the primary move to create and manage a top media brand (i.e. TV programs, Internet sites, newspapers, magazine). To understand the fact that engagement and experiences facilitate firms of journalism to develop and facilitate such worth to clients and separate their contributions from other individuals. Thus, an idea behind this study is to explain engagement, to know the extent of client experiences via web-based media, propagate engagement designs and experiences, and evaluate the expected verification of our measures. Newspapers provide instant news, and effect readers’ perception of the era in which they lived and support to configure historical memory (Heyd, U. (2017). To know about the fact that how an individual can be involved in some publication, we should start knowing the way in which media brands (i.e. TV programs, Internet sites, newspapers, magazine) set into its reader’s routine. This assumption modifies the task of explaining engagement complicated because the relationship among publication and its readers are difficult as well as complicated. Focus on a media brand that circulates content through print publication and internet website. Obviously, readers might be involved with publication for the reasons they think that it attaches them to the group they have a good time interacting via conversations. In addition, they feel connected to it because it facilitates refining of all published updates that is end- users needs to sustain with some content and trust that this print publication will facilitate them with the content they required to know. On the other side, readers might see reading the newspaper as an approach to calm down and relax after a hectic routine of a day. This can also be a reason for their engagement that it makes them appealing by facilitating with new topics for discussion. Study on engagement has mainly focused on explaining the engagement nature and its scope (Baldus et al., 2015). The main idea basically is that engagement of individuals with any media brand provides them a way to make experiences through that product or item. The media brand exhibits significant role in individual’s life. Individuals are having timeout experience when they read publication just to calm down and for their relaxation. People who engaged in reading publication for things to discuss are having experience called as public-facilitation experience. Usually, a collection of ideas and views about the possibility of publication involvement in an individual life routine is known as engagement. Whereas, engagement can be defined as a high quality, integrated emotion of reader, which could not be calculated instantly, readers aware with the existence of involvement through ideas and views, which are easily measurable. The empirical section of our study will consider further experiences and, also contain the way in which calculation cab be carried out as latent variables utilizing element assessment. Individual thoughts about some publication like ‘this newsprint facilitate me relaxation; and ‘I prefer to chill down and wind down this newsprint’ will turn into survey questions that carried on a (1st order) public facilitation experience component. Now, our study demonstrates that a set of experiences that readers adopt with a media can be called as engagement (see Fig 1). On the other hand, experience can be defined as the ideas and views the reader own about how it sets into its routine life. According to this evaluation, several media requirements do not provide the similar experiences for interest development. Few might be interested due to the reason that they facilitate increase levels of utilitarian experience, delivering beneficial suggestions and guidance, while other may be interested because they are substantially pleasing. Experiences are not particular all the time, and some content might produce higher level of compound experiences. Essen- tially, it has to be understood that there are multiple paths of involvement and those different paths are figure out by consideration of variety of experiences, which allow the brand to discriminate itself from others. Such as, the transportation part of Thai Rath newspaper. Few articles engaged peoples by describing utilitarian experience, where the people think that the article providing beneficial suggestions. Some articles are engaging people because they enjoy intrinsic pleasure.

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Engagement Consequences Experience number 1

Utilization and Experience number2 attentiveness

Experience number3

Fig 1. Experiences, Engagement and their consequences

So, we evaluate that the high level of readership provided directly by readers experiences that lead to engagement. As shown in figure 1, we thus hypothesized

H1: Engagement and readership are connected with each other positively.

For developing calculations of engagement which we defined before, we are required to construct a sample of experiences through structural scope, but before sampling, first we have to develop the limitation of this scope. For this, we consider uses and gratification context, which earlier utilized by mass media investigators to recommend that people tells their requirements and commands regarding media searching procedure in order to gratify those requirements.

Uses and Gratification theory that explain several types of media uses selected by different peoples and basically consider for the measuring individual engagement in any media. According to (Rubin, 2009), Uses and Grat- ification Theory emerged from theories concerning why individuals select various kinds of media assumption. Also it has been utilize to analyze client engagement in web based networking sites (Ku et al., 2013); (Whiting, A., & Williams, D. 2013) video sharing (Chiang, H. S., & Hsiao, K. L. 2015), live streaming (Sjoblom, M., & Hamari, J. (2017), and eSports (Sjoblom, M., & Hamari, J. 2017). In accordance with U&G theory, people actively searching, spend, and involve in media that meet their personal requirements and match their priority better than other media choices. U&G theory presents practical approach which facilitates the understanding process of how several forms of media engagement related to the satisfaction of several psychological needs (Hilvert et al., 2018). Therefore, U&G theory supports a structure for understanding client preferences and role in media engagement as practices which are responsible for satisfaction of person’s psychological needs. Uses and Gratification theory creates a history of communication theories and research. It starts by researchers’ study of radio listeners. Uses and Gratification theory reinforce by Katz, Hass and Gurvitch in 1973 and it was proposed in 1940s, is designed to determine psychological needs that encourage the utilization of any particular medium to gratify those needs. According to U&G theory peoples utilizes media strategically (Merhi, M. I. 2016).In accordance with Uses and Gratification theory, peoples are active in assessing any convenient media and will make wise choices to select the medium they think will better fulfill their requirements and optimize their personal gratification. Whereas Uses and Gratification theory assumes that peoples understand their personal needs, it is implies to figure out that why peoples select one particular medium instead of other medium based on the previous media’s advantage (Luo, M. M., & Remus, W. 2014).

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(McQuail 1983) proposed Gratification theory and suggested four utilizations of media: l Information: searching for suggestions and recommendations on practical matters or decision preferences; fulfill concerns, curiosity and common interest and attaining feeling of protection through knowledge. l Personal Identity: seeking out support for personal interests; attaining insight awareness of own self. l Integration and social interaction: interacting with others and attaining a sense of communicated; make individual capable to coordinate with family, friends, peers and society. l Entertainment: relaxing, running away, or being away from concerns, issues and difficulties.

Web based gratification theory is different in several ways than those of conventional published products. These differences enhanced by interactivity concept explained by (Ruggiero, T. E. 2000). The actual benefit of interactivity for person is not only about multimedia videos, buying online, or gaining knowledge on demand, interactivity facilitate individual the way to create new means of communication. Also, interactivity substantially enhances the core uses and gratification concept of active user.

We followed McQuail’s typology and Ruggiero recommendations about further interactivity elements, as the construct scope, and we named those elements as extended uses and gratification context. The various roles prescribed using this context are experiences. In measurement model terminology, experiences are top-order construct whereas 2nd- order construct refer to engagement. So, when we will point to a particular collection of client beliefs regarding vehicle, we will refer the term as experience, and when we will point to an entire experience regarding vehicle, we will refer the term as engagement. Thus, the purpose of our study is to evaluate the several experiences within the extended uses and gratification context element. Our description regarding engagement as a set of experiences comprises several explanations that has now been enhanced. Like an aspect of engagement by (Pantic, M. 2017) is active user, in the today’s media atmosphere, they actively select whatever they want to utilize from a broader variety of content than ever before, and normally engaged in a news generation process. (Munson et al. 2015) explains, to increase engagement, practical application adopts gami- fied features because health gamification may assist behavior modification. (Krebs, I., & Lischka, J. A. 2019) focused on comment reading; Comment reading may facilitate readers with more knowledge to form opinions. Another aspect is, digital editor of Telegraph Media Group (TMG) Edward Roussel has focused on action. Roussel, E. (2008). Defines, publishing newspaper to develop capability (internet based) that promote user to give eyewitness reports about newsflash, give reviews about services, and get into arguments. The contribution approximations also enhanced by Mr. Jaranpisit Changpunt, vice president of The Nation and Ms. Worarak In- gkamanee , senior vice president of The Nation(The Nation is daily digital newspaper of Thailand, published in Bangkok). Samorn Terdthampiboon, president of Thai post (Thai post is a daily newspaper published in Bang- kok in Thai language). We named this as participatory and socializing experience. Further more broadly utilized by reporters and journalism researchers are a substitute approach to engagement in society involvement or participation terminology (Mersey, R. D. 2009a): (Mersey, R. D. 2009b)). We will name it as civic experience. This point of view brought in front by (Putnam, R. D. 2000), awards concerns to the communication peoples having with each other and their geographical societies. Putnam’s considerations usually focused by investigators of conventional publications, but this native structure has also been utilized by scholars of web media. The ‘participatory and socializing’ and ‘civic experience’ both definite means about engagement, so, we refer them as demonstrating of a second-order engagement construct. However, uses and gratification researchers famous for long time, because of several other utilitarian, hedonic and public intellectual objectives. Our approaches to be engaged as a 2nd order construct provide assessments and facilitate further ways to be engaged.

2. Method and Outcomes

Our approach includes many steps, which we will discuss in detail further.

Selecting Experience Scales

First of all, we had to choose estimation scales for a collection of web-based experiences, which grabs uses and gratification framework elements and are engagement indicators. Theoretically these proportions must result in

1382 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online appropriate fit in an estimation model and possess suitable psychometric characteristics for example appropriate reliability.

We utilized collection of mass media experiences Calder-Malthouse (CM), the reason that they facilitate estimation with respect to wide spectrum of experiences (Calder, B. J., and Malthouse, E. C. 2004); (Calder, B. J. and Malthouse, E. C. 2005); (Malthouse et all 2007)). We sum up the Calder-Malthouse approach and discuss that these experiences extent the scope of engagement. Calder-Malthouse continues 350 hours, interviews with clients about the task that particular internet site, magazine, newspaper and Television news telecast perform in those individual’s daily routine. They evaluate the transcripts for regular aspects and create numbers of measuring components. These components were added in a media user’s survey. Exploratory items evaluation determined 20 web-based experiences, 42 print publication experiences, 36 magazine experiences and 11 Tel- evision news experiences. The coefficient alpha values recommend that many scales were reliable (with few having weak reliability due to very small number of items). Actual CM studies do not estimate confirmatory elements analysis (CFA) models.

For confirmatory evaluations, we selected eight experiences from the total of twenty experiences, because of constraint survey range and respondent fatigue. In examining the actual 20 experiences, we conclude that few are not appropriate for construct domain for the reason that they explain the website itself instead of describing how the website fits into client’s routine life, such as take an example of the experience; it was regarding reliability of the website. Many experiences were abandoned because they were particularly about the publication on the websites (Thaker et al., 2020).

In Table 1, we present eight experiences along with their items. We have choose with the stratifying sampling process through the rest of the experiences in order to utilize from the four McQuail’s uses and gratification classification that identify more conventional means of communication, and further, for example ‘society’ and ‘participatory and socialization’ which are specifically related to means of communication via internet. We try not to take too much experience for McQuail uses and gratification classification, such as; three experiences among the leftover experiences go according to McQuail’s classification named as ‘information’: “want to be informed,” it is regarding making individuals updated on matters that concern them, and “utilitarian,” it is regarding suggestions. After tossed, we selected to add utilitarian. Similarly, the actual Calder-Malthouse experiences “native pleasure,” and “amuse and engross me”, these two experiences go according to McQuail’s enjoyment classification and we choose the first one randomly. The “public facilitation” fit under a McQuail’s integration and interaction category, so we selected this for this classification. The “self-assessment and civic spirit” go with McQuail’s personal identity classification.

Table 1. questionaries’ wordings and Parameter Estimation with CFA Measurement Model

Experience Component Stand Loading

This website facilitates my personal life through inspiration. 0.84 Encouragement and this website drives me to see things in new possibilities 0.85 motivation This website promotes my thinking about several different matters. 0.79 (α=0.88) I feel myself more interesting because of this website. 0.78 Some of this website stories strongly touched me. 0.72 I elevate things which I have seen while interacting with several other individuals. 0.84 public facilitation this website usually facilitate me something new to discuss 0.83 (α=0.88) I utilize things through this website in debating or communicating people I know 0.85 This belongs to my daily routine life. 0.84 Temporal Whenever I surfing the internet I go to this website 0.85 (α=0.90) I see this website as an essential part of receiving the news for the day 0.83 This website encourages me to start a day in the morning. 0.81

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I feel myself better citizen through using this website. 0.85 Self- assessment & This website makes difference in my daily routine life. 0.86 civic-spirit This website mirrors my values. 0.75 (α=0.91) This website increase my participation in society 0.76 Through this website I feel myself as a better person 0.87 This website is a treat for me 0.82 Spending time on this website alters my mood and makes me feel happy 0.84 Native pleasure I want to kick down and calm down with this website 0.81 (α=0.87) I prefer to see this website while I am relaxing or eat something 0.66 I never think of other website while I am using this website 0.70 This website support me in making buying decisions 0.83 This website support the learning about making yourself a better person 0.81 Utilitarian It enables me in making important decision by providing information 0.77 (α=0.88) This website helps me in managing by money 0.80 I give suggestions and advices to other users I know based on the thing 0.75 I came to know from this website I will lower socialization on this website 0.85 Participatory & I participate to the discussion on this website 0.76 socialization (α=0.88) I usually guilty regarding the socializing time I have spent on this website 0.81 I should possibly chop off the socializing time I spent on this website 0.77 Society I am interested in users review as I am the regular content on this website 0.85 (α=0.88) The basic reason of liking his website is what I get from other peoples 0.84 This website facilitate its visitors in a better way to provide reviews 0.60 I am interested to meet other users who are regular visitors of the website 0.81 because of this website i am now interested in those things 0.72 otherwise would not have Generally, the users on this website are well aware bout the topics 0.67 it defines so they can be advantageous for you

The above eight experiences represent engagement construct domain. Obviously, further sets can also fit under our scope, but our approximation is completely constant with our motive of creating engagement clues.

3. Survey Methodology

The second step is sampling media websites users.11 internet sites regarding mass communication were utilized in the current evaluation of confirmatory. These websites present a relevant sampling but added wide range of several kinds of sites regarding mass communication including sites having national level fame (such as bangkokpost.com), special interest websites (such as thaipost.net). The targeted public, determined by screening questionnaires, was individuals who visit the website at least once in a month. Individuals were drafted from the specific website visitors, who were redirected to a survey on internet. The sampling range for the eleven websites are from n=36 to n=1290. Participants were inquired about their experiences and usage about specific website.

Measurement Models for Experiences and Engagement

The further move was about creating online engagement measures as follows: (a) Evaluate a CFA measurement model to evaluate psychometric characteristics of measures of our experience. (b) Utilizing eight experiences, we create second order engagement elements through the application of exploratory element analysis. (c) Fits second order Confirmatory element analysis (CFA).

We assess and try every available pair of experiences to be associated. Table 2 represents fit statistics. Table

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1 contains the values of coefficient alpha, questionaries’ wordings, and element loadings. There were total 37 items utilized to calculate eight experiences. The result showed that, every single scale from eight scales is extremely credible, along with coefficient alpha range 0.88 to 0.93. CFI, GFI, and NNFI all reached to 0.90, specifying a suitable fit. Discriminant and convergent legitimacy were suitable.

Table 2. Summarizing CFA Model

Measurement Second order Parameters 103 88 CFI .9156 .9030 GFI .9481 .9391 NNFI .9427 .9345 RMSEA .0471 .0404 n1=5941 having 37 items

Table 3 represents the Individual association among the experiences and a pattern which was followed indicates the possibility of 2nd order elements. The first 6 experiences are slightly associated with each other, with value range .41 to .74. Participatory and socialization experience is considerably less associated with the other 6 experiences, but slightly associated to society experience. Society is less associated to first 6 experiences. This association configuration recommends that there is a first-order elements configuration producing the figures.

Table 3. Association hierarchy

Individual Association Experience one two three four five Six seven eight nine ten Encouragement and motivation Public facilitation 0.52 temporal 0.52 0.54 Self-assessment & civic spirit 0.66 0.56 0.48 Native pleasure 0.65 0.52 0.63 0.64 Utilitarian 0.61 0.52 0.42 0.71 0.56 Participatory and socialization 0.25 0.18 0.18 0.30 0.32 0.36 Society 0.47 0.42 0.32 0.54 0.53 0.56 0.56 Engagement Individual engagement 0.82 0.76 0.76 0.84 0.82 0.75 0.33 0.59 Interactive engagement 0.57 0.48 0.42 0.70 0.66 0.75 0.76 0.91 0.74 Readership 0.28 0.26 0.47 0.23 0.22 0.33 0.14 0.24 0.38 0.28 1: All associations are significantly different from 0 at the 0.0001 level

Thus, the next step in creating the measurement model is to determine the second-order engagement element utilizing both exploratory and CFA. We carried out exploratory element evaluation with a varimax rotation on the first-order experiences and found two eigenvalues greater than one. Table 4 represents rotated element loadings and presents two interpretable elements, from now on called an individual engagement and public- collaborative engagement. Associated hierarchy of first six experiences has the biggest loadings on individual engagement, even though society also contain cross-loading element larger than three. ‘Society’ and ‘Par- ticipating and socialization’, these two exhibiting biggest loadings on public-collaborative engagement; with many other experiences have substantial cross-loadings. The utilitarian experience possibly cross-loadings on public-collaborative engagement due to the fact that most of the suggestions and recommendations might be provided through user’s society instead of through the content produce by workforce of the website itself. Self- assessment possibly cross-loading due to the reason that contribution to a web-based discussion contributes to individual self-assessment.

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Table 4. Exploratory Element Calculation Loadings of First-Order Experiences

Experience Element 1: individual engagement Element 2: collaborative engagement Public facilitation .769 Temporal .752 Encouragement and motivation .745 Self-assessment and civic spirit .712 .374 Native pleasure .702 .365 Utilitarian .613 .471 Participatory and socialization .882 Society .362 .754 1 : Loadings less than 0.31 were not considered

Further we calculate a 2nd order CFA to examine if there might be any possibility that the individual and public collaborative engagement latent variables produce the respected association construct among the item and experiences. Public-collaborative and individual engagement would be utilized in the further evaluation regarding readership. Table 2 represents appropriate credentials, with GFI, CFI, and NNFI all greater than .9 representing suitable figures. Parameter estimation of second-order element represent in Fig 2

Fig 2. Order Engagement Element Construct

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Individual engagement is demonstrated in experiences that are in accordance with the experiences that people have with magazine and printed newspaper. Such as, item of experience for example “this website drives me to see things in new possibilities” or “this website usually facilitates me something new to discuss” might also be applicable to print. Public-collaborative engagement, somehow, is highly particular to websites. Components for example “I will lower socialization with this website” and “I participate through discussion on this website” couldn’t describe print. On the other hand, public-collaborative engagement is much nearly correlated to internet, features of it can be considered for some other means of communication. The utilitarian experience is exhibiting both forms of engagement.

Thus, it has been seen through the estimation and values of coefficient alpha that eight experiences were calculated with high reliability and the competent and determinant legitimacy of scales were also supported. The 2nd -order evaluation presents two elements of engagement, public-collaborative and individual engagement. Individual engagement is demonstrated by the experiences that have been carried out in printed publications (such as magazines and newspapers), whereas public-collaborative engagement is mainly précised to internet websites. Fig 2 represents the loadings, users having individual engagement searching out for motivation and encouragement from the website; they need to utilize the internet site to utilize their contacts with more individuals, users get a feeling of native pleasure in utilizing the website, they seems it beneficial for achieving targets, and users appreciate contribution from other peoples. Users of public-collaborative engagement experiences some of the similar things in a way of native pleasure, utilitarian worth, appreciating the contribution through bigger user’s communities but in a manner that relate to a feeling of involvement with other peoples and socialization on the internet sites. Therefore, public-collaborative engagement is stimulated both intrinsically and extrinsically. Further it is the appreciation of contribution from the participants of society and idea of involvement with more people and socialization that provide public-collaborative engagement as its leading status.

4. Engagement Validity

Now, we examine our expected measurements validation by evaluating if engagement is related with readership. We calculate readership through SUM (Site Usage Measure) and associate it through utilizing two methods for both engagement types. SUM refers to the standard number of website visits and the total duration on a website. First of all, Table 3 represents positive and very important association with readership from individual and public-collaborative engagement. Increased readership’s level is related to increased engagement level of some other type. Simple association, whereas, have many limitations, which would be considered in next evaluation study: (a) They do not allow for unlike associations for different websites. (b)They do not report for the association among both engagements’ types.

The further evaluation utilizes two apart hierarchical models (HLM) to anticipate RBS from two kinds of engagement (see Table 5), for engagement at website level we added a random intercept and random slopes. The slope for individual engagement as well as public-collaborative engagement is productive and very important. No single random effect is important which specifying that we do not have any proof to state that the relationship fluctuate among different websites. We thus recommend that our engagement measurements forecast readership.

Table 5. Engagement with a HLM

Fixed effect Random effect Effect slope Standard error p-value deviation Standard error p-value Intercept 0.6393 0.08086 <0.0001 0.006809 0.01017 0.2419 Personal 0.7377 0.02474 <0.0001 0.000559 0.000979 0.2844 Intercept 1.5589 0.08096 <0.0001 0.01433 0.007956 0.0360 interactive 0.5503 0.02654 <0.0001 0

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5. Results and Managerial Implications

With this study we evaluated three contributions: (a) Engagement refers as a set of experiences. (b) We showed engagement types which are individual engagement and public-collaborative engagement. (c) Manifest that two engagement types contain forecasted validation due to the reason that they are related with readership.

These outcomes promote uses and gratification construct, earlier described, by developing those experiences that provide engagement beneficial for the growth of readership. Now, it is logical to declare that mass communication related firms ‘arguing about the way to create and retain readership’ must concentrate on experiences creation to facilitate readers associated to the 2nd -order construct related to individual engagement. Experiences and engagements have several important managerial implications. We suggest an approximation (Fig. 3) to make a media brand (Calder, B. J. and E. C. Malthouse (2008a); (Calder, B. J. and E. C. Malthouse 2008b). The media firm must express an idea that will direct its formation of connections to facilitate media brand. (Calder, B. J. 2010) examines the way of merging a collection of experiences and proposed a conception allocation declaration. Experiences are produced by contacts for the viewers and in this way relate to the concept. Edito- rial and commercial content and its presentation can be added by contacts by their selves, also the publications and happenings about the media brand. The viewer’s thoughts regarding concept build hopes, which could also influence their experiences with brand, including their activities beyond it.

Media firm’s Viewer’s Viewer’s thoughts Contacts concept experiences of concept

Fig 3. A Procedure for developing Experiences

Periodically, media firm must utilize the scale suggested in this research estimation if the viewers are owning experiences determined in the declarations for many different causes. (1) These estimations can facilitate an earlier caution that the intended experiences are not being formed. (2) These evaluated estimations are beneficial to marketers, who are seeking for media-neural metrics regarding common-currency comparison reason. (3) Engagement can be used by media managers as a possibility to distinguish from their opponents and retain marketers.

Actual debate is readers those are having increased engagement level much better exposed to advertisements; advertise conveyed by vehicle through increased readers engagement must control a premium price for ad space, or at least take a benefit in retaining marketers.

Conclusion

In this research we have investigated that experiences and engagement supports organization to create and retain client value and considering their worth by separating it from other peoples. It has been concluded that engagement has two types; comprises of many different experiences and that every experience has its own uniqueness. Media utilization normally exhibits a productive relation with engagement along with its two more categories. This paper describes a qualitative research on U&G which enhances the uses and gratification theory. This study explicates a media role supports engagement behaviors under the media domain. We have indicated that strong readership possesses strong engagement, and the two subcategories of engagement are related through the readership domain. We have seen that the media (i.e. TV programs, Internet sites, and newspapers, magazine) impacts on an individual measure of engagement, which contribute to individual’s life with several experiences. An individual with strong engagement and experiences lead the company to develop and maintains a successful

1388 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online media brand. So, the basic concept is that, user’s engagement with any specific brand facilitates a means for creating experiences via brand product. This study provides a several contributions to journalism firms and offers hypothetical implementations. The current paper responds to calls about the empirical requirements for evaluating the individual engagement and involvement. Further studies might be seeking a way to more evaluate readership and user engagement.

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1392 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 http://doi.org/10.9770/jssi.2020.9.4(23)

TOWARDS SUSTAINABILITY OF FINANCIAL SYSTEM VIA COMPLEX ASSESSMENT OF BORROWER’S CREDITWORTHINESS

Aina Caplinska1, Manuela Tvaronavičienė2

1Department of Economy, Faculty of Social Sciences, Daugavpils University, Parades Str.1, Daugavpils, LV-5401, Latvia General Jonas Zemaitis Military Academy of Lithuania, LT-10322 Vilnius, Lithuania

E-mails: [email protected]; [email protected]

Received 15 November 2019; accepted 18 March 2020; published 30 June 2020

Abstract. The purpose of this article is to identify important aspects of the development of creditworthiness in the post-crisis period. The customer’s creditworthiness was and is one of the main valuation objects in the practice of banks in the world and in Latvia, determining the usefulness and types of credit relations. It is important for both the lender and the borrower to make an objective, complex assessment of the potential borrower’s creditworthiness in order to make an informed decision. More than a decade after the global financial crisis, the financial sector is still considered vulnerable. An analysis of the borrower’s creditworthiness is a mandatory step in the credit granting process. Because the borrower’s creditworthiness depends on many factors, determining a change in all the factors, causes, and circumstances that will affect the creditworthiness in the future is a significant and rather complex issue. Consequently, the purpose of the borrower’s creditworthiness analysis is to conduct a comprehensive examination of his / her performance with a view to making a reasoned assessment of the possibility of returning the resources granted to him. The complex analysis of the borrower’s creditworthiness uses different types of economic analysis. The article analyzes the theoretical and methodological aspects of the borrower’s (legal entity’s) creditworthiness and compares the empirical research of the real practice of Latvian commercial banks in 2011 and 2018. The author investigates the choice of borrower’s creditworthiness analysis methods in Latvian commercial banks, their ranking by importance, the importance of credit policy in the lending process and the main signals that indicate the low creditworthiness of borrowers, thus confirming the likelihood of credit risk.

Keywords: borrower’s creditworthiness; lending; valuation techniques; commercial bank manager; company/borrower.

Reference to this paper should be made as follows: Caplinska, A., Tvaronavičienė, M. 2020. Towards sustainability of financial system via complex assessment of borrower’s creditworthiness Journal of Security and Sustainability Issues, 9(4), 1393-1403. http://doi.org/10.9770/jssi.2020.9.4(23)

JEL Codes: G21

1. Introduction

There is a lot of contemporary literature devoted to issues related to sustainability of financial systems. Siddique et al. (2020) compares performace of banks in ASEAN and developing countries. Tatibekova and Bubeyev (2020) elaborates issues related to regulation of bank capital adequacy. Sanchez-Roger et al. (2020) concéntrate on bail-in and interbank contagion risk. Huy et al. (2020) explore inpact of a set of factors on selected banks performance. Adeniran et al. (2020) tackle impact of information technologies on bank performace. Laila et al. (2019) stresses importance of efficient portfolio composition. Herianingrum et al. (2019) analyses peculiarities of providing financing. Nasr et al. (2019) stress importance of enterprise risk management. Tvaronavičienė et al. (2018) points to the issue related to necessity of overcoming liquidity risk and cost inefficiency in leading banks of UK and Germany. JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online

Among listed facets, affection sustainability of financial systems, as a whole, client’s creditworthiness plays an important role (Beaver, 1966; Trueck, Rachev, 2009; Mishkin et al., 2013; Bentley Capital Ventures, 2017; Fair Isaac Corporation, 2018; Caplinska, Ohotina, 2019; Caplinska, Tvaronavičienė, 2020). Especialy, when banks competes in the area of credit cots (Rahman et al., 2019). The presented paper is devoted, specifically, to this aspect of bank performance.

The formation of credit portfolio is based on the ability to predict credit risk, therefore its management elements are picked accordingly. In bank’s credit policy, it is significant to objectively evaluate the credit worthiness of the potential borrower, based on which to make a relevant decision. Globally, based on the diversity of experience and economic situations, in analysis of credit worthiness, different methods are being applied that can be distinctive or similar, however, every bank customises these methods to their own parameters, therefore, obtaining uniqueness. Contemporaneously, rating systems that separate companies into certain groups of credit risk are topical. The author investigates the choice of methods of creditworthiness analysis by managers of Latvian commercial banks, the ranking of indicators by their importance, the role of credit policy in lending process, and main signals that indicate a low credit worthiness of borrowers, thereby confirming the possibility of credit risk. In 2018, among the surveyed experts, there are 12 managers from five leading Latvian commercial banks. To compare, the results of survey of managers of Latvian commercial banks conducted in 2011 are being used (Caplinska 2011).

2. Design of research

Methodology. Based on theoretical findings on evaluation of creditworthiness and practical information of real banks on creditworthiness drivers, the authors seek to evaluate the degree to which the a set of criteria affect companys’ creditworthiness evaluation. The research is based on opionions of main Latvian banks managers, who act as experts. The following criteria were evaluated: Company balance-sheet indicators: asset structure, structure of equity and liabilities; Company cash flow indicators; Company profit/loss indicators; Financial ratios: profitability, return on assets and capital, liquidity, activity ratios, financial leverage; Dubious positions in financial report; Credit history; Adequacy of collateral; Risk of the project after changes in market capacity, competitiveness and adaptability; Evaluation of the sector and operating environment; Company character, principles of business and cooperation; Company management, its competency; Planned financial position with well-founded forecasts;

Results. The obtained results are reflected in Figure 1.

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Planned financial position with well-founded forecasts Company management, its competency Company character, principles of business and... Evaluation of the sector and operating environment Risk of the project after changes in market capacity,... Adequacy of collateral Credit history Dubious positions in financial report Financial ratios: profitability, return on assets and... Company profit/loss indicators Company cash flow indicators Company balance-sheet indicators: asset structure,...

48 50 52 54 56 58 60 62 Number of points

Figure 1. Analysis result of answers to the question (To what extent You are using the criteria in evaluation of company creditworthiness?) by credit managers of Latvian commercial banks, 2018

Source: data of author’s analysis.

According to experts, company creditworthiness to the greatest extent (5 points) has been expressed by balance- sheet indicators and adequacy of collateral, which purports the willingness of commercial banks to ensure the amount of issued credit with quality and appropriate pledge, as well as with the demand to insure, hence a caution can be observed. Overall, the banks are looking into possibilities to lend to companies also with inadequate amount of collateral, but in this case, by attracting guaranties from European Union and other forms of pledge. As balance-sheet indicator, banks evaluate equity, since most of company assets are financed by owners themselves, not creditors, thereby increasing the possibility to raise debt financing (equity must not be negative).

The second ranking spot is taken by financial ratios and company profit or loss indicators. The capital adequacy is being evaluated, so that the company would have enough cash to repay debt, the attention is being turned to the total amount of debt in relation to EBITDA (earnings before interest, taxes, depreciation and amortization), it must be out of the risk zone. Liquidity shows how fast company assets can be converted into cash, thereby indicating the financial stability of the company. In the financing process, one of the most significant indicators is the ability of a company to operate with profit.

Third place has been occupied by the following indicators of creditworthiness: company profit/loss, company management, its competency, planned financial position with well-founded forecast. The attention is being turned to adequate sales now or in the future; in this case, one must present a project that will increase sales. In a multi-year perspective, steady growth in sales is being regarded as a sign of a financially healthy company. Forecasts also justify the purpose of raising financing and the vision on the repayment plan. Managers highly regard the age of the company – the longer it has operated in the market, the greater the possibility to raise debt. Since company performance to a great degree depend on its teamwork, bank evaluates the professional experience of the management of the company.

Managers give fourth place to the following criteria: company character, business and cooperation principles, dubious positions in financial reports, credit history. The cooperation of a company is evaluated with the bank, as well as with other companies –business partners, and the state. Bank client’s (company’s) form with topical

1395 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online data is considered, favourable conditions for receiving financing are generated by successful long-term cooperation between bank and the company, bank analyses the credit history as a whole, as well as company account history. Primarily, it is being considered whether the account is active because account blocking indicates serious difficulties in company operations. Dubious positions in financial reports rank in the more distant 4th place since initially managers analyse balance-sheet, profit or loss account, cash flow, and only then the dubious positions are investigated more diligently and in more detail.

The criterion of company creditworthiness evaluation ranked number five, according to bank managers, is project risk after changes in market capacity, competitiveness, and adaptability. The same ranking is taken also by the evaluation of sector’s business environment, thereby one takes into consideration the business cycle, market and macroeconomic factors characteristic to the sector of industry, since they impact the business model and the structure of the company, outlook for long-term growth, and competition among market players.

It is notable that no expert has used the evaluation of the criteria with 1 and 2 points, where 1 point would indicate the ability of the criterium to reflect company creditworthiness to the least extent. Accordingly, this emphasises the wide view of the credit policy of commercial bank on client’s creditworthiness. The company is being evaluated extensively, turning less or more attention to every factor (See figure 1, figure 2, figure 3, figure 4, figure 5).

0 2 4 6 8 10 12 14

Criteria 5 Criteria 4 Criteria 3

Figure 2. Summary of ratings of answers to the question (To what extent You are considering the criteria in evaluation of company creditworthiness?) by credit managers of Latvian commercial banks, 2018

Source: data of authors' analysis.

In the 2011 study of criteria used in practice by credit managers of Latvian commercial banks in corporate lending decision-making (Caplinska 2011), the results of factor analysis showed that nearly half (48%) of the decision-making was ensured by analysis of company financial indicators. The next factor (company’s share of the sector, propensity to protect image and reputation) determined 17 %, the third factor in terms of importance – 12 % (peculiarities of company organisational structure, tolerant attitude towards business environment factors, political situation in the country), and the fourth factor of least significance (8 %) – the level of company management and personnel competency, which in 2018 is rated as most important and very important by all managers.

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Figure 3. Factor analysis results on factor significance proportion in granting of credit decision-making practice of managers of Latvian commercial banks, 2011

Note: Factor 1– „company financial indicators and situation in industry”, Factor 2 – „company position, specifics and image”, Factor 3 – „business environment and ability of the company to adapt to it”, Factor 4 –“level of competency of company human resources”.

Source: figure formed by the authors according to the results of factor analysis.

When one evaluates creditworthiness analysis criteria, there are many signals that indicate the possible low creditworthiness to bank managers, thereby alerting to the probability of default on loan’s principal and interest payments. Therefore, the next question in this paper is to name the main signals that indicate low creditworthiness of clients.

According to experts, the main signals that indicate low creditworthiness of a client are: Low liquidity; Bad credit history, late payments, large debt; Large amounts in dubious positions; Decrease in sales and orders (>20%) compared to previous periods; Rapid changes in settlement terms of accounts payable, suppliers shorten repayment deadlines; Owners are not proud of the business, change of owners; Negligence towards assets, for example, inventories are not stored properly; Unusual/unexplained records in financial reports, dubious income is recognised or expenses are reduced; Negative financial results – losses, negative EBITDA, DSCR (debt-service coverage ratio) <1, equity <20%; Slowdown in collection of receivables; Dealings with affiliated companies are not adequately explained; Reduction in cash balances; Tax debts; Ambiguities in financial reports are justified with changes in management and accounting; Factory is operating with low, inadequate capacity.

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The signals are reasons to think about the possible credit risk; bank managers before making the decision might invite the client to submit additional documents that clarify the existing situation. Otherwise, the decision not to grant funding is being evaluated.

Based on theoretical and practical aspects, the author offered to bank managers the most popular methods of evaluating creditworthiness (see Figure 4) to ascertain, which of them are known to and used in practice by bank managers.The bank managers received a task to give evaluation in points (from 1 – to the least extent to 5 – to the greatest extent) to what extent the application of the method reflects the true creditworthiness of the company.

12 10

8 6 4 2

Credit scoring Lisa method SWOT analysis CART methodPARTS method „Six C’s” method PARSER method J.Olson methodOther methods Cash flow analysis CAMPARI method CAMELISE.Altman method methodJ.Fulmer method Ginsburg method G.Springate method M.Zmiyevska method Grade analysis method R.Tafler & G.Tishof method Analysis of financial indicators Bankruptcy prediction Chesser... is known Used in practice Assigned 5 poits Assigned 4 poits Assigned 3 poits

Figure 4. Summary of answers to the question (Which methods of creditworthiness evaluation do You know, are using in practice, to what extent the application of the method reflects the true creditworthiness of a company?) by credit managers of Latvian commercial banks, 2018

Source: data of authors' analysis.

Out of the 20 offered methods, all bank managers surveyed noted five methods that they know and use; four of them are used by all bank managers in the survey, and they are: credit scoring, company rating, cash flow analysis, analysis of financial ratios. The fifth method known to all respondents – SWOT analysis – is used only by four experts, who note that this method is used only in analysis of big clients. According to awarded points, the first method that reflects company financial position to the greatest extent is company rating and credit scoring. The second place is taken by analysis of financial ratios and cash flow, third – by SWOT analysis. Company rating encompasses financial indicators that allow comparing the company with the rest of the respective industry, with average ratios in the country, therefore these methods are close to one another, in first and second place, respectively. The data of survey of bank managers conducted in 2011 by the author showed (see Table, Table 2) that the absolute majority of the surveyed managers were acquainted with and primarily used two methods of evaluating borrower’s creditworthiness – credit scoring and cash flow analysis, followed by SWOT analysis.

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Table 1. Distribution of answers of credit managers of Latvian commercial banks to the question (Which methods of company creditworthiness evaluation are You acquainted with and which methods do You use, when company creditworthiness is evaluated?), 2011

Acquainted with Using Methods of company creditworthiness evaluation Proportion Rank Proportion Rank Credit scoring 87.5 1-2 93.8 1-2 Cash flow analysis 87.5 1-2 93.8 1-2 SWOT analysis 68.8 3 56.3 3 Grade analysis method 31.3 4-5 12.5 4 Bankruptcy prediction Altman method 31.3 4-5 0.0 „Six C’s” method 18.8 6 0.0 - Bankruptcy predictionChesser method 12.5 7-8 0.0 - CAMPARI method 12.5 7-8 0.0 - CART method 6.3 9-10 0.0 - Other methods 6.3 9-10 6.3 5 Bankruptcy prediction Fedotova method 0.0 - 0.0 - Bankruptcy prediction Sayfullin-Kadykov method 0.0 - 0.0 - PARTS method 0.0 - 0.0 - PARSER method 0.0 - 0.0 -

Source: data of authors’ calculations of frequency analysis conducted with the SPSS software.

As known methods but not used in practice, bank managers mark the “six C’s” method, CART method, CAM- PARI method, PARTS method, CAMELS method, E. Altman (2002) prediction model, G. Springate model, and M. Ginsburg model, both in 2011 and 2018. Other methods – D. Chesser prediction method, J. Fulmer model, R. Taffler and H. Tisshaw model, Liss model, M. Zmijewski model, J. Ohlsonmulti-factor model – are classed by bank managers as unknown to them.

The authors infers that bank managers are relying on bank’s internal systems of credit scoring and company rating, which are formalised, and award a specific risk zone. The methods of evaluation analysis often synthesise and complement one another. Bank managers are motivating the decision mainly with mathematical evaluations and conformity of financial indicators, relying to a lesser extent on their intuition and experience. This specific is substantiated by bank credit policy, which is proved by the next question in the survey of experts: to what extent and how clearly does credit policy reflect bank strategy regarding the whole lending process? Author puts forward distinct, determined principles that can be combined into four large categories: l Creating a credit risk management environment that involves the description of the potential service market’s geographic and sector boundaries; the authority of bank’s council, executive board, credit committee, and personnel of the credit department in the process of awarding, administrating and controlling of loans. l The use of criteria for awarding loans that involves basic rules in credit allocation, the conformity of credit collateral, the description of the duration of loans, the principles of determining the interest rates of loans, the types of loans, and the structure of loan portfolio. l The administration, evaluation and monitoring of loans encompasses requirements for credit content, maintenance and quality control, the principles of administrating and classifying loans. l The control of credit risk that lays down the principles of credit monitoring, the management methods and organisation of problematic loans, monitoring of credit risk limit system and loan portfolio.

From the survey results, one can conclude that banks strictly follow the credit policy and it is designed in an integrated way, covering whole spectre, functioning as guidelines to personnel connected to the lending process. All bank managers allocate rank one 11 principles from 12, thereby giving evidence that the bank designs credit policy in a diligent way. So, the following groups are reflected in the credit policy in nearly wholesome manner:

1399 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online application of criteria in loan allocation, administration, evaluation and monitoring of loans, credit risk control. The principle, which takes rank two, is the description of potential service market’s geographic and industry boundaries; although the diversification of loan portfolio is prerequisite for a successful credit policy, it has been reflected in credit policy in an inadequate way. This can be substantiated with changeable conjuncture, inability to quickly change strategy to adapt accordingly to changes.

Table 2. Analysis of results of answers to the question (To what extent and how clearly does the credit policy reflect bank strategy regarding the lending process as a whole according to the following principles?) by credit managers of Latvian commercial banks, 2018

Principles of credit policy Proportion Rank Characteristics of geographic and industry boundaries of potential service market 86.7 2 Authority of bank council, executive board, credit committee, credit staff in the process of granting, 93.3 1 administrating and controlling of loans Basic rules in granting of loans 93.3 1 Adequacy of loan collateral 93.3 1 Loan duration 93.3 1 Principles of setting of loan interest rates 93.3 1 Types of loans and structure of loan portfolio 93.3 1 Requirements for credit content, maintenance and quality control 93.3 1 Principles of credit administration and classification 93.3 1 Principles of credit monitoring 93.3 1 Management methods and organisation of problematic loans 93.3 1 System of credit risk limits and monitoring of credit portfolio 93.3 1

Source: data from authors’ calculations.

Evaluating the answers provided and the theoretical aspects discussed above, the author infers that the framework of creditworthiness evaluation of the borrower in Latvian commercial banks is based on gathering and verifying of information, so that it meets certain criteria. Through the documents submitted and negotiations with clients, the bank learns the needs of the borrower and checks the sincerity of the lending objective, evaluates the conditions of business environment and operations of the borrower, ascertains the financial position and creditworthiness based on the rating. How efficiently do the methods used in banking practice reflect the real creditworthiness of companies? Every commercial bank has its own method of creditworthiness evaluation of clients, it is a trade secret, however, is based on general rules. Scoring and rating is formed individually in banks according to the credit portfolio, in some cases, a comparison is conducted with companies of the same industry or geographic area, or even with all companies registered in Latvia that have submitted an annual report in the Register of Enterprises of the Republic of Latvia. As a result of this comparison, a rank or points are awarded. In turn, scoring and rating is based on calculation of financial ratios, for example, a composition of publicly available corporate rating indicators is offered by theLursoft database, where the rating of a company is determined as follows: l Solvency – describes the proportion of equity of a company in total assets. The proportion of this ratio in rating is 30%. l Earnings before taxes – describes company profit or losses in a period before tax expense deductions. Pro- portion in rating – 20%. l Liquidity – describes the ability of a company to settle its current liabilities. The proportion of this ratio in rating is 20%. l Sales growth – average sales growth during the three most recent years. If a company is younger, one calculates annual report data from last available years. Proportion in rating – 10%. l Return on capital – net profit divided by equity. Proportion in rating – 10%. l Liabilities–turnover of creditors during the last financial year. Proportion in rating – 10%.

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Companies are arranged from the largest to the smallest by every ratio (solvency, liquidity, etc.). Every company is awarded rating points from 0 to 100. The company that is ranked 1st receives 100 rating points, median ranking company receives 50 rating points, the one that is ranked last – 0 points. The rest of companies receive points proportionally, depending on their ranking.

More than ten years after the global financial crisis, what has changed in the cooperation of clients-borrowers with commercial banks, when a loan demand is evaluated, from the perspective of companies/borrowers (leading managers of 38 Latvian companies/borrowers as experts, results of the 2018 survey).

Borrower’s solvency

Borrowe’s credit history

Borrower’s financial position

Existence of a loan guarantor

Loan collateral

0% 20% 40% 60% 80% 100% 120%

Weakly No changed Strictly

Figure 5. Answer given by borrowers to the question on criteria, in modern economic situation, do the commercial banks evaluate more strictly or liberally, compared to 2007

Source: developed by the authors (survey of leading managers of 38 Latvian companies/borrowers, in 2018).

Analysing the respondents’ answers (see Figure 5), the author concludes that only 2 criteria (borrower’s solvency and credit history) can be considered as debatable from the point of view of companies/borrowers, 86% of respondents believe that evaluation of solvency and also in 68 % of cases the evaluation of credit history now, compared to 2007 is tighter. Regarding the other criteria, the respondents’ views are in complete agreement. The companies/borrowers surveyed are convinced that both the financial position of the company, the collateral of the loan, and the existence of the guarantor are subject to more rigorous evaluation in modern commercial banks.

Proper assessment of its creditworthiness is a prerequisite for the success of any company/borrower. Next, the author wanted to find out, whether the company/borrower is assessing its creditworthiness, when deliberately borrowing money from a commercial bank. Precisely half of those surveyed give the answer “not always”, only 38 % unequivocally believe that have evaluated risk options and their ability to repay the incurred debt, while 12 % admit that they have not at all evaluated and considered the risks that exist, when a company incurs liabilities (see Figure 6).

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Not always

Yes

0% 10% 20% 30% 40% 50% 60%

Yes No Not always

Figure 6. Answer of respondents to the question on risk awareness, self-assessment of creditworthiness when borrowing money in 2018

Source: developed by the authors (survey of leading managers of 38 Latvian companies/borrowers, in 2018).

In 2018, while continuing to develop digital banking services and following global best practice to improve access to finance for small and medium-sized businesses, commercial banks in Latvia are beginning to introduce online creditworthiness assessment that could improve the access of entrepreneurs/borrowers to their creditworthiness and credit risk evaluation.

Conclusions

The research on the borrower’s creditworthiness and methods of its evaluation was based on three empirical studies, which focused on the credit managers of Latvian commercial banks (64 experts in 2011 and 12 experts in 2018) and Latvian companies-borrowers (38 companies in 2018).Managers of Latvian commercial banks were interviewed to find out what they are paying attention to when assessing a borrower’s creditworthiness and what methods they know and use in the lending decision-making process.It was hypothetically assumed that the post- crisis approach to creditworthiness evaluation – the field of work has improved for both the bank and entrepreneurs/borrowers. The results of the study partially proved this assumption, as managers in 2018 appear to have a more detailed and nuanced assessment of the borrower’s creditworthiness than managers in 2011 (different aspects appear).There was a broad consensus among Latvian entrepreneurs/borrowers that the assessment of creditworthiness in the post-crisis period has become stricter in all key criteria. Despite research limitations related to subjective opinions of experts, the obtained results may be used for formulating economic policy implications.

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Siddique, A., Masood, O., Javaria, K., Huy, D.T.N. 2020. A comparative study of performance of commercial banks in ASIAN developing and developed countries. Insights into Regional Development, 2(2), 580-591. https://doi.org/10.9770/IRD.2020.2.2(6)

Tatibekova, A., Bubeyev, M. 2020. How regulation of bank capital adequacy and liquidity affects pricing of bonds of the banks. Entre- preneurship and Sustainability Issues, 7(3), 1708-1722. https://doi.org/10.9770/jesi.2020.7.3(18)

Trueck, S., Rachev, S. (2009). Rating Based Modeling of Credit Risk. Academic Press

Tvaronavičienė, M., Masood, O., Javaria. K. 2018. Preconditions of the Eurozone economic security: how to overcome liquidity risk and cost inefficiency in leading banks of UK and Germany. Polish Journal of Management Studies, 18(1), 418-427. http://doi.org/10.17512/ pjms.2018.18.1.31

Aina CAPLINSKA Dr.oec., She is a docent at the Department of Sociology and Economics at Daugavpils University, Latvia. Her research interests are finance and credit, banking. ORCID ID: https://orcid.org/0000-0003-3099-7641

Manuela TVARONAVIČIENĖ is professor at General Jonas Zemaitis Military Academy of Lithuania. She is national head of European Union’s Horizon 2020 research and innovation programme European Research Council (ERC) under the European Union’s Horizon 2020 research and innovation programme Marie Sklodowska-Curie Research and Innovation Staff Exchanges ES H2020-MSCARISE-2014 CLUSDEVMED (2015-2019) Grant Agreement Number 645730730. ORCID ID: https://orcid.org/0000-0002-9667-3730

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1404 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 http://doi.org/10.9770/jssi.2020.9.4(24)

SUSTAINABLE DEVELOPMENT OF ECONOMY VIA SOCIALY ORIENTED ACTIVITIES1

Nikolay Gelashvili¹, Tatyana Pritvorova², Elena Petrenko3, Begarshyn Zhumanova4, Azhar Kizimbaeva5

1,2Y.A. Buketov Karaganda State Universit, Karagandy, Universitetskaya Street, 28, Kazakhstan 3Plekhanov Russian University of Economic, Moscow, Stremyanny lane 36, Russia 4Kazakh University of Economics, Finance and International Trade, Nur-Sultan, Akhmet Zhubanov street, 7, Kazakhstan 5Yessenov University, Aktau, 32 microdistrict, Kazakhstan

E-mails: [email protected], [email protected], 3petrenkо[email protected], [email protected] , [email protected]

Received 18 October 2019; accepte 15 April 2020; published 30 June 2020

Abstract. The article considers the problem of forming the vector of economic development on the principles of sustainable development and social economy. State security is based not only on successful economic development, but also on maintaining a balance of social interests. Social entrepreneurship is contrary to social stratification and confrontation in society. As an empirical basis for this direction of development, the authors explore the segment of non-profit organizations with constant income and organizations providing services in the social sphere of Kazakhstan. In the absence of an official definition of social entrepreneurship, these types of socially oriented activities most fully implement the principles of sustainable development, while at the same time forming economic and social value. The results of a sociological study reveal the microscopic extent of this phenomenon in Kazakhstan, and the overwhelming array of respondents focuses on the system of institutional support for social entrepreneurship. The authors developed recommendations on the regulatory legal status of social entrepreneurs and the main directions of their institutional support. Particular attention is paid to the development of intersectoral and intra-sectoral ties in the development of social entrepreneurship. The emphasis is on the accelerator model, as the most productive form of support, which has a network nature and is based on coordination mechanisms between the state and non-state actors. The formation of a full-fledged institutional environment will ensure the stability and progression of the economic development of socially oriented activities and create a critical mass of entities acting on the principles of sustainable development in the unity of economic and social values of social development.

Keywords: sustainable development; safety; socially oriented activities; institutional environment; Kazakhstan

Reference to this paper should be made as follows: Gelashvili, N., Pritvorova, T., Petrenko, E., Zhumanova, B., Kizimbaeva, A. 2020. Sustainable development of economy via socialy oriented activities. Journal of Security and Sustainability Issues, 9(4), 1405-1419. http://doi.org/10.9770/jssi.2020.9.4(24)

JEL Classifications: O15, O5, O53; P4; P47

1. Introduction

The concept of sustainable development of the economy implies a balanced development of the economic, social and environmental subsystems of society, which is a rather complicated task of applying a systematic approach to the regulation of public processes [Spangenberg 2005]. From the standpoint of combining social mission and economic profitability, and often all three characteristics of sustainable development, social entrepreneurship is a worthy alternative to the traditional solution to the problems of social vulnerability of target groups based on institutions of redistribution of national income (Goyal, Sergi 2015).

1 This research was supported by the project, which has received funding from the Committee of Science of the Ministry of Edu- cation and Science of RK under the grant №AP05130260 https://www.ncste.kz/assets/uploadify/vyipiska-nome-%E2%84%962-p8- ot-6- 12-2019.-09-12-2019-15-38-01.pdf JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online

The concepts of sustainability and social economy in the modern world, characterized by a decrease in the economic security of the development of countries, receive a lot of evidence of the synergistic effect of the synthesis of economic and social values in the sector of social entrepreneurship (Picciotti 2017).Social entrepreneur- ship is a relatively new phenomenon for Kazakhstan but has been rapidly developing in the OECD countries since the 70-80s of the XX century, i.e. has almost half a century of history. Its essence can be represented suc- cinctly: solving the social problem of society on the basis of an innovative idea, which simultaneously allows the entrepreneur to extract regular income.

The demand for social entrepreneurship as one of the phenomena of the modern economy, embodying the essence of its sustainable development in the inextricable unity of production of social and economic value, determines the relevance of the study of this phenomenon for Kazakhstan.Since the formation of the social entrepreneurship sector is going through the initial stage in Kazakhstan, it is advisable to create an institutional environment to support it, which will ensure its sustainable expanded reproduction.The purpose of the study is to identify social entrepreneurs in Kazakhstan (including potential ones) and determine their needs in forms of support to increase the sustainability of the country’s economic development.

2. Literature review

In scientific research and institutional practice of regulating social entrepreneurship, there are several different approaches that are taken by countries in the context of tasks being solved by the state and society (Moskovs- kaya et.al. 2017). Researchers emphasize that one of these priorities is to increase the sustainability of the economy at the regional and local level (Kim, Lim 2017). Other authors identify specific ways in which social entrepreneurs contribute to the transition to sustainable development (Hudon, Huybrechts 2017).The system of initial ideas about social entrepreneurship was laid down by researchers Dees (2012), Martin, Osberg (2015), Mair, Marty (2006), Satar, Natasha (2019), Alter (2006) and others.

The appearance of regularly earned income that is not related to grants and subsidies has opened up a new development opportunity for the nonprofit sector and at the same time provided the basis for identifying signs of entrepreneurship in it. This point of view is supported by such researchers as Boschee (2001), Defourny, Nyssens (2010), Sullivan et.al., (2003), Haugh (2007) and others. For non-profit sector organizations, income did not become an independent goal, but became a means for realizing a social mission and a criterion of entrepreneurial activity.

The variety of official legal frameworks used by different countries to regulate the activities of social entrepreneurs is systematized in the works Nicholls (2010), Galera, Borzaga (2009), Grishina (2016) and others.The experience of an effective institutional environment that supports social entrepreneurship in countries around the world is presented in many studies, including by international organizations, and reflects its diversity. De- fourny, Nyssens (2017), Hwang et al., (2017), Marianne (2018), Arai, Burmistrova (2014), Kennedy (2016). The creation of an institutional environment for the development of social entrepreneurship in Kazakhstan is the most important prerequisite for activating its development.

3. Methodology

Systemic and institutional analysis, comparative cross-country analysis, a sociological study of business entities: existing and potential social entrepreneurs. A sociological study was carried out in five regions of Ka- zakhstan: East Kazakhstan, Pavlodar, Kostanay, Karaganda, Akmola, as well as in the cities of Nur-Sultan and Almaty. Survey methods in the form of questionnaires and interviews in focus groups were used. The aim of the study was to identify social entrepreneurs in the commercial and non-profit sectors of the economy to determine their needs for support measures.

In our country, despite the absence of a definition of social entrepreneurship in the official regulatory framework, certain scales of empirical practices have developed that, in terms of activity, correspond to the frame-

1406 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online work definition of social entrepreneurship that has developed in world science and practice.In addition to non- profit organizations (NPO) with constant market income, such framework definitions correspond to “organizations operating in the social sphere” (Code of the Republic of Kazakhstan dated December 25, 2017 No.120-VI “On taxes and other mandatory payments to the budget (Tax Code)”).

The possible areas of activity for them include education services at all levels, social protection of the population, sports, medical services, and some others that are in line with the social obligations of the state. There are no requirements for the legal type of organization, which gives it maximum freedom in this matter. Organiza- tions that attract employees with disabilities (at least 51% of employees and their share in the salary Fund, and 35% for certain types of disabilities) are recognized as a separate type.

In the sociological study, subjects with the status of NPOs and small and small businesses that meet the requirements of article 290 of the Tax Code of the Republic of Kazakhstan (Tax Code) were interviewed. The electronic survey of NPOs was conducted using the database of the umbrella organization Association of legal entities (ALE) “Civil Alliance”. Commercial organizations were surveyed according to the register of the national chamber of entrepreneurs (NCE) “Atameken”.

Identification of social entrepreneurs in the NPO sector was carried out based on the criteria: 1) The presence of activities with regular market income. 2) Planned activities with regular market income.

The identification of social entrepreneurs in the commercial sector was based on the criteria: 1) Organizations working in the social sphere (education, healthcare, culture, sports). 2) Organizations attracting labor of employees with disabilities.

Those who met the criteria were asked questions about the problems in their activities, the available and desired forms of support from the state (tax and other financial benefits, grants / interest-free loans, preferential rental of premises) and other entities of the institutional environment (universities, foundations, international organizations, associations, business partners).

Focus groups were held at regional seminars of the ALE «Civil Alliance» and NCE «Atameken» with the participation of experts - heads of organizations and a similar range of issues was discussed.

4. The main results

There are no official sources of data on the scale of social entrepreneurship in Kazakhstan, and therefore, estimates of our sociological research are of interest, which are confirmed by independent estimates in the sector of non-profit organizations.

We interviewed 237 NPOs in 5 regions and two capitals of Kazakhstan. 22 organizations, 8.6% of the total number of respondents to the questionnaire, noted social entrepreneurship as an ongoing project. Another 7 organizations (2.9%) have ideas or specific plans for its development. Thus, in 2019, 11.5% of NPOs are already or plan to become social entrepreneurs.According to the assessment given in the analytical report on the current state of the non-governmental sector in 2019, 14.4% of 272 NPO organizations in 14 regions and 3 cities of republican significance noted social entrepreneurship as an active area of activity. 16% said that commercial activities / paid services are convenient sources of financing for them.

If we make an assumption and extrapolate this data to the number of NPOs, then we can say that 10-15% of Kazakhstani NPOs are engaged in or plan to develop business activities, that is, approximately 3 thousand organizations.Answers were received from 158 commercial organizations providing social services or representing organizations with the participation of workers with disabilities.The opinions of 37 experts of different levels on the development of NPO experts participating in focus groups and representing the managerial body

1407 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online of the Civic Alliance and NCE Atameken were also taken into account.

The range of opinions on the necessary forms of institutional support for social entrepreneurs outlined its following priorities: l 68% of respondents believe that at this stage there is no need for a separate law “On Social Entrepreneurship” and the introduction of an appropriate definition in the basic regulatory act is sufficient. (Code of the Republic of Kazakhstan dated October 29, 2015 No.375-V “Entrepreneurial Code of the Republic of Kazakhstan”) l 71% of respondents believe that they need financial support in the form of grants or interest-free loans for development. l 83% of respondents need additional training to develop the first business model or to develop what they already implement. l 25% would like assistance in accessing free or preferential rental premises. l 46% feel the need for free consulting assistance at the initial stages of implementing a business model.

Possible forms of support for Kazakhstan’s social entrepreneurs should be considered in the context of world experience. The main directions of the social entrepreneurship support system in modern countries are: legal support, tax incentives, research results, financial loans and grants, methodological assistance (work technologies, competencies and skills, mentors, etc.), resource support (providing infrastructure for doing business, network resources of associations of social entrepreneurs, etc.), information support.

The institutional support environment is constituted by a system of entities represented by all sectors of the economy. The elements of the institutional environment include: 1. State authorized bodies in the form of central and local governments. Interstate organizations, for example, the European Union. 2. Universities performing, including the functions of business schools. Research centers that carry out fundamental research (concepts, theories, support methods) and applied research (regulatory framework, business models, organization development strategies, etc.). 3. Non-profit and commercial organizations, depending on the specific project, supporting social entrepreneurship in various forms. 4. Association of social entrepreneurs. 5. Periodicals of a scientific and applied nature. 6. Conferences and forums on social entrepreneurship. (Figure 1)

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Conference forums — network and print media

1 Social Entrepreneurship Policy: 2 Universities and research centers: 1.1 Legal framework 2.1 scientific research; 1.2 Tax system 2.2 educational programs; 1.3 Direct financial support for 2.3 Business schools and trainings; joint ventures through non- 2.4 Accelerators with resource companies - profit organizations (Funds) 3. Association of social philanthropists entrepreneurs 1.4 Indirect financial support (scientific grants in the field of joint ventures) Information support 4. Commercial organizations: 1.5 Grants / subsidies in kind at 4.1 Investors the local government level 4.2 Sponsors (preferential or free rent, 4.3 Mentors business incubators with benefits for utility and other 6. Foundations payments, etc.) 6 .1 Private and corporate charitable foundations, 1.6 Assistance in the sale of 5 Non-profit organizations 6.2 International funds products and services with the functions of business 1.7 Participation in acceleration 6.3 Venture capital funds incubators or accelerators programs as a customer and 6.4 EU as a sponsor technical sponsor support

Figure 1. Subjects (elements) and communications in the system of mechanisms for supporting social entrepreneurs

Source: compiled by the authors

Depending on the country, different elements will be the drivers of the system, but, ultimately, its complexity and ability for the social entrepreneur to receive comprehensive support depending on specific problems will play a significant role (Bozhikin et al., 2019).

5. Regulatory status of social entrepreneurs

A distinctive feature of the state, as a subject of the system, is its rule-making function, which involves the legal definition of social entrepreneurship and the procedure for its taxation (Pritvorova, Spanova 2019). The main characteristics of modern norm-setting practice in the global economy are either / or: l The specific legal form of registration as a special type of cooperative or company (Belgium, United King- dom, Canada, Poland, Italy, USA, etc.). l Legal qualification of the organization’s status (status, certificate), which is used in South Korea, Finland, Slovenia, Austria, etc.

The norms that are recognized by most countries and determine the legal personality are: l Implementation of both economic and social activities; l Financial independence from other legal entities, local communities, government bodies; l Prohibition of distribution or the right to distribute part of the profit; l Transfer of assets in the event of bankruptcy to a similar organization in status.

Some countries indicate specific areas of activity for social entrepreneurs, allow issuing shares, apply the procedure for blocking assets, i.e. the possibility of their withdrawal only in the event of a similar reward. The decisive basis for legitimization in the status of a social entrepreneur is tax and other benefits that the subject receives after confirming the status. If these benefits are small or absent, then many prefer to act in the status of a non-profit or commercial organization.

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It should be noted that, despite the absence of an official definition of social entrepreneurship, the Tax Code of the Republic of Kazakhstan offers significant tax benefits for non-profit organizations and organizations engaged in social activities, which at this stage represent empirical practices of social entrepreneurship in Kazakhstan. When paying income tax, non-profit organizations can deduct income from a state social order, Deposit, sponsorship, grant, or charitable assistance. The remainder is taxed according to the General rules.

Organizations operating in the social sphere are exempted from corporate income tax if their activities are included in the list of types of activities and income from it established by Article 290 of the Tax Code of the Republic of Kazakhstan and make up 90% of the total income. Since the already provided tax incentives are maximum, for such organizations only the possibility of renting state property without a tender and at reduced rates can be attractive.

Organizations employing workers with disabilities in established quantitative ratios are exempt from paying value added tax and social tax. (Articles 394 and 482 of the Tax Code of the Republic of Kazakhstan). In addition, they have priority in public procurement, but the list of goods, services and participating organizations is fixed. (Law of the Republic of Kazakhstan dated December 4, 2015 No.434-V “On Public Procurement”).

Taking into account the trends of world practice and surveys of the Kazakhstan’s expert community, we propose the establishment of status (certificate) of the social entrepreneur, the receipt of which is not related to a specific legal form, but is associated with fulfilling the requirements and receiving the benefits. The following standards are proposed as requirements: 1) the Implementation of activities according to the list provided in article 290 of the Tax Code of the Republic of Kazakhstan or the presence in the organization of 30% of employees from among citizens in a difficult life situation. (Law of the Republic of Kazakhstan dated December 29, 2008 No. 114-IV “On Special Social Ser- vices”). 2) A ban on the withdrawal (blocking) of assets without an appropriate consideration.

As benefits are offered: 1) Application of tax benefits by type of organizations providing services in the social sphere (Article 290). 2) The right to distribute 30% of the organization’s profit. 3) The right to lease state property without a tender and at reduced rates is not more than 30% of the generally accepted level.

These conditions will be interesting for non-profit organizations, as they now do not have the right to distribute profits, and therefore are not attractive to outside investors. At the same time, they will not change the legal form and can participate in state orders according to the profile of their activities and combine different sources of financing.The possibility of renting state property without a tender and at preferential rates will be of interest to commercial organizations providing social services and meeting the requirements of Article 290 of the Tax Code of the Republic of Kazakhstan.

If the certificate is in demand and will allow increasing the number of economic entities engaged in social entrepreneurship, then in the future it will be possible to adjust the requirements for social entrepreneurs and benefits for them.

6. Other forms of state support for social entrepreneurs

As for other forms, we can say that a purposeful state policy in Kazakhstan in the field of social entrepreneurship is not being implemented. At the same time, this type of business can solve many social problems in the future, provide employment and reduce the dependence on state aid for many target groups. In world practice, there are many forms of support from the state. Most commonly used by countries: l subsidizing the costs of hiring labor resources from target groups (the composition is regulated);

1410 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online l subsidizing start-up business (up to 3 years); l tax incentives for start-ups for 2 years; l access to grants, l non-competitive access to public procurement and rental of state property (at preferential rates); l access to educational programs and consulting with targeted or co-financing.

For the first time since 2018, in Kazakhstan, only two scientific grants of the Committee of Science of the Ministry of Education and Science of the Republic of Kazakhstan on the development of social entrepreneurship are being implemented, and there is some informational support in the media, mainly of a situational nature. At the same time, according to the results of a sociological study given above, many organizations are interested in grant support or soft / interest-free lending. In our opinion, the activation of the state’s participation in supporting social entrepreneurship can be carried out in the following areas: l Funding of applied research in the interests of social entrepreneurship in the framework of grant funding Of the Committee of science of the Ministry of education and science of the Republic of Kazakhstan and the National joint stock company “ Civil Initiatives Support Center “ (CISC). l Interest-free lending to social entrepreneurship from the funds “CISC”, which can conduct such activities independently, but better in partnership with Foundations (public organizations) through acceleration programs, which will be discussed in more detail below. l The participation of local governments as a grantor or lender (with preferential lending rates) through regional socio-entrepreneurial corporations (SEC), which will fully correspond to their social function. It is local governments that know which target groups in the difficult life situation in this region are the most problematic (oralmans, children, citizens after probation, etc.), what should be concentrated on solving their difficulties. Such activities are advisable in cooperation with local universities or accelerators, which will provide training, methodological support, consulting and other technical support measures. This mechanism of coordination of efforts of subjects of different sectors will be most effective. l Providing at the local level preferential or free rent of premises, places in business incubators with a basic set of services. l Regular informational support of social entrepreneurship in state media at all levels.

7. Opportunities for supporting social entrepreneurship in other sectors of the economy (non-state actors)

Social entrepreneurship, due to its low profitability, relies heavily on the network structure of the business ecosystem, in which private and non-profit sector entities are represented. Non-governmental structures provide training, provide grants / loans, and consulting services for social entrepreneurs.

In world practice, there are two main models for the participation of non-state actors in the development of social entrepreneurship. In liberal countries, support is mainly provided by private foundations, which, together with universities or non-profit organizations - accelerators, provide educational, consulting, and training support to social entrepreneurs. In Europe, these functions are financed more by the state, and are implemented by actors of the non-profit sector. US private foundations have been active in this area since the 80s of the 20th century. Some of them focus on the formation of communities and networking, while others specialize in startups with a social mission for people who experience significant difficulties in finding work.

A typical networking structure is the private Skoll Foundation, which supports social entrepreneurship. It includes: l Scientific Skoll Center for Social Entrepreneurship at Oxford University Business School; l Skoll World Forum on Social Entrepreneurship; l Grant program for the promotion and development of the work of social entrepreneurs-innovators Skoll Awards for Social Entrepreneurship.

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This example points to the widespread link between private foundations and universities. Starting at Harvard Business School, many universities have established research centers, MBA curricula and regularly conduct economic and sociological research in the field of social innovation.

Public organizations such as associations are active, such as the Social Enterprise Alliance, which unites 941 organizations in 44 States. The membership of the Association is diversified. its members are business structures, non-profit organizations, individuals, and social enterprises. They are United by supporting effective social changes achieved through events, projects, and creating business networks. The Americas Group of Workability International is an active Association that unites those who attract workers with disabilities.

In the last twenty years, several active acceleration programs have appeared, operating on the basis of non- profit organizations and universities. Acceleration programs implemented by non-profit organizations are presented at the expense of sponsors, philanthropy of large corporations and charitable foundations. The most experienced US organizations are Uncharted and Propeller. There are examples of university-based accelerators, such as the GSBI Miller Center of Santa Clara University (Silicon Valley). Accelerators are an example of coordination of financial resources and productive management and demonstrate a high level of “survival” of subjects of social entrepreneurship.

The institutional environment in European countries is generally similar. The peculiarity of the European model of social entrepreneurship development is that it was born in the environment of the non-profit sector, but it is still developing mainly as one of the directions of its development. Despite the adoption by many European countries of special narrowly focused laws for social entrepreneurs, most active actors still prefer to remain within the legal framework of the”third sector”. The main subjects of social entrepreneurship in Europe are cooperatives, mutual aid societies, and associations. International foundations, such as the Schwab Foun- dation for Social Entrepreneurship, based in Switzerland, play a significant role in the development of social entrepreneurship in Europe.

There are major research centers - EMES European Research Network, which is a chain of University research centers and individual scientists who specialize in forming an array of theoretical concepts and empirical research in the field of social entrepreneurship. In the practice of many countries, universities were the first structures that contributed to the growth of educational training and the formation of practical skills of social entrepreneurs.

The European Union, through its international organizations, actively promotes training programs in countries around the world where the phenomenon of social entrepreneurship is just emerging. Projects of this kind are usually implemented through a multi-entity institutional partnership of non-profit organizations and universities, which involves entities from several countries, including the European Union and other countries of the world. For example, Belarus has implemented the Business incubator for social entrepreneurs program, in which the Belgian non-profit organization OBD Brussels, TNU Network University (the Netherlands) and the public Association “New faces” (Belarus) participated in the partner network. In such programs the emphasis is on methodology and technical assistance in the organization of social business, but not for grant support.

Accelerators also appeared in Europe in the 2000s, promoting social projects with constant profitability. Since 2016, a joint project of the Lund University, the School of Social Work in Helsingborg and the Swedish Agency for Economic and Regional Growth, the SoPact accelerator, has been operating. The model is focused on network relationships and communications.

An active accelerator is Social Impact Start (Berlin, Vienna, Stuttgart and other cities), which provides up to 8 months of support in the form of professional counseling, coworking, coaching, seminars. It is supported by 9 largest banks and funds in Europe. Knowledge and skills are distributed through social impact laboratories, which operate in 8 cities in Germany and Austria. The accelerator employs 90 mentors. Local authorities also participate in the programs, which initiate, for example, targeted programs for migrants.

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Features of accelerators for social entrepreneurship are summarized and presented in Table 1.Thus, the institutional support of social entrepreneurship is multi-channel and network. It involves all sectors of the economy, providing a flexible institutional environment and, ultimately, significant social effects for society.

Table 1. Features of support for social entrepreneurs through acceleration programs (based on US materials)

Attracting The involvement Social Accelerator Financial Founder resources to Implementation period of qualified Specialization performance projects consultants Nonprofit Sponsorship Only with Programs from 3 to 10 months, Consultants According to organizations or and charity. projects that have an average of 6 months, longer are attracted published data, universities State significant social periods due to the peculiarities of on a paid and from 10 to 80 financing or environmental social business projects free basis from projects are effects, directions leading supported per annually companies in the year world. NPO: Limited use For instance: Uncharted work mostly remotely. Active Mass Challengeс Uncharted of the Propeller: water, 4-5 weeks away camp: training, cooperation from 2011 to (formerly practice food safety, consultations with mentors, with 2018, Unreasonable of investing healthcare, investors. companies he supported 600 Institute, in company education; The team draws up a plan PwG, social projects, Colorado); capital, the Global Social Benefit for 18 months and is given a Morgan attracted 700 Propeller (New use of grant Institute: poverty; mentor who will accompany the Stanley, million dollars / Orleans); support Uncharted: implementation of the plan. FSC Uncharted: from Mass Challenge systems and urban poverty, GSBI work with scalable Interactive, 2010 to 2019 (Boston) interest-free discrimination; projects: 3 months of personal Amazon et al. - 190 projects, University: loans Mass Challenge participation of the team in the investments of GSBI Accelerator annually depending strategic session and 6 months of 252 Santa Clara on the priorities of mentoring support million dollars (Silicon Valley) partners Fast Forward: $ 25,000 grant, Fast Forward 13 weeks of training and 100 (California) mentors

Source: compiled by the authors

The Kazakhstani practice of training and consulting social entrepreneurs is based mainly on the model of business schools and trainings. In Kazakhstan, Almaty University of Management (AUM), together with the Kazakhstan Management Development Fund (KMDF) and the non-profit organization “Management Devel- opment Association”, has been implementing a training program “уСПех” since 2016. Akimat of Almaty city provides informational support to this project. The business cycle of the project represents a training program in business planning skills and related competencies. At the end of the training, participants present their projects, and invited experts give a predictive assessment of the prospects of this project in the markets for goods and services and recommendations. The project involves both students and non-profit organizations wishing to master this type of activity.

There is an example of an international project sponsored by the European Union, which is being implemented as a training cycle for social entrepreneurs, launched in 2019 at the Karaganda State University with the participation of universities and organizations from Lithuania, India, Argentina, Uganda.Both of these projects are a continuation of the main activities of universities that have mastered the model of business school, trainings and apply it confidently enough.

At the same time, a comparative analysis of the effectiveness of the three tools in international practice allows us to conclude in favor of the acceleration project, which is more costly, but at the same time, more effective in achieving the final results.

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The accelerator project is quite complicated in management, it needs funding for training the project team of social entrepreneurship in the field, as well as long-term mentoring by mentors, which also requires payment for their work. Therefore, the accelerator project involves a partnership: l commercial organizations (investors, sponsors, mentors), l non-profit organizations (in practice, implementing the accelerator business model for social entrepreneurs), l funds with diversified complex sources of financing having different status (may be charitable, venture, budget).

Table 2. Comparative analysis of the program “Zharkyra” and the typical model of the accelerator

Comparison options Typical Accelerator Model Zharkyra Program Enrollment in the Open accelerator access contest Open tender for a package of program services and an interest-free loan 1 stage. Those who have passed the competition at the stage of the business Competition of social The stage of the idea expressed in the application are invited to the accelerator for business ideas, whose project from which personal participation of the team in the training session business plans are finalized they come to the in the course of 4 trainings program (pre-seed and the best ones are stage) selected during the defense 2 stage. Project teams are invited to the accelerator (summer camp, Project protection and financing Formation of laboratory, etc.) for personal participation in the training session, of the best projects: interest-free competencies which lasts from 3 to 5 weeks. loan for 1.5-3 years and During this period, the business model is worked out with different development of consultants and other teams. practical skills He is trained in marketing, sales, negotiations, etc. 3 stage. After the period of personal participation, a demo session is held Providing opportunities Demo session to attract for the team, gets a mentor, mentor works with him in close contact for training tours and investors remotely for up to 18 months, gets access to the alumni community internships Ability to get advice and can use their support too and networking

Source: compiled by the authors

Closer than Kazakhstan’s universities, the Zharkyra program approached the accelerator model, which is one of the projects of the Eurasia Central Asia Fund in Kazakhstan (EFCA), implemented in Atyrau and Mangistau regions together with Tengizchevroil LLP. The program for 2016-2018 supported 21 projects. Judging by the fact that while the program is being implemented in only two areas, it is possible with the financial support of such a powerful partner as Tengizchevroil LLP.

A comparative analysis of a typical business model of an accelerator and support measures under the Zharkyra program is presented in Table 2.

Comparison of models allows us to conclude that the Zharkyra program, unique for Kazakhstan today, has a simplified cycle, which is primarily associated with resource constraints. Characteristic differences are the following features: l In the Zharkyra program, the business acceleration program includes 4 trainings, during which a business plan is developed, and a business model is honed. In the standard model, the main work is not only honing the business plan, but personal participation of the entire project team in training, discussing the project with other teams and consultants, teaching active project management skills. In the Zharkyra program, it is not possible to attract the entire project team to the accelerator and create field conditions for the team, but internships and study tours in the CIS countries are provided. l In a typical accelerator, a team is assigned a mentor who is an experienced businessman and is selected by type of activity. He oversees the team for quite a long time, up to 1.5 years. In the program “Zharkyra” this action is absent. l Typical accelerators create associations of graduates who can also provide resources of their social network

1414 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online to solve problems or difficulties for beginners. Since the Zharkyra program has been in operation for only three years, it has not yet announced the creation of an association of its graduates.

In our opinion, it is necessary to expand the practice of acceleration in Kazakhstan, since its effectiveness is higher than that of the standard project “training cycle” in a business school.

8. Discussion

The research results cover three types of institutional support for social entrepreneurship: the regulatory framework and forms of support from the public sector, support to other entities of the institutional environment (non-state actors).

An assessment of the legal support in Kazakhstan in the context of global trends allows us to agree with the point of view (Galera 2009, Hwang et al., 2017), which consider that the legal qualification of the status (status) of the organization, which is confirmed by a certificate, is sufficient. The rationale for such a proposal is the presence of a significant number of existing tax benefits for organizations providing services in the social sphere. In this regard, the status will be of interest more likely for NPOs that will receive the right to distribute 30% of profits and free rental of premises if they fulfill the conditions for obtaining this certificate. In this regard, we present a point of view that is different from those authors who believe that a separate law on social entrepreneurship is necessary (Lambooy, Argyrou 2014).

We also believe that the efforts of individual actors in the institutional environment or their fragmented efforts are insufficient, as was already indicated, for example, in (Jung et al., 2016). A concentration of resources and actions of subjects of all sectors of the economy is needed to stimulate the growth of social entrepreneurship. Only an increase in the scale of socially oriented activities at the local and regional level will allow us to form a vector of sustainable development, in this we agree with the results set forth in the article (Kim, Lim 2017).

9. Conclusion

Summing up the study, we can draw the following conclusions and offer recommendations:

1. Only the formation of multilevel institutional support for social entrepreneurship will allow to accumulate at the local, regional and national levels a critical mass of changes for the genesis of the transition to sustainable development of the economy of Kazakhstan.

2. Social entrepreneurship in Kazakhstan is a fairly new phenomenon, not yet fully reflected in theoretical general- izations, empirical research, and public policy. There is no definition of this phenomenon in the regulatory framework, but the Tax Code of the Republic of Kazakhstan has benefits for organizations that, in terms of activities, comply with the international framework definition of this type of business. These are non-profit organizations that have a social mission and can have regular market income. They are also commercial organizations that provide social services within the framework of social obligations of the state or employ workers with disabilities.

An important factor in the successful development of the country is the provision of social security, which is an integral part of national security. Social entrepreneurship removes the confrontation of economic benefits and social benefits and thereby contributes to social security in society.

Our sociological study allowed us to estimate the number of existing and potential social entrepreneurs in Kazakhstan at approximately 3 thousand organizations. Existing and emerging entrepreneurs need financial (grants / interest-free loans) support, training and mentoring services, consulting services, free / preferential rental of premises.

3. In world practice, there is multichannel support for social entrepreneurship, since its hybrid nature suggests

1415 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online the possibility of participation of all sectors of the economy in the development of this type of economic activity. The main structures contributing to the development of social entrepreneurship in world practice are non- profit and commercial organizations, as well as government agencies that play a greater role in Europe and a smaller one in liberal countries (USA, UK, etc.).

4. State support in Kazakhstan at this stage is represented by tax incentives for certain types of social entrepreneurship organizations and three research grants through the Ministry of Education and Science of the Republic of Kazakhstan and CISC.

We believe that it is necessary to move to systemic support based on coordination of actions and cooperation of efforts of all sectors of the economy.

We propose legal support for social entrepreneurship in the form of legal qualifications of the state of the organization? i.e. certificate of a social entrepreneur, the receipt of which does not require a change in the legal form. The application of the certificate will expand the range of organizations supported by tax and other benefits that will meet the requirements (area of activity, share of the target groups, a ban on the withdrawal of assets) and have the appropriate rights (tax benefits, distribution of 30% of profits, advantages in the issue of renting state property).

It is proposed to expand financial support from the state through the EFCA Foundation and other proto-acceleration programs, with the function of a specific order of the direction of entrepreneurship, for example, boarding houses for the elderly. CISC may participate as a donor in these specific projects through the EFCA Foundation and other funds, which would strengthen the current orientation of the activities of CISC itself.

At the local level, it is necessary to intensify the provision of in-kind grants when obtaining a loan in the acceleration program, i.e. provide preferential premises for rent / property, reduced tariffs for utilities.

Social and entrepreneurial corporations that operate in each region must finally strengthen their social mission and conduct start-up events in the form of hackathons, not only for innovative projects, but also for social entrepreneurs. It is also possible for the SEC to participate in acceleration programs or business schools of local universities.

The organization of the annual forum of social entrepreneurs of Kazakhstan is advisable, which is impossible without state support. The forum may discuss new ideas and directions of development, specific business models and the possibilities of their replication in other regions (for example, an effective model of the Kenes Center NGO in Almaty). The forum can become a platform for organizing trainings and master classes with social entrepreneurs from other countries, representatives of international funds and accelerators, many of which work all over the world.

With the support of the state or Atameken NPP, it is advisable to create a dialogue platform that could become a platform for the exchange of views, coordination of efforts, and processing of ideas of various stakeholders supporting social entrepreneurship.

5. NCE Atameken together with the ALE Civic Alliance can create a register of social entrepreneurs in Ka- zakhstan. Since the nature of this type of activity presupposes a duality of origin, the participation of two associations will cover all current and potential entrepreneurs. The registry is necessary to expand the circle of participants in acceleration programs, business schools, international projects and other forms of support.

6. Universities in the world practice were pioneers in the aspect of training social entrepreneurs in business schools. In Kazakhstan, only Alma U and the KFMD fund are implementing a training cycle for social entre- preneurs, but the resources for moving to the accelerator model are clearly not enough. In order to form a critical mass of social entrepreneurs, it is advisable in each regional center not to have a business school, but a proto-

1416 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online accelerator based on a foundation (for example, DARA, which implements charitable social projects in all areas of Kazakhstan). University scientists may be involved in some trainings, but the teaching staff must be diversified. The participation of successful business representatives should not be limited to one-time meetings with students. Moreover, in business schools, these students are often no more active than ordinary students, while project teams trained in applications and aimed at implementing a specific project are trained in the accelerator.

7. Accelerators in the world practice are the most productive support tool, the organizational mechanism of which relies on an open tender for the selection of applications; team training with personal presence and subsequent distance work with a mentor; the formation of multilateral skills not only in business planning, but also many others from the field of operational management; during their stay in the laboratory conducting in-session discussions with all teams; access to network resources of all graduates of the program.

The Zharkyra program of the EFCA Foundation, funded by Tengizchevroil LLP, is currently the closest prototype accelerator for social entrepreneurs. But it operates only in the Atyrau and Mangistau regions, and this program does not have resources for a full-scale effective model.

In such a situation, it is possible either to attract additional resources of the state, for example, through CISC or SEC, or to expand the practice of other funds with experience in social services projects (for example, the “DARA” Fund) to implement acceleration programs for social entrepreneurs.

Moreover, acceleration programs need to focus not only on the non-profit sector, but also on commercial organizations that implement a social mission, that is, on the register of social entrepreneurs.

Economic development and social harmony are the main goal of the country’s development and the key to its sustainability and security Social entrepreneurship, whose activities are based on the principles of sustainable development, will most consistently translate these principles into progressive movement throughout the country’s economy.

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Acknowledgements

This research was supported by the project, which has received funding from the Committee of Science of the Ministry of Education and Science of RK under the grant №AP05130260 https://www.ncste.kz/assets/uploadify/vyipiska-nome-%E2%84%962-p8- ot-6-12- 2019.-09-12-2019-15-38-01.pdf

Nikolay GELASHVILI ORCID ID: orcid.org/0000-0002-7115-2007

Tatyana PRITVOROVA ORCID ID: orcid.org/0000-0002-6306-3960

Yelena PETRENKO ORCID ID: orcid.org/0000-0001-6892-2392

Bekarshin JUMANOVA ORCID ID: orcid.org/0000-0002-4266-7394

Azhar KIZIMBAEVA ORCID ID: orcid.org/0000-0002-2582-3156

This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/

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1420 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 http://doi.org/10.9770/jssi.2020.9.4(25)

SYNERGETIC MANAGEMENT TOOLS FOR ENTERPRISE ECONOMIC SECURITY

Lidiia Karpenko¹*, Oksana Zhylinska², Hennadii Dmytrenko3, Nataliia V. Poprozman4, Viktoriia Koltun5

1* Odessa Regional Institute for Public Administration of the National Academy for Public Administration under the President of Ukraine, Genuezka, 22, 65009, Odessa, Ukraine 2Taras Shevchenko National University of Kyiv, Volodimirska st., 60, Kiev, 01033 Ukraine 3 Institute for Personnel Training of the State Employment Service of Ukraine,52-A, Sichovykh Striltsiv Street, Kyiv, 01000, Ukraine 4National University of Life and Environmental Sciences of Ukraine, 15, Geroiv Oboroni st., Kiev, 03041, Ukraine 5National Academy for Public Administration under the President of Ukraine, 20, Ezhena Pottier st., Kyiv, 03057, Ukraine

E-mail: 1*[email protected] (Corresponding author)

Received 15 October 2019; accepted 25 March 2020; published 30 June 2020

Abstract. The study of synergistic laws and patterns made it possible to substantiate and explain the possibility of their transfer to the plane of the theory of management of economic security of the enterprise in order to develop tools for synergistic management of economic security of the enterprise. The definition of the concept of “economic security of the enterprise” is proposed, which represents the ability to resist it as an ectropic factor to the influence of threats to the environment, ie the supersystems (countries and industries) as an entropy factor, as well as ability to respond to threats in a coordinated way. An algorithm for substantiating the choice of strategies for managing the economic security of the enterprise has been developed; using this algorithm based on the detection of bifurcation points and their analysis, it is possible to identify the type of crisis and take into account the existence of the internal mechanism of development inherent in the economic security of the enterprise in a certain period - adaptation or bifurcation, according to which it is necessary to develop The paper emphasizes that a high level of economic security of the enterprise depends on the formation of synergistic effects, as well as on the ability to establish coherent or coordinated relationships that will lead to cooperative processes. Three types of synergetic effects resulting from management actions are considered: functional (this is a result equivalent to the sum of the component parts), positive (this is a result that exceeds the sum of the component parts) and negative (this is a result that is less than the sum of the component parts).

Keywords: economic security; synergistic effect; strategy; adaptation mechanism; bifurcation mechanism

Reference to this paper should be made as follows: Karpenko, L., Zhylinska, O., Dmytrenko, H., Poprozman, N.V., Koltun, V. 2020. Synergetic management tools for enterprise economic security. Journal of Security and Sustainability Issues, 9(4), 1421-1430. http://doi.org/10.9770/jssi.2020.9.4(25)

JEL Classifications: F35; F42

1. Introduction

The problem of security is widespread in the age of geostrategic reality, its cause is the exponential growth of threats to mankind and their multiplicity. This forces the security phenomenon to be viewed at all levels: at the level of the country, industry, enterprise, personality. Especially relevant today is the construction of the security paradigm of the enterprise itself, since the security of economic entities is a primary element in the security system of the national economy and is its important subsystem. In turn, meeting the needs of the highest level is impossible unless the need for security is satisfied. Therefore, managing the economic security of the enterprise becomes an important prerequisite for its development and achieving a state of stable equilibrium. JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online

Scientific advances in security-oriented management are quite significant. At the same time, exacerbation of resource problems and acceleration of random fluctuations in the economy provoke an increase of chaos and uncertainty, emergence of unmanaged bifurcations, in which there is a probable choice between opposite tra- jectories of enterprise development - either a jumping efficiency increase or bankruptcy.

Therefore, solving the problem of managing the economic security of the enterprise requires taking into account the objective laws of synergetics, which will become its newest methodological platform. If you translate the concept of economic security into a synergetic thesaurus, it can be noted that it is a result of management actions that regulate the chaos in the enterprise, and security activities are an important element of the company’s key homeostats. Thus, the success of the enterprise and its sustainability determine the relevance of the development of tools for synergistic management of economic security of the enterprise.

The purpose of the paper is to develop theoretical and methodological and applied foundations of synergistic management of economic security of the enterprise.

2. Literature Survey

Leading Ukrainian scholars such as: Lusardi, A., & Mitchell, O.S. (2017), Simanavičienė, Ž., & Stankevičius, A. (2017), Tvaronavičienė, M., Masood, O., & Javaria, K. (2018). have developed a powerful methodological foundation for further study of economic security issues. The severity of the issues outlined determines the increased interest of authoritative scientists in the study of synergetics as a theory of self-organization. The followin scientists have made a significant contribution to its research: Augutis, J., et al. (2017), Drobyazko, S., et al. (2019a), Drobyazko, S., et al. (2019b), Tetiana, H., et al. (2019); Plėta, et al. (2020). The issues of the synergetic management of complex systems is addressed by: Ianioglo, A. (2018), Zhou, J., et al. (2018), Hilorme, T., et al. (2019). The exponential growth of threats to humanity and their multiple vectors forces to reconsider the security-science paradigm at all levels: at the state, enterprise, and individual levels (Dudin, M.N., et al. (2018); Chehabeddine, Tvaronavičienė, (2020)).

Understanding security as a law, principle and phenomenon (category) are closely linked: – security as law is equated with being itself, that is, security is an inherent property of being at rest status (Peppers, S.F. (2017)). Being, in turn, is a prerequisite for safety; – security as a principle is a process of protecting being, which obeys the immutable and powerful law of development and is its pledge (Yu, C. (2018)). Security leads to the transition from one being to another, and it is assumed that the next state of being will be better than the previous in terms of quantitative or qualitative characteristics, because security is modified with the development of the object or phenomenon; – security as a phenomenon is opposed to constant being and it is in a dialectical relation to danger, because it is conditioned by the nature of self-preservation (Schimmel, K., et al. (2017)).

The popularity of security issues and their interdisciplinary nature, the volume of available research on security issues have led to the recognition of security studies as an epistemological branch of knowledge (Sohn, Y. (2019)). However, it cannot be said that security studies have acquired an inherent theoretical purity.It can be noted that the economic security of the enterprise is meaningless outside the world (Raji, SA, & Ogunrinu, A. (2018)). It exists by virtue of conventionality and may be a full-fledged methodological concept of such science as security science (Schatz, D., & Bashroush, R. (2017)).

Especially relevant today is the construction of the security paradigm of the enterprise itself, since the security of economic entities is a primary element in the economic security system of the national economy and is its important subsystem (Nan, S., & Wang, Y. (2018)).

With a deep respect for previous scientific achievements that are of great heuristic value, it should be noted that they are not fully completed, which necessitates the formation of the interdisciplinary synergistic paradigm for managing the economic security of the enterprise. It should envisage rethinking of established ideas and to be built on knowledge of the nature of security and the laws of the enterprise, which will allow developing a methodology

1422 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online for synergistic management of the economic security of the enterprise, which will meet modern realities.

3. Methods

The theoretical and methodological basis of the work is a set of general philosophical and special methods, principles and techniques, as well as basic methodological approaches (systemic, process and situational).The following general scientific methods of theoretical and empirical research are used in the paper: systematic approach; analysis and synthesis; methods of theoretical generalization; methods of induction and deduction; semantic-structural analysis - to clarify the conceptual-categorical apparatus of security studies; philosophical and historical analysis - to study the economic security of the enterprise within the framework of scientific pictures of the world and through the prism of historical forms of outlook; problem-chronological analysis - to develop a chronological incorporation of the main legislative acts in the sphere of ensuring the economic security of the enterprise; comparative analysis - to evaluate the effectiveness of existing national security systems; monographic analysis - to study safety as a general scientific and economic category; economic fluctuations; graphoanalytical method - for visualization of basic principles and schematic representation of a number of theoretical and practical provisions.

4. Results

Synergetics explores the self-preservation of systems as a result of evolution, both through self-organization (the process of transition from chaos to order) and through self-disorganization (process of transition from order to chaos), and also takes into account the non-linear-bifurcation nature of development. Security is the need of the system in terms of internal and external destructive effects. If you translate the concept of economic security into a synergistic thesaurus, it can be noted that security activities are an important element of key homeostats of the enterprise, which allows to identify threats in advance and calculate them.Synergetics mathematical apparatus is based on nonlinear dynamics, which is a multidisciplinary science that studies the properties of nonlinear dynamic systems. It uses nonlinear models to describe them, which are usually described by differential equations and discrete mappings.

It is determined that one of the tools is an algorithm for justifying the choice of strategies for managing the economic security of the enterprise, depending on the internal mechanisms of its development. Thus, the processes of alternation of chaos and order are permanent, and the development of the system occurs from one point of bifurcation to another, performing the regulatory signaling function in recognition, which the mechanism is inherent in the system at a certain stage of development time - adaptation or bifurcation. Developing appropriate strategies becomes a decisive factor in the effective management of the enterprise’s economic security.

It is proposed to introduce a new concept of “economic security of the enterprise”, which reflects its resilience as an ectropic factor (FC) to the influence of environmental threats, namely, supersystems (countries and industries) as an entropy factor (FN), as well as ability to respond in a coordinated way.

The more the organization is influenced by the external environment, or the greater dependence of the organization on the external environment, the less stable the organization, and the more it influences the external environment, the more resilient it is.

In our opinion, only the assessment of the level of economic security of the enterprise is insufficient, also valuable is a cut-off (one-time) analysis of the interaction of entropy and ectropic factors, which allows determining the degree and status of resistance, which can be calculated by the formula:

FN RES = (1) EC where RES - resistance to economic security of the enterprise; FN - entropy factor or level of economic security of the enterprise (country and industry) subsystem; FC is the ectropic factor or level of economic security of the enterprise.

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The entropy factor is the external environment, which brings chaos and uncertainty in the form of energy and resources flow, thereby disturbing the state of stable equilibrium of the internal environment of the enterprise until the cardinal restructuring.

The ectropic factor is the state of economic security of the enterprise, which determines the chances of the enterprise for long-term survival under the changing conditions of the environment.

The characteristics of a firm’s economic security resistance are shown in Table 1, which outlines such classification features as the degree and status of resistance. From the point of view of synergetics, it was found that the first two zones correspond to a stable equilibrium state, the third one corresponds to a neutral stable equilibrium state, and the last two zones corresponds to an unstable equilibrium state, indicating a bifurcation point.

Table 1. Characteristics of resistance of economic security of the enterprise

FN FN FN FN FN R <<1 <1 ~1 >1 >>1 ES FC FC FC FC FC Degree of resistance Balance Weak imbalance Average imbalance Strong imbalance Critical imbalance Unstable state Unstable state Status of resistance Steady state Steady state Neutral state (bifurcation point) (bifurcation point)

Source: Designed by the authors

If the level of economic security of the enterprise is higher than the level of economic security of the supersystem, then it indicates the ability of the enterprise to resist destructive influences and the ability to protect against threats of the supersystem, as well as its reliability, stability, integrity. If the level of economic security of the enterprise is lower than the level of economic security of the subsystem, then this indicates that the enterprise lacks the resources and competencies to overcome the environmental resistance, which can cause destruction / bankruptcy, and requires the introduction of a bifurcation mechanism.

It has been researched that the level of economic security of the enterprise and the level of economic security of the enterprise’s supersystem are inseparable functions until the moment of transition of the enterprise to the crisis phase. Thus, the combinatorics of determining the economic security of the enterprise are presented as a two-dimensional matrix (Table 2).

Table 2. Combinatorics of determination of resistance of economic security of the enterprise

Level of economic security of the enterprise (ES) Level of economic security of the enterprise 0-0,170 (limit 0,171-0,320 (limit 0,321-0,490 (limit 0,491-0,710 (limit 0,711-1,0 (limit supersystem (FN) value 0,170 is used value 0,320 is used value 0,490 is used value 0,710 is used value 1,0 is used for for calculation) for calculation) for calculation) for calculation) calculation) 0-0,170 FN/FC ~ 1 FN/FC <1 FN/FC <1 FN/FC <<1 FN/FC <<1 (limit value 0,170 is average imbalance weak imbalance weak imbalance balance balance used for calculation) 0,171-0,320 FN/FC>1 FN/FC ~ 1 FN/FC <1 FN/FC <1 FN/FC <<1 (limit value 0,320 is critical imbalance average imbalance weak imbalance weak imbalance balance used for calculation) 0,321-0,490 FN/F>1 FN/FC>1 FN/FC ~ 1 FN/FC <1 FN/FC <1 (limit value 0,490 is strong imbalance strong imbalance average imbalance weak imbalance weak imbalance used for calculation) 0,491-0,710 FN/FC>>1 FN/FC>1 FN/FC>1 FN/FC ~ 1 FN/FC <1 (limit value 0,710 is critical imbalance strong imbalance strong imbalance average imbalance weak imbalance used for calculation) 0,711-1,0 FN/FC>>1 FN/FC>>1 FN/FC>1 FN/FC>1 FN/FC ~ 1 (limit value 1,0 is used critical imbalance critical imbalance strong imbalance strong imbalance average imbalance for calculation)

Source: Designed by the authors

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An algorithm for substantiating the choice of economic security management strategies of the enterprise has been developed, which allows to identify the type of crisis based on the identification of bifurcation points and their analysis and take into account the existence of an internal mechanism of development inherent in the economic security of the enterprise in a certain period - adaptation or bifurcation, according to which it is necessary to develop the relevant strategies (Figure 1).

FN/FC1>1

Analysis of bifurcation points

No Yes

FN/FC1<1 Strategical crisis

No Yes

Finacial crisis FN/FC2<1

No Yes

Crisis of providing basic FN/FC3<1 business processes

No Yes

The crisis of providing supportive business processes FN/FC4<1

No Yes

Crisis of trust FN/FC5<1

No Yes

Crisis of communications FN/FC6<1

Yes

Bifurcation mechanism of Adaptation mechanism the enterprise development of enterprise development

Development of adaptive strategies Development of bifurcation for managing the economic strategies for managing security of the enterprise the economic security of the enterprise

Figure 1. Algorithm of justification the choice of management strategies of economic security of the enterprise depending on internal mechanisms of its development

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It is proved that the algorithm is equivalent, that is, if at least one condition is not fulfilled, then there is a need to develop bifurcation strategies for managing the economic security of the enterprise. The crisis can testify both to the approach of economic catastrophe, especially when there is a cascade of bifurcations, and to new opportunities for the development and emergence of several alternatives to transformational change. Therefore, the manager must put the right emphasis on the events that occur at the enterprise. It can be noted that if to see the norm, growth, redistribution of resources, temporary difficulties in the crisis and to convey this to the subordinates, then it is already able to manage the crisis.

Table 3 provides an identification of the type of enterprise economic security crisis based on an algorithm (Fig- ure 1), which enables the development of appropriate strategies.

Table 3. Identification of the type of crisis of economic security of the enterprise

Development of bifurcation Condition Type of Characteristic features strategies for managing the of the crisis crisis economic security of the enterprise Loss of market share, low labor productivity, low capital Protection and Survival Strategy. productivity. Breakthrough strategy. Clipping strategy FN / FC1

Source: Designed by the authors

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Adaptation strategies include support or early prevention strategies based on: the formation and use of special reserve funds, risk redistribution (diversification, hedging), stockpiling of resources and management systems, renewal of fixed assets through long-term loans and financial leasing, economic and social responsibility, harmonization of interests and values of internal and external stakeholders, formation of competitive, innovative position. Therefore, the methodology of assessing the economic security of the enterprise allows: studying its degree and status in dynamics, identifing and analyzing the points of bifurcation, identifing the type of crisis and developing appropriate strategies for managing the economic security of the enterprise.

5. Discussion

The high level of economic security of the enterprise depends on the formation of synergistic effects, as well as on the ability to establish coherent or coordinated relationships that will lead to cooperative processes. This determines the urgency of entropy utilization and its transformation into synergy.

The main task of synergistic management of the economic security of the enterprise is not so much the combination of resources and interests of stakeholders, but the creation of a coherent potential, namely the combined potential of mutually supportive relationships, relationships and concerted behavior. They can mutually reinforce each other, which increases their overall performance. As noted above, this phenomenon is called synergy, or “joint effect” or “one-vector effect” (Okewu, E., et al. (2017)).

Therefore, increasing coherent capacity is tantamount to acquiring a new resource, the emergence of a new productive force, or qualitatively new sources of development, and reducing it is tantamount to actually losing the resource. Consistency of business processes provide positive and negative feedbacks.

Functional synergistic effect is the result that is equivalent to the sum of the components. It occurs when the business processes of the enterprise are parallel (for example, in the process of exchanging job responsibilities for wages).

A positive synergistic effect is a result that exceeds the sum of the components. It arises at the intersection of the business processes of the enterprise as a result of the alignment of their internal and external vectors, which are aimed at the same goal (for example, efficiency of a cohesive team is much higher than the individual workers who simply perform their duties).

A negative synergistic effect is a result that is less than the sum of the components. It arises when there are differences in the parallel or interacting business processes of the enterprise (for example, team conflict or combination of unskilled workers and new equipment). That is, when the goals of one business process become more prioritized and overlap with the goals of another business process, their divergence becomes inevitable as a result of the mismatch of their vectors, which are aimed at different goals.

Therefore, it can be noted that the greatest potential of synergism in an enterprise lies in its staff, which is a source of self-organization and self-disorganization. Therefore, it is necessary to implement innovative training methods with the involvement of consulting firms (teambuilding, teamspirit, corporate time management, mind-management, coaching, mentoring, tutoring, budding, mastering, secondment, learning by idea, business, metaphorical and metaphorical games.

The practical significance of the results of the study is to achieve a stable equilibrium through the implementation of a synergistic principle – minimizing entropy production and maximizing synergy production.

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Conclusions

A descriptive model of the interrelation of synergistic laws and patterns with the economic security of the enterprise is offered, which allowed to develop and substantially fill in the tools of the synergistic management of the economic security of the enterprise from the positions of the thesaurus of security science and synergetics, namely: algorithm for justifying the choice of strategies for managing the economic security of the enterprise, depending on the internal mechanisms of its development; a synergistic model of firm sustainability in the context of managing its economic security; scientific and methodological approach to forming the effect of synergism in managing the economic security of the enterprise.

Methodological provisions have been developed to determine the nature and assessment of resistance of economic security of an enterprise, which is the ability to resist it as an ectropic factor to the impact of environmental threats, namely the supersystems (industries and countries) as an entropy factor, as well as ability coordinately to respond to threats that, in turn, allows determining the status and degree of resistance of the economic security of the enterprise in dynamics, identifying and analyzing bifurcation points, identifying the type of crisis and developing appropriate strategies for managing the enterprise’s economic security.

It is outlined that the entropy factor is an external environment, which brings chaos and uncertainty in the form of energy and resources flow, thus disturbing the state of stable equilibrium of the internal environment of the enterprise until cardinal restructuring. The ectropic factor is the status of economic security of the enterprise, which determines the chances of the enterprise for long-term survival under the changing conditions of the environment.

If the level of economic security of the enterprise is higher than the level of economic security of the supersystem, then it indicates the ability of the enterprise to resist destructive influences and ability to protect against threats of the supersystem, as well as its reliability, stability, integrity. If the level of economic security of the enterprise is lower than the level of economic security of the supersystem, then this indicates that the enterprise lacks resources and competencies to overcome the environmental resistance, which can cause destruction / bankruptcy and require the introduction of a bifurcation mechanism.

Prospects for further research are the development of economic security scenarios based on synegetic management. Modeling an enterprise’s economic security system is a fairly complex process. A reliable system of economic security of the enterprise is possible only if a comprehensive and systematic approach is used. This system provides an opportunity to evaluate the development prospects of the enterprise, develop its tactics and strategy, reduce the negative impact of threats and dangers. Therefore, it is considered necessary to investigate the applied aspects of the mechanism application of managing the enterprise’s economic security in specific industries using the features and directions of their development.

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Lidiia KARPENKO, Doctor in Economics, Professor, Odessa Regional Institute for Public Administration of the National Academy for Public Administration under the President of Ukraine ORCID ID: orcid.org/0000-0002-2888-2477

Oksana ZHYLINSKA, Doctor in Economics, Professor, Taras Shevchenko National University of Kyiv, Ukraine ORCID ID: orcid.org/0000-0001-8366-0474

Hennadii DMYTRENKO, Doctor in Economics, Institute for Personnel Training of the State Employment Service of Ukraine ORCID ID: orcid.org/0000-0003-3368-3410

Nataliia V. POPROZMAN, Doctor in Economics, National University of Life and Environmental Sciences of Ukraine, Kyiv, Ukraine ORCID ID: orcid.org/0000-0001-8402-3389

Viktoriia KOLTUN, Doctor of Science in Public Administration, Associate Professor, National Academy for Public Administration under the President of Ukraine ORCID ID: orcid.org/0000-0001-8432-873X

This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/

1430 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 http://doi.org/10.9770/jssi.2020.9.4(26)

FRAUDULENT CONDUCT IN THE MANAGEMENT OF APARTMENT BUILDINGS - A LEGAL PERPECTIVE1

Michal Krajčovič¹, Jozef Čentéš², Michal Mrva3

1,2,3 Comenius University in Bratislava, Šafárikovo nám. č. 6, Bratislava, Slovakia E-mails: [email protected]; [email protected];3 [email protected]

Received 16 October 2019; accepted 25 March 2020; published 30 June 2020

Abstract. Many of us are living in apartment buildings and this form of living is becoming more frequent and popular with urban development. A large number of those living in apartment buildings are also owners of the apartment they live in (or other non- residential premises in the apartment building). Not only rights, but also certain obligations are associated with the ownership of apartments. One of the legal obligations is to bear the common costs of goods and services, which are being provided to the apartment bulding. In Slovak republic, the division of these costs and the settlement of monthly advance payments is being done on an annual basis. The basis for the division of these costs is the proportionality of the use of the common parts and common facilities of the apartment building, which is expressed in the so called person months (metric unit for settlement). By not reporting the true number of personmonths to the administrator, an owner may gain material benefit (achieve higher overpayments and lower arrears) and this illegal financial benefit needs to be covered and compensated by other owners in the same apartment building. In terms of criminal law, the owner is committing fraud (a related offence to insolvency crimes). The authors analyze the legal aspects related to this criminal offence with relation to case law, legal doctrine, based on the systematical and teleological method of interpretation of relevant legal norms. The article addresses also issues related to the purposefullness of sanctioning of perpetrators, reflecting that the primary purpose of their fraudulent behaviour was enrichment (material gain).

Keywords: apartment buildings management; fraud; criminal liability; insolvency; insolvency and related offences

Reference to this paper should be made as follows: Krajčovič, M., Čentéš, J., Mrva, M., 2020. Fraudulent conduct in the management of apartment buildings - legal perpective. Security and Sustainability Issues, 9(4), 1431-1444. http://doi.org/10.9770/jssi.2020.9.4(26)

JEL Classifications: K14

Additional disciplines (besides field of economics reflected in JEL classifications): sociology; psychology

1. Introduction

Ownership of apartments and non-residential units entails a legal obligation to bear a proportionate share of the common costs of an apartment building. An owner’s proportionate share of such costs is determined based on “person months”, a unit expressing the number of persons using an apartment in a particular month. In practice, owners are often motivated by selfishness to report incorrect numbers of person months to the administrator for longer periods, which reduces the share of the building’s common costs that they have to bear when the accounts are settled.

The present article addresses the theoretical aspects of fraudulent behaviour occuring in the processes of apartment buildings management. The authors focus on the significance of property values and means of their legal protection from the viewpoint of criminal law and misdemeanour law area. Fraud is an criminal offence, which protects property against a conduct, by which a perpetrator enriches himself or others at the expense of some-

1 This research was supported by the project “Guidelines and tools for effective elimination of unlawful acts in relation with potential insolvency”, which has received funding from the Slovak Research and Development Agency under the contract No. APVV-15-0740. JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online one else’s property by misleading them or exploiting the other person’s error so that the person acting in error executes disposition of property. The authors analyze the criminal offence of fraud with regard to (besides the legal theory - its constituent elements) case law and legal doctrine and diferentiate between fraud as a criminal offence and misdemeanour. The perpetrator needs to fulfill the condition of minor damages in order to be prosecuted and the article addresses also ways how this condition may be fulfilled (either by one attack or by cumulation of damages caused in continuous attacks agains the property of others). The theoretical approach is supported by the statistics of the Ministry of Justice of Slovak Republic (2013-2018; basic form of fraud) with the sentencing overview (as a percentage of the number of convictions and in absolute numbers), number of persons convicted and crimes detected.

With regard to methodology, the articles is based on a detailed legal analysis of applicable substantive legal norms. By means of analysis of current legislation of fraudulent conduct and by comparing criminal and administrative liability (as alternative ways of sanctiong of the perpetrator - based on total incured damages, the authors aim at addressing the effectiveness of legal regulation in the section of fight against fraudulent conduct of the owners of apartments and non-residential premises in apartment buildings. Based on the application of quantitative methods related to acquisition and analysis of official statistics of the Ministry of Justice of the Slovak republic it can be stated that current legislation regulating criminal law sanctioning of fraudulent conducts requires attention as it is not effective as it should be. These offences occur at a large scale, although data between 2013-2016 show a particial decrease in registered offences. The statistics also show that penalties might not always be purposeful, as fines (sanctions aimed at the perpetrators property) are being applied at an average yearly rate of only 6-7 %. The sanctioning of perpetrators (mainly by a suspended sentence) is thus not eligible to act as an effective instrument of general prevention on potential offenders of fraud (or other property crimes).

The authors also reflect previous research on the topic of fraudulent behaviour, property offences in general or other relevant issues (ČENTÉŠ, J. et al., 2015; ČENTÉŠ, J., MRVA, M., KRAJČOVIČ, M., 2018; STRÉMY, T., 2010; ŠAMKO, P., 2012; ŠAMKO, P., 2016; JURGILEWITZ, M., 2020; IVANČIKS, J., TROFIMOVS, I., TEIVANS-TREINOVSKIS, J. (2019), but it needs to be emphasized, that no sufficient previous attention has been paid to the problematics of fraudulent behaviour occuring in the apartment buildings management (only to other forms of fraudulent behaviour or fraud in general terms).

2. Property as the subject-matter of legal protection

Property represents the aggregate of goods accumulated through the performance of various activities over the course of a human life, or goods acquired through gifting (by transfer) or through inheritance (succession) from a legator, or by other means (by operation of law, original acquisition etc.).

The asymmetry of society in the quantity of property owned and the differences in how individuals rank property in their value hierarchy cause differences in the intensity of demand for its protection. Some of the population subjectively consider crimes against property as especially serious because the perpetrator attacks or threatens things that they are most proud of and which are not infrequently the source of their social standing. The importance of property in the ordinary life of an individual affects the degree to which they demand its protection (not only) by the state (e.g. ČENTÉŠ, J., MRVA, M., KRAJČOVIČ, M., 2018).

The legitimacy of the legal protection of property is inherent in the conditions of the legal state (concept of legal state), including the protection afforded by criminal law, provided that it is proportionate. The aim is to provide legal security (JURGILEWITZ, M., 2020) to citizens and other entities. By using legal methods of social regulation, including elements of the state’s coercive powers, the state seeks to prevent the infringement or endangerment of values and interests protected by law. This is a manifestation of the regulatory function of law in the form of the deterrence and elimination of social deviance leading to the protection of specific values (and the setting of state policy priorities), goods, persons and their needs and interests in the interest of ensuring the smooth functioning of society and social integrity (for more detail, see MARŠÁLEK, P., 2018, pp. 34 - 41). In other words, ensuring an effective framework for criminal proceedings falls under the state’s internal functions – the protection of public and

1432 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online private property (against the gravest offences against these values) against the gravest forms of unlawful conduct. The protection of property by criminal law can be looked at in the light of the principle of ultima ratio, in the sense that this type of repression is used only in cases where it is needed, where the intensity of the punishment of the offender is proportionate and just and the objective pursued by the sentence could not be achieved by milder repressive means. The case law of the Constitutional Court of the Slovak Republic states that punishment is“the sharpest instrument of state coercion that the state uses in performing its functions”. (Finding of the Constitutional Court of the Slovak Republic, PL ÚS 106/2011-85). In certain cases, the criterion of proportionality may be satisfied by liability under administrative or private law, but following the Constitutional Court of the Czech Republic (Finding, PL ÚS 17/10) we take the view that in certain cases it is possible to speak about effective prevention and protection of victims only based on the criminal law – the enforcement of legal responsibility through application of the provisions of criminal law. At the same time, we recognise that the most effective form of protection for society is an effective state social policy.

Since it is in the public interest to provide an effective framework for the protection of property (amongst other values), the principles by which the rule of law is organised and implemented must always include creation of an effective system for the investigation, prosecution and judging of crimes (cf. TOMOSZEK, M., 2015, pp. 72 -74). To uphold the values of democracy and the rule of law proclaimed in Article 1(1) of the Constitution of the Slovak Republic (“the Constitution”), it is also necessary to ensure the quality of the protection that the criminal law provides for the most important interests protected by law.

The article applies this perspective in considering the protection of property rights under criminal law, more specifically with reference to criminal fraud. This is a relatively common crime that can take various forms. The specific form of interest for the present article is a latent and hard-to-detect fraud in the management of apartment buildings related to the calculation and billing of the annual management costs of an apartment building. The present article first considers this issue with reference to the specific constituent elements of the crime. Since the offence causes damage to the property of the owners of apartments and non-residential units in an apartment building (“owners”), we will consider how these can be protected effectively (and how owners can exercise their rights) in criminal proceedings, proceedings on misdemeanours and insolvency proceedings.

3. The management of apartment buildings

It is a legal duty of owners to pay a fair and proportionate share of the common costs of their apartment building based on a regular annual settlement of accounts. These costs are distributed in proportion to the use of the common parts and common facilities of the apartment building (and necessary services such as emergency services and municipal waste disposal). In practice, these proportions are calculated using “person months” representing the number of persons using a flat in a calendar month.

If an owner fraudulently conceals one or more persons’ use of an apartment and common areas and facilities in an apartment building, this causes the administrator of the apartment building to calculate the cost distribution incorrectly and thus damages the integrity of the other owners’ property.

They are unfairly obliged to bear a greater cost for the goods and services related to use of the apartments than they would if the owner had not misled the administrator when reporting the data necessary for the administrator’s allocation of the apartment building’s management costs. The amount unfairly borne by the other owners is the damage that the perpetrator causes and the sum of the partial damages (on the level of actual damage) corresponds to the benefit obtained by the perpetrator.

4. Protection of property in the legal system

In considering how the law protects property, our attention focuses primarily on the protection provided by public law – in particular criminal and administrative liability, whose essence is repressive action against the responsible person for the protection of society and deterrence on the individual and general levels. A public

1433 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online law sanction is not equivalent to the damage or other harm suffered and can also be applied for matters where there is no liability under private law, for example if there was no damage (preparing or attempting a crime or an administrative offence).

If the state and society aim to respond justly to illegal actions, the reaction must be proportionate to the severity of the act that created the substantive liability relationship comprising the right to impose a sanction and the responsible subject’s duty to comply with the sanction. Only a fair (proportionate) penalty for the responsible person can terminate the substantive relationship without the state or other public authority being liable for unlawful infringement of the given person’s rights.

The general effort of the legislature to preserve criteria of proportionality in the enforcement of public law liability for unlawful conduct can be seen primarily in their division into crimes and administrative offences depending on their severity (social danger) and further in the different ranges of penalties laid down in law. Depending on how they are defined, penalties can be classified asabsolutely definite, absolutely indefinite and relatively definite.

Absolutely definite penalties are those where law does not give the court or other public authority any space in their decision-making process (see VRABKO, M. et al., 2013, p. 14 et seq.) to choose the most suitable variant of a penalty because it exactly determines its type and extent. In the case of relatively definite penalties, upper and lower limits are set for a specific penalty (legal differentiation) and through the penalty levels applied, the legislature expresses the damage or the typical severity of a given illegal action. Furthermore, by comparing the set levels, it is possible to determine which illegal actions the legislature considers to be more harmful to society. In criminal law, every legal differentiation of penalty levels corresponds to the level of severity of a crime of the given type (See also Finding of the Constitutional Court of the Slovak Republic, Pl. ÚS 106/2011-85).

Since the legislature cannot foresee the development of specific social relationships (the actions of members of society), it must leave the authorities responsible for applying the law adequate space for reflection and indi- vidualisation of penalties in specific cases if it is concerned with preserving the criterion of fairness. Absolutely definite penalties are usually inadmissible (there must be at least one alternative or variant in the decision- making process) and they are acceptable only for extremely harmful illegal actions.

Absolutely indefinite penalties weaken the feeling of legal certainty in the addressees of the law and allow wide scope for the arbitrary application of law by the authorities. The principle of legal certainty is a pillar of the rule of law and, following Dr Mrva (MRVA, M., 2013, pp. 66-79), it can be seen as “the principle of confidence in the law, because people must have confidence in the law and the foundation of this confidence depends on both the content and form of the law, and the quality of its application and implementation”. In judicial proceedings and the like, the parties must have a degree of certainty that their legitimate expectations will be met as regards the predictability of the decision-making of the authorities responsible for applying the law. Absolutely indefinite penalties impair the predictability of decision-making and the authority responsible for applying the law is reduced to the level of an ideology of free application of law (for more detail see KÜHN, Z., 2002, p. 237).

In practice, it is most appropriate to accept relatively definite penalties which, subject to set criteria, provide the authority applying the law adequate space for reflection and an individual approach, and since they have upper and lower limits laid down by law, they provide a formal guarantee against manifestly disproportionate penalties (either formalistic or draconian). They are primarily found in the special part of Act No 300/2005, the Criminal Code (“Criminal Code” or “CC”) and administrative criminal law.

5. Criminal versus administrative liability

This section considers in more detail the issue of public law liability under criminal law and administrative criminal law, which defines the penalties for administrative offences. The type of administrative offences with which the present article is primarily concerned is misdemeanours, which are their largest subcategory and are

1434 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online often distinguished from other administrative offences only formally – because they are not explicitly identified as misdemeanours. Misdemeanour law is the most complex part of administrative criminal law, in part because misdemeanours are not concentrated in a single law. Both types of liability are distinguished primarily by the penalties that can be imposed for specific types of conduct condemned by law (conduct constituting a crime or an administrative offence) and the procedures by which such penalties are imposed and enforced.

A common feature of the two branches of public law is that in both cases legal theory stipulates that the primary characteristic of their penalties is repression. They deliberately infringe an offender’s human rights. The purpose of this is to protect society (and specific values), to reform the offender and to have a deterrent effect on society. The fundamental purpose of repressive penalties in criminal and administrative proceedings is to cause harm in a sphere of the offender’s life that should be individually and appropriately chosen to create a subjective awareness proportionate to the severity of the threat or attack against a specific interest protected by law, and it should also be capable of achieving the intended purpose.

In terms of the potential consequences, the qualification of an action as an administrative offence and the imposition of a penalty under administrative law is more favourable to a perpetrator. The act on misdemeanours lays down an exhaustive list of penalties in Section 11, under which the perpetrator of an misdemeanour may be given a reprimand, a fine, a disqualification or forfeiture of assets.

The general penalty under misdemeanour law is a fine, as a penalty of an economic nature whose imposition should make the offender aware of the economic disadvantages of unlawful conduct in society. It cannot be imposed cumulatively with a reprimand. Section 13 stipulates that a finemust not exceed 33 Euros unless the law sets a higher upper limit in the legal differentiation of the fine.

In criminal law, the universal penalty is an unsuspended sentence of imprisonment and the different levels of this penalty are laid down in law in the definitions of constituent elements of crimes in the special part of the Criminal Code. The Criminal Code divides criminal penalties into punitive and protective measures. The imposition of a sentence is not an obligatory consequence of a crime, as Section 40 of the Criminal Code allows a criminal court to waive punishment on the satisfaction of set criteria (as regards misdemeanour law, see SREBALOVÁ, M. et al. 2015, p. 56).

Through the individual provisions of the Criminal Code and the Code of Criminal Procedure, especially the definition of the types of punishments, their level and the rules for their imposition, the legislature seeks to deter individuals and groups from certain types of conduct defined mainly in a descriptive manner. The aim of deterrence is to deter the transition from those stages of criminal conduct that are not relevant under criminal law to those that are relevant and punishable. This is not to deny that deterrence depends primarily on the timeliness, targeting and inevitability of punishment that incorporates elements encouraging the rehabilitation of offenders and their reintegration into society.

The Criminal Code also provides an exhaustive list of the permitted punishments in Section 32(a) to (l). The present article will not consider protective measures. A sentence of imprisonment can be imposed for any crime provided it respects the principle that the sentence should only be imposed if another type of punishment could not achieve the intended purpose. This principle favours the ideal of restorative justice, under which criminal justice should primarily be based on alternative punishments and alternative solutions to criminal matters. Al- ternative punishments allow discretion so as to avoid excessive imprisonment by offering a wide range of fair and effective criminal penalties. Alternative punishments can also be seen as a tool for supporting the rehabilitation of convicted offenders. (m.m. STRÉMY, T., KLÁTIK, J., 2018).

The main alternative punishments are house arrest (electronic tagging), community service and fines. When applying the law, a criminal court must consider whether the purpose of punishment can be achieved by a non- custodial sentence (an alternative punishment or a suspended custodial sentence) or one of the alternative forms of criminal proceedings.

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5.1. Protection of property in the provisions of criminal and administrative law

The present work is concerned with specific forms of legal protection for property through the definition of the constituent elements of crimes and administrative offences and their subsequent application to impose penalties on offenders. It reflects in particular on fraudulent conduct relating to the management of apartment buildings in which the perpetrator misleads the administrator or exploits an unforced error for material benefit at the expense of others’ property.

One of the pillars of the rule of law is the strict application of the principle of legality, a derivative of which in the field of criminal law is nullumcrimen sine lege, nullapoena sine lege. If illegal conduct against another’s property is to be qualified as a crime, it must be identified as a crime expressisverbis in law and cannot be subject to any penalty other than that stipulated by law. The same guarantee applies in administrative criminal law, under which an action can only be classified as an administrative offence if it has been expressly designated as such.

The extension and application of criminal law principles to administrative criminal law is in accordance with the consistent interpretation of Article 6 of the Convention (Right to a Fair Trial) by the European Court of Human Rights starting from Engel and Others v. the Netherlands of 8 June 1976 and subsequent case-law (decisions are based on the Engel criteria – legal classification of an offence under national law, the nature of the offence (in terms of the protected interest and purpose of the legal rule) and the material nature and severity of the penalty (consideration of the unfavourable consequences for the offender) – compare ČENTÉŠ, J., 2017, SVÁK, J., BALOG, B., 2012).

For this reason, the constituent elements of administrative offences must also have an exact definition and only when the requisite evidence is presented can the public authorities impose a penalty on an offender.

Misdemeanour law

In misdemeanour law, fraudulent conduct can be classified under Section 50 of the act on misdemeanours, which is labelled with the systematic heading Misdemeanours against Property. This provision “regulates misdemeanours against property, which, in the most general terms, are aimed at protecting property interests, primarily ownership rights, as one of the fundamental human rights” (Srebalová, M. et al. 2015, p. 233).

The qualification criteria for such an misdemeanour are that the offender (a general subject) deliberately causes damage to another’s property through theft, embezzlement or fraud, or the damage or destruction of items constituting such property or attempts such an act. The attempt is thus promoted to the same level as a completed misdemeanour. A fine of up to 331 Euros may be imposed for such an misdemeanour.

The method by which an offender commits an misdemeanour (as regards the objective constituent elements of the misdemeanour) are not specified in more detail in the act on misdemeanours. The content must therefore be stabilised by reference to the descriptive constituent elements of the relevant crimes under the Criminal Code, i.e. by using formal-systematic interpretation (considering arguments arising from the system of law making and other parts of the legal system) that abides by the aim of objective interpretation and legal certainty (compare MELZER, F., 2011, pp. 130-152). Such interpretation is legitimised by the similarity of the regulated subject-matter, which is relatively specialised in criminal law.

The legal qualification of the defined conduct depends on the amount of damage caused. Qualification as an misdemeanour against property is possible only if the damage caused to other’s property by the offender’s conduct does not exceed 266 Euros (the criterion of minor damage). This does not mean that if the criterion of minor damage is fulfilled, conduct will automatically be a qualified as a crime. Classification as a crime has a formal and substantive base that also considers the intensity (severity) of the attack or threat against a legally protected interest.

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Criminal law

A principle of criminal is the subsidiarity of criminal repression, which means that the criminal law should not serve as a substitute for the protection of the rights and legally protected interests of individuals in private law relationships and that it should only react to illegal conduct in the gravest cases because overvaluing the role of criminal law in solving social problems will not contribute to their solution. (MENCEROVÁ, I., TOBIÁŠOVÁ, L., TURAYOVÁ, Y. et al., 2013, p. 21, m. m. JELÍNEK, J. et al., 2013, p. 24).

This guiding idea, which is mainly relevant to the law’s interpretation and application, is also reflected in the formal and substantive understanding of a crime, which Section 8 of the Criminal Code defines as an action whose constituent elements are laid down in the act, unless the act stipulates otherwise. It is expressed in another way in the negative definition of a crime concerning the substantive nature (or extra-legal social content – see KRATOCHVÍL, V., KUCHTA, J., KALVODOVÁ, V., 2002, pp. 149-150) of an act that otherwise has the formal characteristics of a misdemeanour (Section 10(2) of the Criminal Code). This is a substantive corrective that is a necessary condition for the substantive understanding of the category of a crime where the character of illegal conduct is formally defined by its generic traits.

The substantive understanding includes a certain objectivised social conception of which offences are so severe (harmful) for development and relationships in society that they need to be penalised under the criminal law. (BURDA, E. 2006). It is important to note that the severity of an offence can only be assessed against others with the same constituent elements – comparable offences. Otherwise, absurd conclusions could be drawn, because crimes against property are nearly always less severe (harmful) than crimes against life and health (JIŘÍČEK, P., MAREK, T., 2014, p. 43).

The application of the substantive corrective in law excludes the legal classification of an act as a misdemeanour if its method, its consequences, the circumstances in which it was committed, the degree of fault and the motivation of the perpetrator make its severity negligible. With reference to young offenders, an offence is not a misdemeanour if it is of minor severity (Section 95(2) of the Criminal Code).

The substantive nature of the action must be considered in the case of every misdemeanour – to allow an assessment of proportionality in the application of criminal repression and consideration of whether the purpose of punishment cannot be achieved with other means of social regulation than those established in criminal law. This also applies to property crime where the principle of subsidiarity of criminal repression is fulfilled mainly through application of the institute of minor damages.

6. Fraud

Fraud has one basic and three qualified constituent elements as a criminal offence.

The criminal offence has a generalsubject .

In its subjective aspect, it requires deliberate fault, which expresses the principle of individual responsibility for fault. The intention must apply to all the constituent elements defined in law, otherwise there is no liability for fraud. There must be a direct intention (dolus directus) or indirect intention (dolus indirectus) firstly to mis- lead or exploit error and secondly to benefit materially by causing damage to others’ property.

The object of the mentioned offence isother people’s property regardless of the type and form of ownership.

Regarding its objective aspect, the law describes it as illegal conduct in which the perpetrator enriches himself or others at the expense of someone else’s property by misleading them or exploiting the other person’s error so that the person acting in error executes disposition of property resulting in minor damage. “The triggering mechanism for fraud is misleading another into error or exploiting another’s error, because fraud can only take

1437 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online place when the cause of damage to the other person’s property involves another’s error.” (Judgement of the Supreme Court of the Slovak Republic, 2 TdoV 21/2013)

Error means discrepancy between a person’s knowledge or ideas and the actual situation. It is aptly described by Šamko as a non-violent (hidden) means by which the perpetrator influences the will of a person making a decision on the disposition of their property, who is unaware of their error (they are not acting under physical or psychological pressure) and whose interior world is based on false information that does not reflect reality (ŠAMKO, P., 2012, pp. 19-20 (a), compare ČENTÉŠ, J. et al., 2015, p. 417).

Misleading means that the perpetrator states or falsifies circumstances that do not correspond to reality or the actual state of affairs andexploiting an error includes exploiting a discrepancy between the victim’s ideas and reality that was not created by the perpetrator but arose independently of their actions.

Fraud also takes place if the perpetrator conceals significant information or fails to disclose, in the course of the fraudulent conduct, any matters that are decisive or significant for the victim of the fraud because if the other party were aware of them, they would not engage in the relevant transaction (Judgement of the Supreme Court of the Slovak Republic, 2 TdoV 21/2013).

The perpetrator must be aware of the error of the person acting and the error (whether forced or unforced) must be used for the disposition of property – thus, from the perspective of time, awareness of the error must precede the disposition of property. Disposition of property means a transfer of property by the victim that results on the one hand in damage to the integrity of the victim’s property and on the other to the enrichment of the perpetrator at the victim’s expense.

A further requirement is that the misleading information or error must have a certain “quality” (it cannot be just any falsehood) and must be a means capable of deceiving another person in the specific situation. If a person that conducts a disposition of property in error has a duty (by law, contract or custom) to investigate the claims of other persons using means that are routinely available and routinely used in similar cases, the presentation of false claims by themselves cannot be considered “misleading” in the sense of the constituent elements of criminal fraud (Judgment of the Supreme Court of the Slovak Republic, 2 TdoV 21/2013).

Consideration of the objective merits of fraud cases includes examination of the causal nexus – causal connection, as an objective quality that cannot be presumed but must always be properly proven. “The number of potential causal factors is infinite. It is always necessary to identify the causes that the law can consider as qualification of an infringement of rights. To recognise a certain behaviour of a person as the cause of an occurrence, the behaviour must be a necessary condition for the occurrence (conditio sine qua non).” (OSINA, P., 2013, p. 111).

It must not be forgotten that a causal connection must be distinguished from the mere proximity and sequence of phenomena in time and space. In other words, one must not apply the principle of “ante hoc, propter hoc”(Finding of the Constitutional Court of the Slovak Republic, I. ÚS 177/08-31; Section 16). The principle ante hoc, propter hoc means “before this, because of this” and is sometimes written “Ante hoc, ergo propter hoc”, meaning “Before this, therefore because of this”. It characterises a logical error in which the fact that two events follow each other in time is assumed to indicate a causal relationship between them.(Judgement of the Supreme Court of the Slovak Republic, R 21/1992).Phenomena that precede other phenomena in time can be their causes but may not be. A temporal relationship only helps the assessment of the substantive relationship. (m. m. Finding of the Constitutional Court of the Slovak Republic, I. ÚS 177/08-31).

Fulfilment of the conditions giving rise to criminal fraud thus requires the existence of a causal connection between one person’s error and their disposition of property and another causal connection between this disposition on the one hand and on the other the loss of a third party’s property and the enrichment of the perpetrator or another person. A fraud can thus involve up to 4 persons: the perpetrator, the person acting in error, the victim and the beneficiary (ČENTÉŠ, J. et al., 2015, p. 418).

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The perpetrator’s conduct may fulfil the criteria of one or more of the special qualification elements laid down in Section 221(2), (3) and (4) of the Criminal Code. It must not be forgotten that in this case, one of the special qualification elements cannot be applied – the use of deceit in committing the crime. This special qualification element (as one of the aggravating factors under Section 221(3)(c) of the Criminal Code) is excluded because the law already defines it as a basic constituent element of criminal fraud.

In the event of a qualification under Section 221(2) of the Criminal Code (causing at least major damage) the perpetrator is punishable by a sentence of imprisonment for one to five years, In the event of a qualification under Section 221(3) of the Criminal Code (causing significant damage, committing the crime with a special motive, with an aggravating factor, or against a protected person), the range is three to ten years and under Section 221(4) of the Criminal Code (causing large-scale damage, committing the crime as a member of a dangerous group or in a crisis), the range is ten to fifteen years. As previously mentioned, increased regard for restorative justice ideals has given rise to a preference for alternative sentences not involving imprisonment provided that the sentence fulfils the purpose of punishment – punishment should ensure that society is protected against the offender by preventing them from committing further crimes, it should create conditions in which they are motivated to live a normal life, and it should deter others from committing crimes; punishment also expresses society’s moral condemnation of the offender.

The following table shows the frequency of criminal fraud and the methods used to punish (convicted) offenders based on the ministerial statistics of the Ministry of Justice of the Slovak Republic for the period 2013–2018 (using the statistical yearbook for 2018 and statistics provided based on a freedom of information request). Separate statistics are not kept for fraud in the management of apartment buildings.

Table 1. Fraud - number of persons convicted

2018 2017 2016 2015 2014 2013 Number of persons convicted 1004 414 463 518 627 676

Table 2. Fraud - number of crimes detected

2018 2017 2016 2015 2014 2013 Number of crimes detected 1092 457 504 601 706 758

Table 3. Sentencing overview – absolute numbers

Penalty 2018 2017 2016 2015 2014 2013 Suspended imprisonment including proportionate restrictions or obligations 125 59 59 79 75 35 Suspended imprisonment with probation 48 25 27 28 32 34 Suspended imprisonment without proportionate restrictions or obligations 306 225 255 276 343 422 Community service work 17 16 29 39 63 65 Fines 47 36 31 36 42 53 Imprisonment in a low-security prison 117 34 36 24 40 31 Imprisonment in a medium-security prison 62 14 22 26 20 22 Imprisonment in a high-security prison 5 - 1 - - 2 Prohibition of motor vehicle use 15 2 2 - 1 - Disqualification from employment / occupation / function / other 15 10 3 2 4 3 Expulsion 1 - - - - - Prohibition of residence 5 1 1 2 2 1 House arrest 1 1 - - - 4 Detention; juvenile ------Forfeiture 12 4 1 2 1 5

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Table 4. Sentencing overview – as percentage of the number of convictions

Penalty 2018 2017 2016 2015 2014 2013 Suspended imprisonment including proportionate restrictions or obligations 12.45% 14.25% 12.74% 15.25% 11.96% 5.18% Suspended imprisonment with probation 4.78% 6.04% 5.83% 5.41% 5.10% 5.03% Suspended imprisonment without proportionate restrictions or obligations 30.48% 54.35% 55.08% 53.28% 54.70% 62.43% Community service work 1.69% 3.86% 6.26% 7.53% 10.05% 9.62% Fines 4.68% 8.70% 6.70% 6.95% 6.70% 7.84% Imprisonment in a low-security prison 11.65% 8.21% 7.78% 4.63% 6.38% 4.59% Imprisonment in a medium-security prison 6.18% 3.38% 4.75% 5.02% 3.19% 3.25% Imprisonment in a high-security prison 0.50% - 0.22% - - 0.30% Prohibition of motor vehicle use 1.49% 0.48% 0.43% - 0.16% - Disqualification from employment / occupation / function / other 1.49% 2.42% 0.65% 0.39% 0.64% 0.44% Expulsion 0.01% - - - - - Prohibition of residence 0.50% 0.24% 0.22% 0.39% 0.32% 0.15% House arrest 0.01% 0.24% - - - 0.59% Detention; juvenile ------Forfeiture 1.20% 0.97% 0.22% 0.39% 0.16% 0.74%

Source: Statistical yearbook of the Ministry of Justice of the Slovak Republic for year 2018 and freedom of information request replies

When interpreting the quantitative research, one must come to the conclusion, that fraud is perpetrated at a large scale and when comparing the period 2013-2018, it´s perpetration (officially registered) in 2018 rises significantly (influenced by the change in methodics by the Ministry of justice of the Slovak republic) after a yearly decline in number of detected crimes and convicted persons. It needs to be emphasized, that sentencing of perpetrators focuses mainly on suspended imprisonment without proportionate restrictions or obligations. The average sentencing (percentage of the number of total convictions) in the period 2013-2018 is at 49,35%. This can be a result of different causes. This fact does not automatically mean, that the criminal offences are of lower severity and therefore don´t require a more severe punishment. One of the possible explanations is that the courts don´t need to be active in monitoring the execution of sentence (punishment) in this way. Whether criminal punishment has fulfilled its purpose (whether the perpetrator behaved as he should), will be known from the fact, that no indict- ment has been filed against the perpetrator during the probational period. The role of courts is thus passive and this can be subjectively considered by the judge as an effective time management tool in his agenda.

It is unclear, whether the justice system reflects the ideas of reciprocity (as a subprinciple of the principle of justice - fairness) in sentencing, because when taking into account that fraud is a property criminal offence (and the perpetrator´s motive is enrichment), then the fine (sanction based on repression against the property values of the offender) should be applied at a much broader scale. The average sentencing in the period 2013-2018 is only 6,62%.

The authors emphasise (reflecting previous stance and research in this area, ČENTÉŠ, J., MRVA, M., KRAJČOVIČ, M., 2018) that fines can be considered as effective measures against the perpetrators of property crimes, because the sentencing results in a result directly opposite to what the perpetrator had in mind when committing this property crime (enrichment). The loss of property values as a result of punishment motivates the perpetrator to avoid criminal behaviour in future - because of the previous knowledge, which motivates him/her to cover the material (financial) needs by lawful means of fulfilment, not those prohibited by the legal order. Effectiveness of this sentence is supported also by the current era of consumption (prioritisation of material values), when the fine restricts the perpetrator from buying goods or services, which he/she would have otherwise bought, if there was no conviction and fine. The main disadvantage for our quantitative research is that it cannot be fully individualised on the topic of frauds occurring in the processes of apartment buildings management, because separate statistic are not available. As sufficient previous attention has not been paid to

1440 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online the topic of our research, we hope that mainly the Ministry of transport and construction of the Slovak republic (as a authorised guarantor in this field) will develop efforts in order to make data of unlawful behaviour of owners occurring in the management of the apartment buildings available.

6.1. On the fulfilment of the criterion of minor damage (on a continuous criminal offence)

A criminal offence is considered to be a continuous criminal offence if the perpetrator continuously repeats the same crime. Criminal liability for a number of partial offences will be treated as one offence if all the partial offences of the same offender have an objective link in time, in the manner in which they are committed and subject-matter of the offence, and a subjective link such as a unifying intent of the offender to commit the given crime (Section 122(10) of the Criminal Code).

Causing consequences in the form of (at least) minor damage can occur in two ways – in a single offence or gradually (through multiple partial offences that the offender commits against the property of others). It is not necessary for the offender to cause minor damage by a single action (offence) with the constituent elements of criminal fraud.

There can be multiple offences against legally protected interests. The criterion of causing minor damage can therefore be fulfilled gradually when the offender’s partial offences do not individually cross the threshold of minor damage but in aggregate (in terms of the total damage caused) the criterion of at least minor damage is fulfilled. It is also possible for individual offences to fulfil the criterion of minor damage but for the aggregate damage of individual offences (with objective and subjective links) to fulfil the criterion of major, significant or large-scale damage, which are usually fixed as special qualification elements in the definition of individual crimes.

This applies in the case of criminal fraud, where the law stipulates more severe sentences of imprisonment based on the extent of the damage (major damage, significant damage, large-scale damage). The present article focuses on the special qualification element of committing criminal fraud for a longer period of time (an aggravating factor). As a rule, this aggravating factor comes into consideration in continuous offences and perpetual offences.

A continuous criminal offence is regarded as one action – a separate offence. In the event of prosecution for a subsequent partial offence, a previous valid conviction must be set aside as regards the conviction for other partial offences of the same criminal offence (Section 41(3) of the Criminal Code). The time of commission of a continuous offence is considered to be the time when the last partial offence against a protected interest was committed. The bringing of charges is considered an interruption in a continuous offence and after this procedural act, continued criminal conduct is deemed to be a new offence.

To be classified as a single offence, the offender’s partial offences must havea link in their subject matter, the method used in the partial offences and above all in timing, which is the most significant from the objective perspective (Decision of the Supreme Court of the Slovak Republic 2Tz/32/2005). In addition to the objective factors, subjective factors are also required – at the time of the first partial offence the offender must already intend to commit further partial offences the( unifying intent of the offender). In the absence of a unifying intent, the offender’s partial offences against legally protected interests can “only” be qualified as concurrent offences and will not be treated as a single offence.

6.2. Analogically to a continuous administrative offence

To provide the reader with a comprehensive approach to the qualification of partial offences against property, it is also necessary to consider their sanctioning in misdemeanour law. The act on misdemeanours does not recognise the institute of a continuous misdemeanour (administrative offence) but in practice a statutory analogy with the Criminal Code is used: due to the lack of special regulation, a continuous administrative offence must be regulated by statutory analogy with Section 122(10) of Act No 300/2005 (Judgement of the Supreme Court

1441 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online of the Slovak Republic, 5Sž/21-22/2011). It would be more appropriate to call this an argument a simili because “analogy” tends to be used in the area of judicial law-making in the proces of interpretation of applicable law (this view of the terminology is shared by Melzer – MELZER, F., 2011, pp. 166-167).

With reference to the provisions of Section 122 (10) of the Criminal Code, a continuous misdemeanour can be defined as conduct of an offender that is condemned by law (in individual partial offences) that meets the definition of the same misdemeanour (has the same constituent elements) where the offender’s partial offences have both an objective link (in time, method and subject-matter) and a subjective link, especially a unifying intent of the offender (Compare KRAJČOVIČ, M., 2015).

In proceedings under the act on misdemeanours, such conduct must be considered one offence that has just one consequence based on the cumulative damage committed by the offender in the partial offences against legally protected interests. A single penalty is imposed for this offence (not separately for the partial offences).

Thus, a repeated fraud may remain an misdemeanour if the cumulative damage from the partial offences does not pass the threshold of minor damage. It will still be continuous and repeated unlawful conduct but on a less serious level. The qualification of such an offence depends on the total damage caused by the offender’s partial offences that are objectively and subjectively linked. The area of minor misdemeanours against property that are committed for a longer time or repeatedly (recidivism) is one in which an inadequate differentiation of fines can be discerned. This theoretical investigation will now turn to the qualification of the fraud perpetrated by apartment owners in the management of apartment buildings that was described earlier.

Conclusions

The article approached the theoretical aspects of fraudulent behaviour occuring in the processes of apartment buildings management. our work. The authors focused on the significance of property values and means of their legal protection - with special focus on criminal law and misdemeanour law area. It is in public interest to provide an effective framework for the protection of property and from a general viewpoint this is the authors´ main interest. Fraud is an criminal offence, which protects property against a conduct, by which a perpetrator enriches himself or others at the expense of someone else’s property by misleading them or exploiting the other person’s error so that the person acting in error executes disposition of property. Similar misconduct is sanctioned as a misdemeanour against property under par. 50 Act on misdemeanours under the circumstance, that damages are not higher than 266 Euros (the legislator thus reflects the principle of proportionality in sanctioning). One of the forms of fraudulent behaviour is fraud occuring in the processes of apartment buildings management, when the administrator is misleaded in the process of settling arrears and overpayments from the previous year. The authors provided the reader with a brief introduction into rights and obligations associated with the ownership of apartments - being aware of them is a primary step to understanding the mentioned latent form of fraudulent behaviour. The theoretical approach to the criminal offence of fraud is supported by the statistics of the Ministry of Justice of Slovak Republic (2013-2018; basic form of fraud) with the sentencing overview (as a percentage of the number of convictions and in absolute numbers), number of persons convicted and crimes detected. This supports the conclusion, that this frequent (and in many forms latent) form of unlawfull behavior requires sufficient attention in order to provide an efficient protection of society and values of others.

In the september issue of the Entrepreneurship and sustainability issues journal, the authors will publish their article Fraudulent conduct in the management of apartment buildings and related issues - a case study, in which they will focus on deepening their analysis of fraudulent behaviour in the process of settlement of arrears and overpayments, issues relating with insolvency (as fraud is a related offence to insolvency crimes) and efficient protection of owners in an apartment building with regard to potential or existing insolvency of one of the owners. Based on this analysis (demonstrated on the case study) and application of the theoretical findings, the authors will draft recommendations de lege ferenda towards a more efective way of apartment building management, settlement of arrears and overpayments, insolvency issues and sanctioning of perpetrators of the criminal offence of fraud.

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Acknowledgements

This research was supported by the project “Guidelines and tools for effective elimination of unlawful acts in relation with potential insolvency”, which has received funding from the Slovak Research and Development Agency under the contract No. APVV-15-0740.

Jozef ČENTÉŠ (prof., JUDr., PhD.) Graduated from the Faculty of Law of the Comenius University in Bratislava (1991), where he obtained a Ph.D. and the title of Associate Professor in Criminal Law. In 2014, after a successful appointment proceedings at Masaryk University in Brno, he was appointed a professor in criminal law science. He deals with substantive criminal law and criminal procedural law. He is the author (co-author) of the monograph Hmotnoprávne aspekty trestnej činnosti páchanej v súvislosti s nealkoholovou toxikomániou v Slovenskej republike [Substantive Law Aspects of Crime Related to Non-Alcoholic Drug Disorder in the Slovak Republic]. Bratislava (2007), Právne a inštitucionálne aspekty v boji proti legalizácii príjmov z trestnej činnosti ako integrálnej súčasti organizovanej kriminality [Legal and Institutional Aspects in Combating the Legalization of Income from Criminal Activity as an Integral Part of Organized Crime] (2010), Odpočúvanie – procesnoprávne a hmotnoprávne aspekty [Eavesdropping – Procedural and Substantive Aspects] (2013), History of Prosecution in Slovakia (2014). He is Deputy Director of the Criminal Department at the General Prosecutor of the Slovak Republic. He is Head of the Department of Criminal Law, Criminology and Criminalistics at the Faculty of Law of the Comenius University in Bratislava. He is a member of four scientific councils and two scientific boards of professional journals in the Czech Republic. He also acts as an external lecturer at the Judicial Academy of the Slovak Republic. ORCHID ID: orcid.org/0000-0003-3397-746X

Michal MRVA (JUDr., Mgr., PhD., LL.M) graduated from the Faculty of Law of the Comenius University in Bratislava in the field of law (2007), Faculty of Philosophy of the Comenius University in Bratislava in the field of Political Science (2008) and the Faculty of Business and Finance Law, University of Luxembourg in General European Law (2011). At the Faculty of Law of the Comenius University in Bratislava, he graduated in 2012 in the doctoral field of study “Theory and History of the State and Law”. He is the author of several articles in both domestic and foreign scientific journals and publications. He focuses primarily on the issue of the theory of law, while he is a co-author of the monograph Interpretation and Argumentation in Law (2016). He is currently working as a professional assistant at the Department of the Theory of Law and Social Sciences at the Faculty of Law of Comenius University in Bratislava, and is concurrently a practising attorney. ORCHID ID: orcid.org/0000-0002-0741-5538

Michal KRAJČOVIČ (JUDr.) graduated from the Faculty of Law of the Comenius University in Bratislava in 2016. He graduated with a Master’s degree with honours and was awarded the Academic Appreciation of the Dean of the Faculty of Law of the UK for an exemplary fulfilment of study duties during his studies. In the past, he completed an internship at the Supreme Court of the Slovak Republic and worked at the Executor’s office of Mgr. Vladimír Cipár. At present he is a Ph.D. student at the Department of the Theory of Law and Social Sciences, the Faculty of Law of the Comenius University in Bratislava and is employed in Michal Mrva - advokátska kancelária, s.r.o. During his studies he focuses on the field of criminal law, law theory, executive law and primarily active publishing activities. He is the author of several scientific articles and a monograph aimed at the topic of flat-rate compensation of damages caused in the excercise of state power. For a set of articles published in Judicial Review in the column Adspirantes legum he was awarded the Karol Plank student prize for 2015. ORCHID ID: orcid.org/0000-0002-4926-0714

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JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2019 December Volume 9 Number 2 http://doi.org/10.9770/jssi.2019.9.2(27)

THE IMPACT OF VARIOUS CURRENCY REGIMES ON ECONOMIC DEVELOPMENT FACETS: CASE OF GEORGIA

Nodar Chinchaladze

University of Georgia (UG), Merab Kostava Str. 77, Tbilisi 0171, Georgia

E-mail: [email protected]

Received 16 October 2019; accepted 20 April 2020; published 30 June 2020

Abstract. For any business decision, it is important to have grounded information about possible consequences of this decision. The goal of this paper is to show that performance of business companies depends on the currency regime. Therefore, decision makers have to weight decisions about currency regimes in any country, especially developing one. The author of presented paper raises a question what currency regime is better for Gorgia. In his research, on one hand, he relies on opinios of local business companies, and, on the other hand, analyses experiences of different countries, which alredy have made one or another decision in this area. The formulated insights contribute to this scientific field and may have grounded economic policy implications, facilitating economic development of Gorgia, or any other country, which is in similar path of economic development.

Keywords: dollarization; stability; value of money; durability of money; devaluation; sound money.

Reference to this paper should be made as follows: Chinchaladze, N. 2020. The Impact of various currency regimes on economic development facets: case of Georgia. Journal of Security and Sustainability Issues, 9(4), 1445-1457. http://doi.org/10.9770/jssi.2020.9.4(27)

JEL Classification: E000, E420, E310, F310, G380, M210

1. Introduction

In Georgia there is an ongoing debate about the steps, which should be taken to make the economical growth faster. Surely, nobody is arguing against the importance of economical development, but as a rule, the reasoning is superficial, aiming only at the impact on the people who do not have deep insight into the essence of economy. Having careful looks, we find many different problems and one of the most important one is the problem of money. What is money? Who should issue the money and what for? Disagreement in modern society on this issue starts from Keynes and Mises.

After each crisis supporters of the Federal Reserve System argued that the crisis would be even heavier if no active intervention and preliminary measures were taken. But Milton Friedman was of totally different opinion:

“These arguments are ultimately wrong. The fact is that the major depression and other periods of partial unemployment are the result of wrong management by the government itself and not the inward instability of the private economy. The agency established by the Government: Federal Reserve System to which was transferred responsibility for monetary policy. In 1930 and 1931, it managed to make as much as what would have been a slight cut in the economy, turning it into a tremendous catastrophe. “ (Friedmen, 2002, p.39). Despite the fact that the arguments of supporters of the golden standard seem to be more serious about the background of the existing problems, there is no sign that the issue of this dispute will soon reach a consensus. Even Alan Grinspen

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(who later became the chairman of the Federal Reserve System in 1987-2006, for the whole 19 years) noted: “It is against the supporters of the welfare state as the golden standard stands against ‘mysterious’ simple scheme of seize. Deficit spending is a simple scheme of ‘hidden’ deprivation of wealth. On the way to this insidious process, gold is as a defender of property rights. If each of us is going to understand this tricky plan, it will not be difficult to imagine the aggression of the state intervention towards the golden standard” (Greenspan, 2010, p.147). Hayek pointed out that the problem comes from old superstition about money and blamed Keynes for current problems: “The head of the current monetary problems is associated with Keynes and his disciples who have given scientific power to the centuries-old prejudice - long-term prosperity and full-scale employment” (Hayek, 2016, p.280). Hayek believes that the only way to a healthy monetary system is the competition: “When the government and other money-straping institutions are in a healthy competition with each other for long-term contracts, long-term stability is expected” (Hayek, 2016, p.297). But it is hard to imagine how such a condition can be reached in the current world. We in reality have inflationary money like which has never existed before: “For centuries, in various societies the role of money was played by wheat, precious metals, sheep, sinks and others. However, gold and silver assumed the function of money best. The vast majority of countreys speaking different languages have unanimously recognized the use of the gold as money, compared to other goods, which made gold (and partially silver) as world’s money centuries ago. Society has never created a need for modern monetary policy, as the society was never bothered with inflation in the conditions of the market value of money, even though the banking system was free of pressure from any central bank. Inflation is the result of unnecessary mass of money and the bank itself is the source of additional money emissions” (Tsomaia, 2010, p. 218). And now we have the system about which Mises mentioned: “The gold standard for determining the changes in purchasing power is completely separated from the political arena. It relies on the recognized truth that one person cannot make all people rich by printing money. The hatred for the gold standard is determined by the prejudice that governments can create a wealth by small piles of paper” (Mises, 2010, p.149). Some authors have more radical views on this subject, indicating that this kind of monetary system is fraud against savers and last receivers: “Accepting money until it is gradually expanded into the entire system of economy, changing the prices and eventually increases the general level of prices, the rate of fraudulently reduced interest rate in receiving credit. So, they are reaching in the expense of savers or last receivers or at the expense of those who cannot get the money at all” (Hoppe, 2010, p.173).

Newest word of 21st century is cryptocurrency: “The twenty-first century can be characterized with a vast development of technologies and the increase use of the internet which significantly succeeded the development of monetary system introducing a new phenomenon - virtual currencies” (Dibrova, 2016). “However, there are signs that the efficiency of all cryptocurrencies, are improving, with all having significant drop in AMIM in the last 6 quarters” (Tran & Leirvik, 2019). But this kind of currency is new for the world yet and no nation uses as their official currency. Despite there is a lot of attention to this form of money (e.g. Salamat et al., 2020; Morozova et al., 2020), it is out of the examination of this article. Hence, the goal of this article is to prove the advantage of fixed currency regimes over floated currency regimes for Georgia and other developing countries in general.

Hypothesis

Under condition of having a currency regime when the national currency is firmly attached to a stable foreign currency, the efficiency and effectiveness of companies in the economical and financial crisis would exceed the efficiency and effectiveness of companies under the current currency regime in Georgia.

2. Review of different currency regimes

One of the most important issues is to properly interpret the essence of money, the role of which in economy is not clear even today: should it be a monetary policy tool or should not? Actually under monetary policy tool is meant manipulations with the value of money by authorities for solving other problems. On the National Bank’s website (Georgian National Bank) one can find the classification of currency regimes. Classification of exchange rate regimes according to the International Monetary Fund (IMF) (See diagram 1).

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Exchange rate regimes

Floating Hard peg regimes Intermediate regimes regimes

Conventional No separate Floating peg legal tender

Stabilized Free Currency board arrangement floatintg

Crawling peg

Crawl-like arrangement

Pegged within horizontal bands

Other managed arrangements (residual)

Diagram 1. Classification of exchange rate regimes

Source: Baiashvili, 2018)\

According to the classification of this scheme there are three main branches of exchange rate modes, where each of them contains several parts. It should be noted that despite of certain characteristics of each model, from the point of view of influencing economic subjects it is enough to consider these three main branches and we can conclude that: There are three types of exchange rate modes of national currencies: strictly fixed, intermediate and floating modes. In addition, a foreign currency may be in use in a country and there may be no national currency (in this case there is no need for a national bank or a currency board) or there may be a multilateral regime, i.e. when it is legal to use any currency. It should also be noted that in some cases different branch modes could be very close to each other. For example, national currency pegged to the US dollar at fixed exchange rate – this regime is marginal case of interim regime, when the regulations are so restrictive that the change of exchange rate is not actually happening, while freely floating regime is practically the same as the intermediate marginal regime when the course regulation becomes so free, that it is a practically free-floating regime. Nevertheless, the difference still remains because psychological expectation derives from the system by which the national currency is regulated, and not from the marginal case of this regulation which emergies if it is liberalized or toughened.

So, there are 5 different currency regimes: The country uses foreign currency (and does not have own currency), the national currency is tied with a fixed rate to a foreign currency, the national currency is attached to a certain foreign currency, national currency is related to other currencies by free market principle and the country’s national currency is not the only currency for payment, but rather is in free competition with any other currency. Obviously, this currency regimes cannot be a strictly separated from each other. For example, the direct use of foreign currency and the fixed exchanged rate with foreign currency is almost the same, although there is still

1447 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online some difference, and therefore it is advisable to allocate these regimes separately. Similarly, free saling regime and the legitimate use of all currencies, including free competition, is very close to each other, but between these regimes there is some significant difference even due to the presence of conversion costs.

All regimes assume comperasion with strong currencies which are not many in the modern world: “We define safe currencies as those for which the estimated portfolio weights are positive, in this case the JPY, EUR, CHF and USD, while non-safe currencies are those for which the estimated portfolio weights are negative for most of the sample period—the GBP, AUD, and CAD” (Cho, et al., 2019). Even GBP, AUD, and CAD are not quite safe.

3. Results of author’s research

The Applied Research Company ARC made research about problems of economic subjects for the current currency regimes in Georgia. Most of respondents of research were companies’ founders, partners, directors, presidents, and financial directors – all of them in high positions in their companies. Let us check some results from the research. There are two kinds of companies: companies using foreign currency and companies do not using foreign currency. Almost all of them noted that the currency rate fluctuations influence to their business (see figure 1).

Does your business depend on exchange rate fluctuations?

does not depends

depends some how

depends very much

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% does not use foreign currency uses foreing currency

Figure 1. Business’ dependence on currency’s exchange rate.

Source: author

Here is visible that less than 8% of companies say that their business does not depend on the currency exchange rates. It should be emphasised that this 8% is for the companies which do not use foreign currencies. For the companies which use foreign currencies this parameter (companies which say that their business does not depend on exchange rates) is about 2.3%. This result shows that the relation between national and foreign currencies is very significant for small developing countries. And this outcome was predictable as the economy of such a country as Georgia depends very much on relations with other countries – too high level of import- export compared to the country’s GDP. And the impact of the changes in the exchange rate is mostly negative (very few answers are about positivity). That means that negative expectations about money puts pressure to business subjects and they count this circumstance into their risky points. Business subjects need to defend

1448 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online themselves and they find some difficulties to do this, spending some resources on it. It is interesting to emphasize that the companies’ answers in this research indicate that the changes in the exchange rate is biggest problem for their business (see figure 2). Problems for business

Refund of taxes paid 0,75% Transportation 0,86% Tax Administration / Inspections 1,18% Telecommunications (high prices, lack of... 1,39% Tax rates 1,68% Licenses and permits for business 1,80% Electricity, Gas (High Price) 2,08% Competition in the informal sector 2,09% Criminogenic situation in the country 2,17% Impartiality of the judiciary 2,30% Corruption 2,30% Inadequate infrastructure (e.g roads, port.. 2,49% Monopolies/ anti-competitive power of bi... 2,52% Political instability 2,65% Labor law regulations 2,82% Customs and Trade Regulations 2,94% Lack of information technology 2,96% High labor costs 3,32% Unstable supply by raw material suppliers 3,37% Lack of trust between business partners 3,72% Complex collateral requirements 3,95% High costs of transportation and storage 4,39% Lack of qualified staff 4,79% Access to finance (financial institutions... 5,26% Lack of working capital 5,42% Lack of demand on market 5,62% Price of finance (high interest rate on loans) 5,80% Volatile market demand 6,04% Volatile market demand 6,10% Exchange rate fluctuations 7,24%

Figure 2. Rate of business problems

Source: author

Changing of exchange rate is on top of problems with 26.7%. Here it should be mentioned that this research was special one concentrating on the question of currency’s regime and in the other type of researches there may be different picture but this problem will never be the last as long as there exists the problem of stability of money. At last, most business subjects think that for Georgia fixed exchange rate would be better – 24.2%, and in addition 12.2% of respondents were for full dollarization. If we take out the note of patriotism this two are the same, so one may say, 36.8% thinks that dollarization would be better. Also, 17.2% is for free regime. Totally, more than half of business subjects understand that the money problem needs to be solved somehow (see fifure 3).

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In your opinion, what kind of currency regime would be better in Georgia?

Free regime (no primate for national currency)

Floating regimes (current one)

Intermediate regimes

Fixed exchange rate

Full dollarization

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%

Figure 3. Which currency regime would be better for Georgia?

Source: author

“Our research shows that the currency regime is very sensitive question for every business and they have problems because of the risks of currency’s value. Most businessmen think that the current regime for national currency is not suitable for Georgia and it would be better to have another one (more than 80% think so). Most of them believe that currency’s fixed exchange rate would be better (as Steve Hanke advices), and the full dollarization is preferred only by 12.2% of respondents. But here should be mentioned that this outcome is a result of a mistake people often make: national currency is understood as an object of national identity. Excluding this factor, one could say that the percentage of respondents supporting the floating regime (17.4%) would be reduced and share of others would be increased.” (Chinchaladze, 2020).

Case of Montenegro

After Chapter 3 it is interesting to consider the case of Montenegro. This post Yugoslavian country has never tried to issue its own currency: “On November 2, 1999, President Djukanovic made a daring and decisive move that would set Montenegro on a course towards independence: Montenegro granted the mighty German mark legal tender status”. (Hanke, 2019, p.5). And soon, Montenegro adopted Euro. This means that in this country in the list of problems there is not and cannot be the problem of national currency. As, an example one could mention that they had some problems with joining to NATO: “In 2017, Montenegro joined NATO and became the thirteenth post-communist member state of the alliance that was founded to contain the spread of commu-

1450 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online nism. Unlike other recent NATO enlargements (Croatia and Albania were the last two countries which joined NATO, in 2009) the process of NATO integration of Montenegro is highly controversial, from both the internal, Montenegrin perspective, and from the perspective of global power relations”. (Beshic & Spasojevich, 2018) However, it is hard to find an article about currency problem in this small country. Similar adoption was made by some other countries with USD: Equador, Puerto Rico, Republic of Palau, Marshal Islands and some others. These countries may have (and really have) many different problems in their ways to prosperity but they have no such problem as national currency’s devaluation.

Fixed currency regime countries

This system is (or was) used by many different countries, like Argentina, Bosnia, Estonia, Gibraltar, Hong Kong, Lithuania and so on. When the country has a currency board and the currency board is really independent from the officials of the government there is real possibility to think that to possess national currency is the same as to possess USD (or Euro or any other stable foreign currency). For example, in Argentina 1 Peso was co-equalled to 1USD, that meant that if you had 50 Peso, you could exchange it for 50 USD. Some may think it is a problem for the country because the government cannot do its own monetary policy (actually monetary policy means to manipulate with national currencies to solve some other problems), but that is a positive outcome of currency board - not negative. From the point of view of business subjects, in this situation, it looks like, as it was mentioned in the Chapter 4, there cannot exist problem with so called national currency devaluation. Only difference is in the expectation – the business subjects always understand that there can be changed something, government can find a way to influence on the currency board and change the parity 1 Peso = 1 USD to a more profitable for the government in the current circumstances (as it happened in Argentina). Regard- less the fact that the fixed currency regime brought quite good results in many countries (like Estonia, Hong Kong, Lithuania and so on), many argue about the case of Argentina – because of crisis of 2001 the parity 1 Peso = 1 USD was changed and the currency went to floating regime. Let us consider this case shortly, not to tell the whole history. There was big inflation and the dicision was made to create currency board in March of 1991: “The main elements that set Argentina somewhat apart from other emerging countries’ efforts to pursue a liberalization process were: i) the Currency Board system – starting in March 1991 and only rejected at the end of 2001 – under which the exchange rate with the US dollar was fixed by Congress and the local currency – pesos – could be issued almost only against the exchange of foreign currencies, meaning that the Central Bank could not possibly finance government deficits nor could it provide support to commercial banks confronting a liquidity squeeze; ii) a full bi-monetary system, placing on an equal status pesos and foreign currency (mainly the US dollar), the public being absolutely free to choose the currency of denomination of their transactions; iii) a fractional reserve banking system even for foreign currency denominated deposits with fully liberalized interest rates and income tax exemptions for interest on deposits; … ” (O’Connell, 2005, 292).

This was done as the country had big problems because of inflation:“Between 1970 and 1991 Argentina suffered from chronically high inflation, punctuated by bouts of hyperinflation. In both 1989 and 1990 inflation in the consumer price index was measured in thousands of percent. In 1991 the newly elected President of Ar- gentina, Carlos Menem, launched the currency-board-like Convertibility Plan to reduce inflation. The architect of this plan was Menem’s Economics Minister, Domingo Cavallo. The Convertibility Plan tied the value of the new Argentine peso to that of the U.S. dollar and was spectacularly successful in reducing inflation. Between 1992 and 2001 CPI inflation averaged about 4 percent per year with prices actually falling slightly over the period 1999-2001”. (Kehoe, 2003). There were many problems Argentina encoutered on the way of stabilization and reducing inflation, for example international trade balance problem because of other countries’ currencies devaluation: “The Brazilian devaluation in 1998 did not lead to problems for the Argentina current account — both exports and the trade surplus in fact grew, except for a mild downward blip in 1999. Direction of trade statistics show that an increase in exports to the United States more than compensated for the decline in exports to Brazil. Argentina exports are primarily agricultural products, especially beef and wheat, whose prices are determined on world markets. The sharp change in Argentina’s terms of trade with Brazil undoubtedly hurt some specific industries, such as the automobile parts industry. It is conceivable that these negative impacts had significant macroeconomic spillovers.” (Kehoe, 2003, p.14). Devaluation affected not only Brazil but also

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Mexico, Chile and other countries with whom Argentina had active trade and that brought the country to some difficulties. It is clear, that the difficulties should be handled somehow but Argentina chose easy way, devaluate its own currency. So, the country decided to have a problem in fiscal policy instead of solving the real one: “The proposed hypothesis is that the Argentina crisis was triggered by a lack of political consensus to control the fiscal deficit. The crucial events occurred in March 2001: On 16 March, President Fernando de la Rúa rejected the plan presented by the Economics Minister, Ricardo López Murphy, to reduce the fiscal deficit. After López Murphy’s resignation, de la Rúa appointed Domingo Cavallo, the architect of the Convertibility Plan during the Menem administration, as Economics Minister. Cavallo presented a new economic plan in the lower house of Argentina’s congress. On 28 March, however, the congress refused to allow Cavallo to cut government salary and pension costs, and the government sold debt to cover the deficit. In December 2001, the government de- faulted on its debt and, in January 2002, it abandoned the Convertibility Plan”. (Kehoe, 2003, p.15). Instead of solving problem the country depreciated its currency which means only postponing the real problem for future. Currently inflation is going on and the postponed problems stay to be coped with: “Argentina is grappling with a serious economic crisis. Its currency, the peso, has lost two-thirds of its value since 2018; inflation is hovering around 30%; and since 2015 the economy has contracted by about 4% and its external debt has increased by 60%”. (Nelson, 2019). So, the case of Argentina does not say that the fixed currency regime leads the country into crisis, it says that fixed currency regime should be saved in any case by having very strong fiscal discipline and clear economy policy to strengthen country’s position in the international trade and to have stabile conditions in the domestic market. In any case, fixed currency regime in the country (in the small developing countries) means more stability for business subjects than the floating regimes. Stability comes from the credibility from the business subjects (locals and foreigns).

Other regimes of national currencies

Other regimes spread in the modern world are mostly comfortable for national governments. These regimes are the systems when the governments (via the national banks) are mostly free to do their politics against currency stability in the concrete situation. Their needs are changing permanently and every time they correct the regime depending to their needs. It does not matter if there is floating regime or intermediate, these cases always offer some more possibities for governments to manipulate with currency value. And therefore, there is no guarantee that it will help against coming problems: “The Asian Crisis in 1997 was triggered off by the Thai baht devaluation. Since May 1997 the Thai’s economy has been slowing down due to political instability, which in turn caused massive market speculations. In addition to that, the currency and stock market sharp fall has created a financial turmoil that affected Thai’s economic fundamentals”. (Noerlina, 2003, p.14).And: “In many Asian countries, production has declined, whilst inflation and unemployment have shot up. The rapid decline in currencies and stock market levels marked the beginning of the Asian financial crisis. While Thai, Korean, Malay- sian and Philippine’s currencies had fallen 40 to 50%, Indonesian Rupiah was experiencing a decline up to 500 to 600%. This affects the local currencies that had to be used to service foreign loans. A tremendous increase in FOREX (Foreign Exchange) loss was then created”. (Noerlina, 2003, p.15). Declined up to 500 to 600%! Crisis in Mexico in 1994 is very similar to this Asian crisis, both of them have begun from devaluation: “The Mexican crisis began in December 1994 when the peso was devalued sharply. Similarly, the East Asian crisis began on 2 July 1997 when the Thai baht was floated”. (Rana, 1999, p.3). The crisis is caused by structural weakness of the financial sector: “It is agreed that the root causes of the crisis of confidence in East Asia were the structural weaknesses in the financial sector, including lending on a nonmarket basis and policy mistakes in handling large surges of mainly short-term capital flows”. (Rana, 1999, p.7). In the same article Rana writes about policies to stabilize currencies. What should be done to a system which needs additional effort to stabilize it, and, also causes crisis?! Emi Nakamura (with Jon Steinsson) makes a good comparison: “The argument for a flexible exchange rate is...very nearly identical with the argument for daylight savings time. Isn’t it absurd to change the clock in summer when exactly, the same result could be achieved by having each, individual change his habits? All that is required is that everyone decide to come to his office an hour earlier, have lunch an hour earlier, etc. But obviously it is much simpler to change the clock...The situation is exactly, the same in the exchange market”. (Nakamura Emi, 2018, p.10).

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The situation is similar, only care should be taken of one thing: which is more correct way, to make change for the people who need this change, or to make a change (even very small) for all people who do not have any interest in this change. Should not be hard to understand which of them is more correct and more productive way to do. Regardless of this fact because of some political or other interests many officials choose to make dicisions spreading over the whole population and do not care that most part of this population does not need to be affected by this dicision. Now, the question of the Summer’s time is disputed one more time and it looks like this practice will be halted soon: “European Commission President Jean-Claude Juncker has said the EU plans to get rid of the switch between summer and winter time. The decision came after a majority of surveyed EU citizens said it should be abolished. A man fixes a clock in Dresden, Germany (picture-alliance/dpa/S. Kahnert) Switching the clocks by an hour between summer and winter time may soon be a thing of the past in the Euro- pean Union, European Commission Jean-Claude Juncker announced on Friday. He said that the decision was taken after a vast majority of EU citizens — primarily from Germany — who took part in a survey on the issue called for an end to biannual clock changes”. (Staudenmaier, 2018). Certainly, there are many arguments for and against summer-winter time change but it is clear, that the mistake was when this rule was established and made big discomfort for the big range of population. No one minded the problems with logistics in transport, the 24 hours services, the people who do not work from 9:00 to 18:00, or the people who do not work at all? And who cared about the health of these people? The circumstance for the currency regimes is worse than the problem of summer-winter time. No one (no decision makers) cares about the economic subjects for whom the voluntary changing in the rate or even not changing, but the perspective of the change depending on political needs, which means that the politicians can change current value as they wish, makes the economic subjects to feel unstable and unsure in their statements. The research mentioned above shows that the absolute, majority of economic subjects make losses in any kind of inflationary environment. All companies try to minimize risk, so that “The firm’s decision is modelled as a mean-variance optimisation problem of modern portfolio theory, in which risk averse investors seek to maximise the expected terminal wealth for a given level of risk captured by the variance of the expected cash flows”. (Harasztosi & Gabor, 2020). It should be mentioned that even big currency union requires more member countries to reach suitable stability of currency system: “Note that the level of economic integration needed for stability under the simple models of behavioral expectations and for determinacy under rational expectations increases with the number of countries in the currency union”. (Ber- tasiute, et al., 2020).

There maybe big problems for outstanding countries. For, example Turkey: “Our results illustrate the investors’ sentiment of how resilient banks would be to possible bank defaults with spillover effects. The stocks of the overall banking sample react negatively to the crisis in Turkey and results indicate that banks that recently increased their leverage or experienced a decrease in liquidity or profitability have also been subject to higher abnormal losses on the event day and a day after the event, where the losses in general were the most severe. Nevertheless, leverage, liquidity and performance ratios are by themselves not sufficient to assess the financial soundness of banks, since the risk is more related to the quality than the quantity of the assets they carry”. (Arbaa & Varon, 2019). It is interesting to note that Steve Hanke recommends to Turkey go to gold standard: “Making the lira ‘as good as gold’”. (Hanke, 2020). At the end of this chapter the circumstances in post communist countries should be mentioned: “This type of constitutional constraints is even more essential in the countries of the post communism transition where the tradition of thorough monitoring of governmental activities and expenditures is still very weak. In these countries budgetary systems are usually based on favoritism, privileges and corruption. Therefore, they need even stronger restraints of governmental spending and taxing powers”. (Jandieri & Chkhikvadze, 2017).

Georgian Lari’s (GEL) value compared with 1995 GEL value. In Georgia national currency was issued in 1995 (let us mark, its value in this year of issue as GEL1995), so it is very interesting to look at it and see how it was doing in the years of its existence (see figure 4).

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GEL1995/current value 4.5

3.5

2.5

1.5

0.5

0 1995 2000 2005 2010 2015 2020 2025

Figure 4 . Georgian 1995 Lari’s value (GEL1995) / current value.

Source: (NBG, 2019).

Here it is given 24 years period and from chart it is visible that current 1 Lari is almost one fourth of the 1995’s Lari. How can it be suitable for the economic subjects to operate in these circumstances and make balances in the currency which loses three fourth of its value in the 24 years period. (nothing is said here about the countries where the inflation rate is much bigger). And worse is expectation rate for which some results were given in the paragraph 3. Everyone expects that the inflation will continue, and it may be steeper. Comparing with USD we can see what Lari’s devaluation looks like (see figure 5).

GEL / USD 3.0000

2.5000

2.0000

1.5000

1.0000

0.5000

0.0000 1995 2000 2005 2010 2015 2020

Figure 5. Georgian Lari’s value / USD.

Source: (NBG, 2019).

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It is clear that the figures 7.1 and 7.2 have some correlation. Inflating national currency in such countries as Georgia always leads to its devaluation compared to USD (or to any other strong currency). And here it should be mentioned that dolar itself inflated by 62% for the same period of time and if we multiply dollar’s inflation to Lari’s devaluation rate we nearly get Lari’s inflation rate. This result was anticipated as Georgian economy is mostly dependent on imports.

Busines efficiency

Each business has its own aims and plans to reach them, but the plans are usually based on given circumstances. Calculating their KPI, one of the most important points is financial stability and reliability in the country. Look- ing at the situation mentioned above business subjects have two choices: Plan their business for the short period only and continue planning after each period; this is not so productive and, also it is expensive way of planning business; Plan and operate their business in the foreign stabile currencies (mainly USD or Euro), which usually is not allowed by national laws. For prosperity of national economics, it is very important to have long run plans in the economy and that means the business subjects should have possibility to make long run projects and plans for their business development. And the currency’s credibility is one of the most important issues for the business subjects: “After having selected the relevant growth determinants using the BMA approach, we show that the higher the undervaluation, the higher the negative impact of inflation on growth”. (Morvillier, 2020). Here can be mentioned also the methodology, it impacts on the results: “The different methods for adjusting for inflation can yield substantially different results. We make recommendations regarding the most appropriate method for various scenarios. Moving forward, it is vital that studies report the methodology they use to adjust for inflation more transparently”. (Turner, et al., 2019).

Conclusion

In terms of the existence of a currency regime in which national currency is firmly connected to a stable foreign currency, the efficiency and effectiveness of companies in the economic and financial crisis exceeds the effectiveness of companies existing in the other currency regimes for countreys with national currency (floating regimes or intermediate regimes). In other words, existing floating regime in Georgia makes less comfortable circumstances in the country for businesses than it would be in case of fixed currency regime with stable foreing currency. The factors for: Psychological expectation of the undesirable change of national currency’s value catches economic subjects out from long run business planning; At the time of the crisis, the national currency is changing significantly, and it is impossible to determine the real value of existing real-life assets and/or services;

In case of international agreements, there is continual necessity of recalculation the costs of existing projects. For business companies whose big share of business involves relationships with foreign partners, it is best to have a financial accounting in any of the harder foreign currencies. Business companies that operate only on the local market are better if they keep track of their record in a fixed-year value of national currency and evaluate their business growth history and future prospects. Going one step further one could generalize that it would be better for the economy of small countries if the local governments change the current monetary policy at- taching national currency to a solid foreign currency or even more - use the solid foreign currency instead of national currency. That would help the country to have more credible circumstances. It is a well-known fact that prices on goods and services are formed by supply and demand on this resource. Any limitations done with whatever good wishes do not lead to good results: the outcomes are shortages and quality problems and these results come from not having real prices. Only market can give a genuine price on any scarce resource. Money is scarce resource too (in any case, it should be) and we need to take this into account, money’s price should be market’s formation and not voluntary decision of some officials. Analogy is clear: If we need grow the tree, we have, to irrigate it, not to manipulate with ruler – tool of measure; If we need to begin work earlear, we have to get up earlier and not to manipulate with clock – tool of measure; If we need to grow economics, we have to care about real problems and not to manipulate with money - tool of measure. Inflation can exist in case of gold standard too, but it would not be because of voluntary decisions of some politicians but because of natural fluctuation from one side to another, and everyone would know it is natural not the inflation tax.

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Acknowledgenets

The author thanks J. Gegelia for comments on the manuscript.

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Nodar CHINCHALADZE ORCID ID: https://orcid.org/0000-0002-7539-3043

This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/

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1458 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 https://doi.org/10.9770/jssi.2020.9.4(28)

CHINA: INSIGHTS INTO PECULIARITIES OF DEVELOPMENT

Natalya V. Osokina1, Mariana Petrova2, Natalia V. Kudrevatykh3, Evgeny E. Zhernov4

1,3,4T.F. Gorbachev Kuzbass State Technical University, 28 Vesennyaya Str., Kemerovo, 650000, Russian Federation 2St. Cyril and St. Methodius University of Veliko Tarnovo, 2 T. Tarnovski Str., Veliko Tarnovo, 5000, Bulgaria

E-mails: [email protected]; [email protected] (corresponding author); [email protected]; [email protected]

Received 18 November 2019; accepted 4 April 2020; published 30 June 2020

Abstract. The subject of the study is economic relations between USA and China. The aim of the study is to characterize the dynamics of the world-system status of China in the XX-XXI centuries and the economic characteristics of its mode of production at present. The main idea of the article is to substantiate the untenability of considering the real state of the economic system of China as “socialism with Chinese characteristics”. Currently, China is integrated into the world-system according to the Beijing Consensus model. The model of China is a specific Asian capitalism, in which a special mode of capital accumulation is formed - with a higher role of the state in the process of capital accumulation than in the fourth cycle of capitalist accumulation. Its world-system status can be characterized as a strong semi-periphery, which entered the competition for hegemony in the next system cycle of capitalist accumulation. If the motion path leads China to the goal, it will be for the first time a specific non-Western hegemony. This research result allows determining the prospects for changing relations in the world economy as a result of the completion of the fourth system cycle of capitalist accumulation.

Keywords: China; the USA; world-system; economic leadership; capital accumulation

Reference to this paper should be made as follows: Osokina, N., Petrova, M., Kudrevatykh, N., Zhernov, E. 2020. China: insights into peculiarities of development, Journal of Security and Sustainability Issues 9(4), 1459-1468. https://doi.org/10.9770/jssi.2020.9.4(28)

JEL Classifications: F01, F60, P51

1. Introduction

Currently, the global economy has seen a downward trend in economic growth. According to the Organisation for Economic Co-operation and Development, “global economic growth will slow to 2.9% in 2019 and to 3% in 20201, which is the lowest annual growth rate after the 2008 financial crisis. Economic growth prospects were revised downwards for almost all G20 countries” (World Economy Review - September 2019, 2019). The growth rate of large economies has a significant impact on the dynamics of world GDP: the USA, China, Japan, etc. This dynamics also directly depends on the relationship between the United States and China, the nature of which is determined by the approaching completion of the fourth system cycle of capital accumulation (Arrighi, 2010), in which the process of transition to a new technological order and the struggle for a future new leadership in the world-system are intertwined. These relationships increase trade tension and worsen the investment climate. According to experts unrelated state activities may significantly hamper the innovation performance (Naama, 2001; Naama, 2011; Musaripov et al., 2019).

1 Without taking into account the impact of the coronavirus pandemic. JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online

Economic relations between the USA and China are on the agenda that defines the 21st century. It is very relevant to clarify the development path in the world-system coordinates of one of the subjects of this relationship - the People’s Republic of China (hereinafter the PRC). Economic strategy should be based on the reality of the economic characteristics of both China itself and the essence of relations between the participants in the world economy, which may emerge as a result of the completion of the fourth system cycle of capitalist accumulation. This determines the theoretical and practical significance of this study.

The central category in world-system analysis is the capitalist world-economy. The hegemonic state derives the largest share of world-system rent from the world economy. It is a country that plays a major role in the functioning of the specific accumulation mode characteristic of each cycle and has a quasi-monopoly on leadership and control in the interstate system. It has advantages in all three main economic fields: agro-industrial, commercial and financial, as well as global military force.

At present, there is an intensification of the US-China leadership competition (Nuruzzaman, 2016; Sun, 2019) in the current system cycle. The dynamic development of the Chinese economy puts the following questions on the research agenda. What are the prospects for this development? What quality of relations in the global economy will it lead to?

2. Dynamics of Economic Development of China in the XX Century

The Celestial Empire entered the 20th century as a periphery. By the middle of the century, China proclaimed building socialism, which was carried out under the patronage of the USSR, taking into account the programs of Soviet economic transformations adapted to Chinese conditions. What are the real successes in building socialism in China?

The basis of the ideology of the PRC was Maoism, which developed under the influence of Marxism-Leninism and traditional Confucian ideology. According to the theory of the unique stability of Chinese traditions (B. Schwartz, R. Solomon), Communism best represented the Chinese tradition and, in fact, was a revival of traditional authoritarian China in new forms (Lukin, 2011). L. Pye wrote: “the Communists again gave the Chinese a political system concentrated around a bureaucratic hierarchy, this time in the form of a communist party, and again integrated with an all-pervasive ideology - Marxism and Maoism ... It is important that the imperial bureaucracy and the communist party in procedural practice, like Confucianism and Maoism in the ideological content, clearly emphasized issues of power and order” (Pye, 1992).

After the death of Mao in 1976, the reforms of Deng Xiaoping began, which were based on the implementation of the “policy of four modernizations”: in industry, army, agriculture and science (Deng Xiaoping and His Economic Reforms, 2016). His visit to the United States in 1979 marked China’s intention to return to the world capitalist scene. “In other words… Deng Xiaoping came to “sell” a huge reserve of Chinese labor at a low price to transnational US corporations; in response the latter had to introduce technologies into China’s industry” (Estachy, 2015). In the course of the aforementioned transaction, the United States sharply increased the scale of world-system rent drawing, associated with obtaining a huge amount of goods at a low price, as well as a massive influx of Chinese capital (due to the surplus of the Chinese trade balance) in US Treasury bonds.

It should be emphasized that until the end of the 80s. XX century, the private sector as a separate form of production was absent in China. Since the 80s XX century in China, the process of economic liberalization was carried out, manifested in the attraction of foreign capital and the expansion of private capitalist production. The corporatization began to spread; the law on corporations was adopted, which implied the transformation of most of the state-owned companies into corporations. In the 21st century, the development of a system of private banks began, which is an innovation for the Chinese economic system, since for a long time it relied on large state-owned banks. At present, the public sector in China is already smaller than the private, with the exception of large processing enterprises, which have asserted themselves on the world market and have established ties with foreign companies and suppliers of raw materials.

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In 1978, when Deng Xiaoping’s economic reforms were just beginning, the public sector accounted for 78% of the gross domestic product, and by 2008, non-state enterprises produced 72% of GDP, and state-owned 28% (Semin, 2011). Gradually, private capital is being expanded in sectors that are mainly occupied by state-owned companies, including the banking sector, mining, transport, telecommunications, construction, medicine, education, and utilities. In 2016, every 13th of the eight millions of Chinese graduates opened own business (Kon- onovich, 2017).

In the 1990s, a Shanghai group came to power in the PRC, which rid the project of socialist China of ideological bias with the term “socialist market economy”. Is it correct to consider the social system of modern China “socialism with Chinese characteristics” in terms of ideology and economics? Opinions on this point are controversial. “The Chinese themselves call their formation socialist, while developing private enterprise and growing capitalist corporations” (Kononovich, 2017). S. Glazyev attributes to China the formation of a new world economic structure, which he called integral. This structure is characterized by a combination of elements of the communist and capitalist systems, and, according to the researcher, the former prevails. The institutional systems of the countries which have such a structure “protect public interests and subordinate to them the regulation of capital reproduction processes”, ensuring “the priority of public interests over private ones” (Glaziev, 2016). In all official speeches and reports of the highest party leaders, the term “socialist market economy” is state capitalism, a turn to which was carried out by Deng Xiaoping, and then the Shanghai group brought it to its logical conclusion.

Chinese labor laws more or less comply with central European standards, but are systematically ignored. Ex- perts note the rather difficult working and living conditions of most workers in China. The country has an im- pressive “reserve army of labor”, which has a negative impact on wages. In 2007, “surplus labor” in rural areas ranged from 150 to 170 million people.

In the 50s of the last century, the hukou system (Colas, Ge, 2019) - a strict registration system in which the distribution of food and other resources was tied directly to the place of registration and restricting the mobility of most Chinese - was introduced in China. Only a small number of Chinese were allowed to live in cities. It gave rise to a system of internal migration and the workers “Minggong” or “Mingun”, i.e. “peasants-at-work” with a temporary residence permit in the city, usually for a period of one year. They do not have the same rights and opportunities as the owners of a permanent city residence permit; they cannot apply to many social services of the city. They account for 57.5% of the workforce in industry, 37.0% in the service sector, and most of the 20 million domestic workers. About half of the Minggong are women. Their most significant problems include low salaries and their delays, 10-12 hours a day (many still have overtime), neglect of work safety and accident rate, lack of social protection, poor living conditions, isolation and discrimination. The Minggongs have been struggling a lot, but it is very complicated by the joint opposition of company leaders and local administrations. China has a system of state trade unions, but it often does not resolve workers’ disputes to the extent that they would like to.

3. PRC’s Entry in Competition For Hegemony in the World System

At present, China is increasing its economic indicators, claiming to be a leader of the world system. In fact, it has already won an advantage in the sphere of production and trade. China produces the world’s largest industrial output, exceeding the United States by more than 2 times and reaching leading positions in many traditional manufacturing industries. China has the largest turnover in the world and occupies a fairly high place in the ranking of Global Innovation Index. China also appears to undertake economic leadership in its capital export (Tvaronavičienė, 2019). A number of key economic indicators of the USA and China are presented in the table 1.

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Table 1. The USA and China in the global economy in 2018

The USA China World total Nominal GDP, billion USD 20412 14092 84740 World GDP share and ranking 0,24 (1) 0,16 (2) 1 Population, million people 329 1433 7713 GDP per capita, USD 62042 9833 10986 Industrial production volume, billion USD and world ranking 3601 (2) 8414 (1) – Turnover , billion USD 3956 4105 35754 Turnover,% of world 11,1 11,5 100 HDI ranking and points 13 (0,924) 86 (0,752) 0,728 Gini coefficient 37,8 51,0 - Global Innovation Index, ranking 6 17 -

Source: compiled by the authors according to (Global GDP of the World: 1980-2018, 2019), (Global Innovation Index 2018, 2018), (Human Development Indices and Indicators, 2018), (Shuvalov, 2020), (The Leading Nations in World Trade, 2018), (World Economies Ranking 2019, 2019), (World Population Prospects 2019, 2019)

China’s development trends are such that it is actively improving its position in value chains with the goal of turning from a large trading power into a powerful one. China is increasingly consolidating its position in world trade in goods and services. According to the data of the General Administration of Customs, Chinese exports grew by 9.9% in 2018, imports increases by 15.8%, and the surplus in foreign trade reached $ 546.8 billion (China’s foreign trade, 2019). This is ensured by the increasing level of industrial development that allows offering the world market new competitive products with high added value (see Table 2). Over 90% of the goods in the export structure are finished products.

Table 2. China’s export structure in 2018

Commodity line In total No Commodity line cost, million export, dollars % 1 Transmitting equipment for broadcasting or television, whether or not incorporating receiving, sound 197 033 7.89 recording or reproducing equipment; television cameras, digital cameras and camcorders 2 Computing machines and their blocks; magnetic or optical readers, machines for transferring data to 173 424 6.95 information carriers in encoded form, and machines for processing such information 3 Electronic integrated circuits 85 969 3.44 4 Telephones, including telephones for cellular communication networks or other wireless communication networks; other equipment for transmitting or receiving voice, images or other data, 54 070 2.16 including equipment for communication in a wired or wireless data network 5 Parts and accessories (except for cases, covers for transportation and similar products) intended 45 570 1.82 exclusively or mainly for automobiles 6 Petroleum and petroleum products derived from bituminous rocks, other than crude; products containing 35 752 1.43 70 wt% or more of petroleum or petroleum products derived from bituminous rocks; waste oil 7 Parts and accessories of motor vehicles 34 850 1.39 8 Lamps and lighting equipment, including searchlights, narrow-beam lamps, headlights and parts thereof; light signs, light plates with a name or title, or address and similar products having a constant 30 586 1.22 source of lighting 9 Diodes, transistors and similar semiconductor devices; photosensitive semiconductor devices, including photovoltaic cells, assembled or not assembled into modules, mounted or not mounted in 29 055 1.16 panels; light emitting diodes; piezoelectric sensors 10 Other furniture and parts thereof 28 090 1.12 11 Traveling bags, suitcases, handbags, cases for business papers, briefcases, school bags, cases for glasses, binoculars, cameras, musical instruments, guns, holsters and similar products; travel bags, 27 401 1.10 thermos bags for food 12 Electric transformers, static electrical converters (e.g. rectifiers), inductors and chokes 26 695 1.07 13 Other commodity lines occupying less than 1.5% 1 721 505 69.25

Source: compiled by the authors according to (China. Export, 2019)

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The range of export goods totals more than 50 thousand items of goods and services and is constantly expanding. Traditionally, China is a leading exporter of textiles, toys, clothes, shoes, etc., however, the country has taken a leading position in the world in the export of electronics, office equipment, automobiles and other high- tech products over the past decade. Machinery accounts for more than 57% of exports, high-tech products - more than 27%. Seven types of labor-intensive consumer goods (textiles, etc.) account for no more than 20% of exports. Thus, the commodity structure of Chinese exports becomes more similar to that of highly developed industrial countries. China has achieved great success in exporting services - construction, telecommunications, information and computer (Liu, Chernetsova, 2018).

The main goods of Chinese imports in 2018 were machinery and equipment, electronics, electronic circuits, mineral and fuel resources (see Table 3).

Table 3. China’s import structure in 2018

Commodity line In total No Commodity line cost, million import, dollars % 1 Electronic integrated circuits 313 222 14.60 2 Crude oil and crude oil products derived from bituminous minerals 239 222 11.2 3 Iron ores and concentrates, including calcined pyrite 75 011 3.51 4 Petroleum gases and other gaseous hydrocarbons 50 035 2.34 5 Cars and other motor vehicles intended primarily for the transport of people (except 49 610 2.32 motorcycles), including utility vehicles and vans and racing cars 6 Gold (including platinum plated gold), unwrought or semi-wrought, or in powder form 45 806 2.14 7 Telephones, including telephones for cellular communication networks or other wireless communication networks; other equipment for transmitting or receiving voice, images or other 42 519 1.99 data, including equipment for communication in a wired or wireless data network 8 Soybeans, whether or not crushed 38 078 1.78 9 Computing machines and their blocks; magnetic or optical readers, machines for transferring 33 776 1.58 data to information carriers in encoded form 10 Liquid crystal devices 33 772 1.58 11 Machines and mechanical devices with individual functions 32 818 1.55 12 Copper ores and concentrates 32 728 1.55 13 Other commodity lines occupying less than 1.5% 1 143 403 53.91

Source: compiled by the authors according to (China. Import, 2019)

A little bit more than 1/5 of China’s total imports are raw materials: oil and oil products, gas, ores and concentrates, unwrought or semi-wrought gold. According to the World Atlas, the import of fuel and energy resources is 17.5% in 2018, food imports is 6.3% (China. Data and statistics, 2020). The largest trading partners to import goods to China in 2018 were: South Korea with a share of 9.58% in the total value of the import of goods, Japan with a share of 8.44%, the United States with a share of 7.3%, Germany with a share of 4.97%, Australia with a share of 4.92%, Brazil with a share of 3.61%, Vietnam with a share of 3%, Malaysia with a share of 2.96% (China. Import and export, 2020). China imports planes, cars, semiconductor products, and agricultural products from the United States, mainly soy, dairy, and pork. One of the leaders in the supply of minerals to China is Australia, for which it is the main exporting country. These are various ores, including iron and copper. Australia is also the largest supplier of liquefied natural gas to China with a 44% share (Khotimsky, 2019). China is also the main importer of Brazilian products, importing soybean flour, crude oil and iron ore concentrate (Brazil’s foreign trade turnover, 2019). Obviously, China aims to gain the status of a core country in international trade.

However, according to a number of indicators, especially in the socio-economic field, China cannot be attributed to the core countries, from which the hegemon of the world system usually rises. First of all, it is an indicator of GDP per capita (see Table 1). The per capita GDP of China is still less than the world average by

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$ 1,168, which does not allow ranking it among developed countries, and is 6 times lower than that of the US. The Human Development Index, which combines information on people’s health, education and income in one indicator, does not correspond to a group of countries with a very high development level. The degree of income inequality in China is too high for the level of developed core countries. So, according to Table 1, the Gini coefficient in China is 51.0, and in the USA it is 37.8.

Accordingly, the PRC is not yet able to demonstrate the most attractive lifestyle for the world’s population (especially for the most developed countries), which is necessary for a hegemon. China now more likely has the status of a strong semi-periphery, making a centripetal movement, and preparing for the role of the new capitalist accumulation regime leader. However, the results of the applicant’s competition with the current world-system hegemon are not yet obvious.

According to the world-system analysis approach, this means: firstly, the formation of systemic advantages in the sphere of production and trade, finance and military power in order to derive the maximum possible amount of world-system rent from the functioning of the world economy, and secondly, ensuring sufficiently powerful positions in the interstate system, which also increases the amount of appropriation of world-system rent. These activities have a synergistic effect, i.e. the achievements in one activity increase the position of the actor in another activity. This is a long process with a number of stages, and the state is implementing a long-term project to guide this process. China maintains its course, demonstrating the presence of not just strategic thinking, but long-term strategic thinking and planning, calculated until 2049 (The Main Trends, 2019).

The PRC gradually creates the conditions for the world-system of economic leadership required by a hegemon, while continuing to assert itself as a developing country. First of all, China faces the typical task of trade leaders to reduce transport costs and improve transportation security. To draw more world-system rent from international trade, it is necessary to create an efficient and controlled infrastructure for the delivery of goods. To this end, China is actively building the architecture of new trade routes. The basis of such a system is the implementation of the “Belt and Road Initiative” (Huang, 2016), which combines the “Silk Road Economic Belt” and the “21st Century Maritime Silk Road” projects launched in September, 2013. China is implementing innovations in comparison with the global trade logistics in previous systemic cycles of capital accumulation in the world economic system. In contrast to the dominance of the system of maritime trade routes in the previous cycles, the PRC assigns the main role to land rail and road trade routes. The PRC is actively entering Europe. More than 170 cooperation documents have already been signed with 150 international entities, including developing and developed countries, i.e. Italy and Luxembourg (Pirozhenko, 2019).

China is strengthening its position in the field of military power and arms production, actively cooperating not only with the Russian Federation, but also with leading EU countries. According to the Stockholm International Peace Research Institute (SIPRI), the PRC ranks second among the world’s largest military spending countries after the United States. Its military budget in 2018 is $ 250 billion, which is 1.9% of GDP. China’s military spending is rising for the 24th consecutive year. In 2018, they were almost 10 times higher than in 1994. US military spending is $ 649 billion. These two countries account for almost half of the world’s military spending, and the increase in world military spending is connected precisely with the increase in spending in these countries (SIPRI, 2019).

The increase in military spending in China is associated with the announced reform of the national defense and armed forces. Its goal is to increase the percentage of military equipment and weapons of Chinese manufacture and the introduction of modern technology. However, in general, Beijing’s military capabilities, according to experts, are still significantly inferior to the resources available to the United States, especially in the field of nuclear weapons (China’s military budget, 2019). The Chinese signed a contract with French and Franco- German companies to jointly conduct research on creating a promising fighter development program (Vavilov and Peretolchin, 2019).

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4. Prospects for Changing Relations in the World Economy in the Case if the PRC Leadership Comes True

What kind of economic relations is China trying to establish in the world? In production, it seeks to obtain a world-system rent through specialization in more complex and profitable product creation operations, transferring simple assembly and packaging links in the production chain to the neighboring countries. At the same time, it uses the channel for obtaining world-system rent by organizing production using cheap resources of the capital recipient countries. Such resources, in particular, include bauxite, copper, nickel, beryllium, titanium and rare earth elements. Already in 2017, China took first place in providing loans to African countries, the total volume of which exceeded the 2010 level by 50 times. In the field of direct and portfolio investments, the main partners of China are Egypt, Nigeria, Algeria, South Africa, Ethiopia, DRC, Zambia, Angola, Morocco, Niger, Cameroon, Chad and some other countries. It is known that many African countries have a geographi- cally favorable position, cheap labor and good conditions for trade. Investment policy is implemented with the help of powerful investment funds created with the participation of state capital, for example, the China-Africa Development Fund, created on the basis of the authorized capital provided by the State Development Bank of China in 2007 (Belyaev and Makarova, 2018). China and France signed agreements on the development of Africa. Since 2009, China has been the main partner of African countries in the field of trade and investment (Chen, Dollar, Tang, 2018).

At the same time, China uses a model of the “debt trap” in the economic development and financing of projects in developing countries in exchange for their natural resources and access to markets. Chinese state-owned companies are building facilities in developing countries, increasing their debt dependence, and then, taking into account the repayment, they take control over a particular infrastructure or raw material resource. This is especially efficient for countries characterized by weak legal systems and authoritarian regimes. For example, as a result of China-Africa fund project, the Chinese company Sinochem International acquired 24 rubber plantations on the territory of 150 thousand hectares and plants in Cameroon, Cote d’Ivoire, DRC (Kinshasa), Nigeria, Ghana and Gabon (Belyaev and Makarova, 2018).

Something like proletarian internationalism can be hardly supposed in the actions of modern China. The “Chi- nese world” sees its civilization in relations with the rest countries, primarily with the Indo-European, Indo- Aryan world, as “global competition”. The famous sinologist N. Vavilov notes: “The very definition of China as Chung-go, “the middle state”, contrasts it with everyone else, an external alien world (Wai). Wai guo are foreign countries, an alien world, unpleasant to the Chinese. The goal of China is to accumulate all the technologies in itself, to spin the whole world around itself” (Vavilov and Peretolchin, 2019).

Since the 80s of the last century, China, by the will of its ruling class, has integrated into the capitalist world- system. This integration model was later designated as the Beijing Consensus, a concept introduced by British economist Joshua Ramo in 2004. According to him, the sense of this category is contrasting the Chinese development model denoted by the Washington Consensus category. The concept of the Washington Consensus was introduced in November 1989 by the American economist John Williamson and includes the sum of the World Bank recommendations on how to overcome the economic crisis in Latin America. They were used as strategies for the transition of countries with an administrative-command economy to the capitalist system.

J. Ramo noted: “By “Beijing consensus” I meant the consensus of nations. Brazil, Russia, India and China are all examples of such consensus. This consensus is that the Washington model is not the only possible one” (Ramo, 2010). It should be emphasized that for all the differences in the paths of economic development described by Beijing and Washington consensus models, they have a very important commonality - both of them are the ways of integration into the capitalist world-system. Theoretically, the world-system is a category that is immeasurably more substantial than the Washington Consensus and the Beijing Consensus, which describe only certain options for the functioning of specific economies in the conditions of the beginning of the 21st century of the existence of the world-system. The Chinese social and economic system is not specific Chinese socialism and is Asian state capitalism.

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Currently, there are serious risks for the successful development of China, including the rapid growth of debts in the Chinese economy. According to the McKinsey advisory company, China overtook the United States in terms of relative total debt: in America it amounted to 269% of GDP and in China - 282%, according to which, as company analysts argue, China can cause threat to economic and financial stability.

Conclusions

The study of the economic description of the PRC does not confirm the opinion that a special model of socialism with Chinese characteristics is being implemented in this state. The model of China is not specific socialism. Rather, at this time it is specific capitalism, that is, capitalism, in which a special mode of capital accumulation is formed - with a higher role of the state in the process of capital accumulation than in the fourth cycle of capital accumulation.

Trends in the Chinese state-economic system in the 21st century suggest that this is the authoritarian capitalism. The country is steadily increasing the power and technological level of the economy in all aspects, including military potential. To spread Chinese values and augment the appropriated world-system rent, China, along with intensifying its economic influence within the existing world-system, uses new, China-oriented tools, such as the “Belt and Road Initiative” and powerful investment funds created with the participation of state capital, including the China-Africa Development Fund, etc.

China is carrying out a systematic process of “passing hurdles” on the path to economic leadership, but if its path leads it to the goal, this will be the first time a specific non-Western leadership.

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Short biographical note about the contributors at the end of the article (name, surname, academic title and scientific degree, duties, research interests):

Natalya V. OSOKINA, Professor, Dr. Sci. (Economic), T.F. Gorbachev Kuzbass State Technical University, Institute of Economics and Management, Professor of Department of Economics (Kemerovo, Russian Federation). Professional interests: world-system analysis. ORCID ID: https://orcid.org/0000-0001-8346-9848

Mariana PETROVA, Professor, D.Sc in Physics and Mathematics, Assoc. Prof. St. Cyril and St. Methodius University of Veliko Tarnovo, Bulgaria; Professor Economics and Management in Department of Management, ISMA University, Riga, Latvia. Research interests: management of IT processes, smart data analysis in economics, systems information security. ORCID ID: https://orcid.org/0000-0003-1531-4312

Natalia V. KUDREVATYKH, Associate Professor, Cand. Sci. (Economic), T.F. Gorbachev Kuzbass State Technical University, Di- rector of Institute of Economics and Management, Associate Professor of Department of Finance and Credit. Professional interests: economic security. ORCID ID: https://orcid.org/0000-0003-3132-6444

Evgeny E. ZHERNOV, Associate Professor, Cand. Sci. (Economic), T.F. Gorbachev Kuzbass State Technical University, Institute of Economics and Management, Head of Department of Economics (Kemerovo, Russian Federation). Professional interests: anthroposo- cial global issues.

This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/

1468 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 https://doi.org/10.9770/jssi.2020.9.4(29)

MIGRATION RISK MANAGEMENT AS A FACTOR OF NATIONAL SECURITY

Oleg Reznik¹, Oleksandr Muzychuk², Oleksandr Yunin3, Svetlana Kaliuzhna4, Oleksandr Dubenko5

1*Sumy State University, 2 Rimsky-Korsakova Street, Sumy, 40000, Ukraine 2Kharkiv National University of Internal Affairs, Lviv Landau avenue, 27, Kharkiv, 61000, Ukraine 3Dnipropetrovsk State University of Internal Affairs, Ave. Gagarina, 26, 49005, Dnipro, Ukraine 4Sumy National Agrarian University, Gerasim Kondratieva Street, 160, Sumy, 40000, Ukraine 5Odessa State University of Internal Affairs, Uspenskaya street, 1, Odessa, 65000, Ukraine

E-mail: 1*[email protected] (Corresponding author)

Received 18 October 2019; accepted 10 May 2020; published 30 June 2020

Abstract. The article theoretically substantiates the methodological approaches and tools of comprehensive statistical analysis of labor migration, based on the principles of systematic research from the standpoint of integrity and integration of processes. This, in turn, allowed to identify the main elements and features that characterize labor migration, as the object of statistical research, as well as to carry out an objective analysis of the condition and development of this phenomenon at both national and regional levels. The role of statistical analysis of labor migration in the management system based on the analysis of the experience of developed countries was also determined. A conceptual approach in the field of state regulation of labor migration was proposed, which is based on the application of a systematic approach and compliance with its basic principles. The place of statistical assessment and monitoring of labor migration was established as one of the main tools for regulating the number of labor migrants from the standpoint of systematics. The results of the assessment of the procedures for acquiring citizenship and issuing permits for foreigners in Ukraine have been analyzed. Moreover, practical recommendations were provided based on a statistical analysis of the procedure for acquiring citizenship and issuing permits to foreigners in accordance with the principles of human rights and non-discrimination. Peculiarities of legal regulation regarding the migration processes in Ukraine were studied. The identified shortcomings and “gaps” in the legal field of Ukraine allow to form practical recommendations on the legal regulation of migration processes in accordance with the basic principles of European integration.

Keywords: national security; migration processes; social risks; migration risks; immigration compensators

Reference to this paper should be made as follows: Reznik, O., Muzychuk, O., Yunin, O., Kaliuzhna, S., Dubenko, O. 2020. migration risk management as a factor of national security, Journal of Security and Sustainability Issues 9(4), 1469-1480. https://doi.org/10.9770/jssi.2020.9.4(29)

JEL Classifications: F35; F42

1. Introduction

The development peculiarity of modern society is that any social activity is characterized by dynamics of all processes and their uncertainty. Thus, risk is a sign of any purposeful activity of a social subject, which in turn directs efforts to reduce the uncertainty of its results.

The structure of the social impression consists of the central nucleus and the peripheral system. The central core is connected with the collective memory and history of the group, it is stable and performs the function of producing social impression. The peripheral system ensures the integration of the individual experience of each member of the group, maintains its heterogeneity, it is also characterized by changes, certain contradictions, adaptability to reality; the system allows content differentiation, however, it protects the central core from any external influences. JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online

Taking into account the objectivity of social life, it is necessary to recognize the attributiveness of risk for the progressive development of society. Risk, in most cases, has a social nature, as it is produced by social subjects, and its actualization affects their main characteristics and interaction. Therefore, the concept of social risk gradually acquires the status of a general scientific category, because of this there is an expansion of the range of theoretical problems that are associated with the need to study its latest aspects. There is a lot attention in economic literature to wide range of risks to economic development (e.g. Lincényi, Čársky, 2020; Tvaronavičienė, Ślusarczyk, 2019; Plėta et al., 2020; Chehabeddine, Tvaronavičienė, 2020)

Migration risks, in terms of security, are related to the impact of migration processes on the level of crime, as well as to the objective and subjective security of migrant workers and residents of host societies. It should be noted that the relevance of the study in theoretical terms is confirmed by the shortage of sound theoretical studies and tools for empirical research of migration risks that arise during the working process and intercultural interaction of migrants abroad.

In the framework of Ukraine-EU cooperation, as a result of the Agreement concluded in 2014, one of the main goals was to strengthen cooperation in the field of justice, freedom, and security in order to ensure the rule of law and respect for human rights and fundamental freedoms (Association Agreement, 2014). Based on the requirements defined by the Agreement, the priority direction was recognized to bring the norms of Ukrainian legislation to the standards of European law, including human rights standards. The provisions of the Agree- ment establish that the national legal regime for the stay of foreigners in the territory of the country should provide for the granting of rights, freedoms, and duties to such persons, which belong to Ukrainian citizens as well, of course, with the exception of certain restrictions. Confirmation of this is the norm of the Constitution of Ukraine in 1996. According to Art. 26, foreigners and stateless persons who are legally in Ukraine enjoy the same rights and freedoms and also bear the same duties as Ukrainian citizens, with the exceptions established by the Constitution, laws or international treaties of Ukraine (Constitution of Ukraine, 1996).

International cooperation results in an influx of foreign citizens into other countries. At the same time, there are not only foreigners on the territory of the state but also stateless persons. Moreover, with the increase in the number of these persons temporarily or permanently located in the country, an increase in the number of offenses is inevitable. In this context, offenses are committed both directly by foreign citizens or stateless persons and in relation to them. For example, cases of illegal migrants staying on the territory of Ukraine are frequent. Therefore, in view of the foregoing, the introduction of effective mechanisms to counter such negative phenomena by bringing individuals to liability requires important attention. The presence of an appropriate regulatory framework allows not only to apply appropriate sanctions for the results of an already committed offense but also to prevent its commission.

2. Literature Survey

In the framework of the subject under study, important attention is required to define the concepts of “foreigners” and “stateless persons”. To this end, it is advisable to turn to the approaches of scientists to the interpretation of these categories. Levenets (2017) defines the concept of “foreigner” through characteristic features, namely: 1) it denotes persons who do not own Ukrainian citizenship; 2) these persons are citizens or nationals of other states and can prove this by relevant documents; 3) these persons permanently or temporarily reside on the territory of the Ukrainian state, and therefore are in legal relations with the relevant authorities; 4) these persons continue to be in legal and political relations with the state of their citizenship and therefore are in dual subordination.

According to Tymchyk (2014), the concept of “foreign citizen” is separable and is identical to the concept of “stateless person”. The scientist substantiates his position by the fact that in fact the concept of “foreigner” is identified with the concept of “foreign citizen”.

Vasylchenko (2014), depending on the degree of proximity of a person to the state and the features of the legal

1470 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online relationship between them, considers it as separate categories of citizens (nationals), foreigners, and stateless persons.

In turn, Hrabylnikov (2015) notes that the concept of “foreigners” is broadly complex since it covers all citizens of foreign states, stateless persons, refugees, foreign Ukrainian, and immigrants in Ukraine, permanently or temporarily residing or staying in Ukraine. At the same time, the scientist comes to the conclusion that all the listed individuals are united by a generic attribute: they came from other lands - territories of other states. However, the important differences, in this case, are the following: 1) different constitutional status; 2) the different legal regime of stay in Ukraine, which is explained by the various interests of the stay with the legal possibilities to satisfy them.

Similarly, the position of Turetska (2018) also concludes that the concept of “foreigner” includes such categories of legal entities as “foreign citizen”, “stateless person”, and “refugee”.

Thus, the scientific approaches to the definition of the essence of the concepts of “foreigners” and “stateless persons” can be combined into two groups: 1) some scientists consider them as separate categories, 2) others, on the contrary, include the concept of “stateless persons” in the scope of the concept of “foreigners”. In our opinion, it is not entirely possible to agree with the second approach since an important distinguishing feature is the different legal status of these persons, based on the presence of citizenship or lack thereof. Therefore, the two concepts studied should not be identified or confused.

It is also important to focus on the fact that the concept of “stateless person” has been interpreted not only at the doctrinal level but also in international regulatory documents. Among international documents relating to the determination of the status of stateless persons, an important place belongs to the Convention relating to the Status of Stateless Persons 1965 and the Convention on the Reduction of Statelessness of 1961. In particular, in Art. 1 Convention Relating to the Status of Stateless Persons, a stateless person is defined as a person that no state considers a citizen based on their own laws (Convention Relating to the Status of Stateless Persons, 1954). Thus, a lack of citizenship in any country is the so-called “legal anomaly” that can prevent interested persons from gaining access to basic human rights of a civil, political, economic, social, and cultural nature (Stateless- ness in the EU, 2016). Convention on the Reduction of Statelessness is the leading international document that sets the rules for conferring and non-exclusion of citizenship to prevent statelessness (Convention on the Reduction of Statelessness, 1961).

3. Methods

The study of the characteristics of the liability of foreigners and stateless persons as a guarantee of ensuring the national security of the state, in particular, types of legal liability, the legal framework, under which bringing these persons to this or that kind of liability, the nature and types of sanctions/penalties, depending on the type of legal liability, etc., are carried out using dialectical, formal, legal, epistemological, and systemic-structural methods.

Using the dialectical method, the essence of the concepts of “foreigner” and “stateless person” is defined.

The formal legal method was used to disclose the content and interpretation of the provisions of certain regulatory legal acts of the current Ukrainian legislation, the norms of which establish the specifics of the legal liability of foreigners and stateless persons, including determining the competence of which state bodies includes taking a decision about instituting administrative action against foreigners and stateless persons, what are the grounds for attracting foreigners and stateless persons to a particular type of legal liability, what types of sanctions/punishment can be applied as a result of the commission of an offense/crime, and so on.

The epistemological method of research made it possible to clarify the features of certain types of legal liability of foreigners and stateless persons, to identify and characterize the barriers to attracting one or another type of

1471 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online liability of such persons, to establish a measure of liability in the form of sanctions/punishments depending on the type of legal liability of foreigners and stateless persons.

Statistical assessment of migration processes requires the availability of information regarding the quantity of population, employment and unemployment, labor force, border statistics on migration of the working population.

Population censuses, current accounting, statistical reporting of the state employment service, sample surveys, public opinion polls and other sociological surveys are the sources of this information support. However, the current accounting of migration events is the main source of operational information on population migration in Ukraine. It is carried out by registering persons involved in migration processes, as well as those who register at a new place of residence. This procedure involves filling out statistical coupons in the arrival and departure address sheets.

International organizations, especially structures within the UN, regularly collect information, which further replenishes publicly available databases on the movement and contingents of migrants. In order to obtain valid and homogeneous statistics, relevant inquiries are sent to countries. Except for the questionnaire of Eurostat, the Council of Europe and the European Economic Commission, which has been sent to the countries of the region since 1993.

For various reasons, national statistical centers may not always be able to provide such information freely. Most often this is due to the lack of data on the required variables. Despite the objective reasons for which these statistics are not available, it should be emphasized that these data are needed not only for international organizations, but primarily for the users within the country.

4. Results

Migration processes are constantly changing, so census data is insufficient during the study of such a dynamic phenomenon. Continuous monitoring of indicators of the scale and direction of labor migration, as well as assessment of the levels of intensity of this process is possible only through sample surveys of the labour force. Survey data are the most effective way to obtain data on employment and movement, as they provide consistent and complete information on labor migration at the regional, national and interstate levels.

Despite the fact that sample surveys allow to obtain information about migration processes effectively, there is a range of other advantages over other types of observations. Sample surveys are the most flexible tool for collecting statistical information, as they allow, during the process of studying the economic activity of the population, to change and adapt the definition and detail of questions to the objective requirements. The universality of these surveys allows to provide static information regarding the movement of the working population to a wide range of users.

Scientifically based sampling allows to take into account almost all social groups of the population, all areas of economic activity and workers categories. Nowadays, the growing influence of demographic factors on the migration scope is evident in Western Europe and Russia, where low population growth and the aging of the nation are mostly compensated by immigrants. Thus, net immigration provides 56% of demographic growth in developed regions of the world, in particular in Western European countries - 89%. Today in the countries that are the main recipients of foreign labor, the share of foreigners is 5-20% of the total population, or 10-25% of its economically active share of population (http://ec.europa.eu/eurostat/web/population-demography-migration- projections).

Next, immigration compensators for 2000-2050 should be considered (Table 1).

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Table 1. Immigration compensators for the period 2000-2050, thousand people per 1 mln. residents every year

Immigration required to support the working Immigration required to maintain the ratio of people Country population (15-64 years) over the age of 65 / people 15-64 years old Germany 6,0 44,8 Italy 6,5 39,8 France 1,8 30,4 USA 1,3 43,2 Japan 5,1 85,6 Russia 2,1 20,3

Source: compiled by the author using the resource http://ec.europa.eu/eurostat/web/population-demography-migration-projections

It should be noted that in the period up to 2050 the following countries will need the most compensatory net immigration: Germany (almost 45 thousand people per 1 million inhabitants annually), Italy (39.8 thousand), France (30.4 thousand), USA (43.2 thousand), Japan (82.6 thousand). Even Russia will need about 20.3 thousand foreigners per 1 mln. residents (Table 1).

It should also be noted that significant changes in the innovation and technological development of countries is due to the migration of highly qualified specialists. Due to the formation of the global scientific and educational space, there has been an increase in the international mobility of intellectual personnel in the context of the rapid development of international information and communication networks.

The virtualization of production processes is becoming increasingly important due to the development of the information economy, in which labor is involved into processes of the foreign countries without changing its physical location through online outsourcing tools (quasi-migration processes).

Today, online outsourcing is a worthy alternative to traditional forms of employment, representing a more flexible and fast hiring system through online platforms (for example, the Upwork platform (after the merger of freelance platforms Elance and oDesk in 2015), opening wider access to highly specialized workers, as well as implementing a 24-hour work schedule, and in general, introducing a new competition format in the global labor market. According to the Upwork online platform data, the number of registered freelancers on this platform in 2014 reached 10 million people and 4 million businesses, whose total revenue in 2014 was about $ 3.2 billion. (https://www.upwork.com/ ).

Asian countries (80 million people) and European countries (78 million people) are the largest recipients of labor migration (Table 2).

Table 2. Number of international migrants by region, million people

arrived emigrated balance Region 2000 2017 2000 2017 2000 2017 Asia 49,2 79,6 65,0 105,7 -15,8 -26,1 Europe 56,3 77,9 49,6 61,2 6,7 16,7 North America 40,4 57,7 3,2 4,4 37,2 53,3 Africa 14,8 24,7 21,6 36,3 -6,8 -11,6 Latin America and the Caribbean countries 6,6 9,5 24,8 37,7 -18,2 -28,2 Oceania 5,4 8,4 1,2 1,9 4,2 6,5

Source: compiled by the author using the resource http://ec.europa.eu/eurostat/web/population-demography-migration-projections

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During the period from 2000 to 2017, Asia received the largest number of international migrants compared to any other region: about 30 million international migrants were involved, a net increase is about 1.8 million migrants per year. Despite the increasement in migration flows, the share of international migrants in Asia, Africa and Latin America does not exceed 2% of the total population of the region, while in Europe, North America and Oceania the share of international migrants makes at least 10% of the total population. (http://ec.europa.eu/ eurostat/web/population-demography-migration-projections).

In the process of analyzing the structure of international migrants in terms of their origin, it should be noted that in 2017, out of 258 million international migrants in the world, 106 million were born in Asia. Europe ranked second in the origin of migrants (61 million people), followed by Latin America, the Caribbean (38 million people) and Africa (36 million people). By country of origin, the largest number of migrants in the world was from India (17 million people), Mexico (13 million people), the Russian Federation (11 million people), China (10 million people), Bangladesh (7 million people), Syria (7 million people), Pakistan (6 million people) and Ukraine (6 million people).

The movement direction of migrants from different countries is gradually changing compared to the data of the beginning of the century. The largest increase in migration can be observed between Africa and North America, in the period from 2000 to 2017, the average annual growth rate of migrants from Africa to the United States and Canada was 4,9% or 1,5 million people per year. For comparison, in Asia, the growth in the number of migrants from Africa reached an average of 4.2% (http://ec.europa.eu/eurostat/web/population-demography- migration-projections ).

Immigration permits were released

Permanent residence permits were released

Temporary residence permits were released

Figure 1. Registration of temporary and permanent residence permits and immigration permits in Ukraine, during the period from 2015 to 2018 (constructed using the resource: https://dmsu.qov.ua/divalnist/statistichni-dani/statistika-z-osnovnoi- diyalnosti.html )

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However, the simplification of the employment process for the foreign workers was highly praised by relevant experts interviewed in the study. Moreover, statistics show that the number of temporary residence permits issued in Ukraine almost doubled in 2018 (64,000) compared to 2017 (33,5 thousand). It should be noted that the growth could also be affected by the adoption of a new Procedure for issuing a temporary residence permit, in which this procedure was reduced to 15 working days.

The statistics data allow us to conclude that legislative innovations did not increase the number of people who immigrated to Ukraine during 2018. Nevertheless, the number of permanent residence permits and immigration permits has decreased (Figure 1).

In addition, in the short term, changes in legislation did not affect the rate of immigration of foreign investors to Ukraine. Nowadays, in order to obtain an immigration permit and in the future - a permanent residence permit, foreigners need to invest into the Ukrainian economy the amount of at least 100 thousand dollars. During 2016, 12 people received immigration permits under this procedure, in 2017 - 13, and in 2018 - only 9 foreign investors.

Summarizing all the above, it should be noted that recent changes in legislation in the field of simplification of employment of foreign workers, along with other innovations have contributed to a significant increase in demand for temporary residence permits in Ukraine. However, changes in the procedure of acquiring citizenship by foreign servicemen did not have any significant effect. In general, the legislative changes did not affect the formation of the immigration quota, as well as the emission of immigration permits and permanent residence permits, which in turn is confirmed by the relatively constant low rates of these services during 2015-2018. This confirms that the priorities of Ukraine’s state migration policy were to attract foreigners on a temporary basis, while the implementation of the new State Migration Policy Strategy remains important, which indicates the need to adjust immigration legislation to the economic and demographic policy, and the need to review the feasibility of forming an immigration quota.

Foreigners willing to acquire Ukrainian citizenship and obtain permanent and temporary residence permits face a number of certain bureaucratic barriers: difficulties in obtaining documents, communication with representatives of relevant authorities, queues, etc. The complexity of procedures related to the acquisition of citizenship in combination with low socio-economic indicators within the country have lead to a slight increase in the number of Ukrainian citizens from abroad.

The procedure for is more accessible to foreigners, which requires fewer documents and the involvement of only two structural SMS (State Migration Service) branches. During 2015-2017, every year about 4 thousand people acquired the citizenship of Ukraine by territorial origin, which is almost 4 times more than the number of those who were granted citizenship by the Decree of the President of Ukraine (Figure 2).

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4500

3994 4000 3745 3612 3500 3388

3000

2500

2000

1500

978 969 983 1000 809

500

0 2015 2016 2017 2018 People who acquire the citizenship by territorial origin Accepted for citizenship of Ukraine by the Decree of the President of Ukraine

Figure 2. Acquisition of citizenship by territorial origin and as a result of admission to citizenship by decree of the President of Ukraine, 2015-2018, thousands of people (constructed using the resource: https://dmsu.qov.ua/divalnist/statistichni-dani/statistika-z-osnovnoi- diyalnosti.html )

Foreigners from countries in which a large share of the Ukrainian diaspora is concentrated, in particular people from the Russian Federation, Azerbaijan, Moldova, Armenia, Uzbekistan and Georgia, most often acquire Ukrainian citizenship by territorial origin (Table 3).

Table 3. Quantitative indicators of citizenship acquisition by territorial origin, and as a result of admission to citizenship of Ukraine, 2015-2017, thousand people

Number of people who acquired Ukrainian Number of persons who have been citizenship by territorial origin granted Ukrainian citizenship Country of citizenship 2015 2016 2017 Country of citizenship 2015 2016 2017 Russian Federation 1837 1835 1499 Syrian Arab Republic 107 98 155 Azerbaijan 198 303 342 Russian Federation 128 131 139 Vietnam 223 243 305 Armenia 116 64 98 Moldova 383 326 280 Afghanistan 110 61 86 Armenia 194 204 173 Moldova 68 43 55 Uzbekistan 150 163 124 Iran 62 62 47 Georgia 117 83 92 Uzbekistan 77 30 36 China 47 31 59 Georgia 68 47 27 Israel 29 52 40 Azerbaijan 22 22 20 Kazakhstan 52 61 36 Belarus 9 13 14 Other countries 515 693 662 Other countries 211 238 292

Source: constructed using the resource: https://dmsu.qov.ua/divalnist/statistichni-dani/statistika-z-osnovnoi- diyalnosti.html

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A wide range of conditions and a slow multi-level procedure for reviewing documents by government agencies creates a system of certain filters for foreigners who are not of Ukrainian origin, but still seek to obtain Ukrain- ian citizenship. For example, only 3,739 people have been granted citizenship in the last four years. Most of them are foreigners from Syria, the Russian Federation, Armenia, Afghanistan and Moldova.

The following changes are necessary to overcome these bureaucratic barriers: the development of an electronic queue system for foreigners, the introduction of a service to check the status of the document, such as what will apply to biometric documents of Ukrainian citizens, increasing the number of inspectors working in the State Migration Service of Ukraine (SMS), who accept documents in accordance with the request for documents for foreigners, as well as the introduction of services for foreigners in the Centers for Administrative Services (CAS), creating a list of states whose legislation provides automatic loss of citizenship by persons who has acquired the citizenship of another state. Moreover, it is important to consider systemic issues, in particular the policy of language integration of foreigners, as well as the policy of dual citizenship.

Making the decision on the forced return of a foreigner or stateless person is within the competence of the State Migration Service of Ukraine, the State Border Service (regarding foreigners and stateless persons detained by them within controlled border areas while attempting to cross or after crossing illegally the state border of Ukraine) and authorities Security Services of Ukraine. The decision on the forced return indicates the period during which the foreigner or stateless person must leave Ukraine. The specified period shall not exceed 30 days from the date of the decision. It is important to note that the decision on the forced return of foreigners and stateless persons may be accompanied by a ban on further entry into Ukraine for a period of three years, which is calculated from the date of such a decision (Law of Ukraine No. 3773-VI, 2011).

Thus, according to the analysis of the current Ukrainian legislation, it should be noted that foreigners and stateless persons who have committed a crime, administrative or other offenses are liable in accordance with the law. For committing a crime defined by CCU norms, such persons are criminally liable and for committing administrative offenses they are brought to administrative liability. Foreigners and stateless persons may also face civil liability for obligations arising from harm (Hula I.L. (2018)).

5. Discussion

According to the results of the study, special attention should be paid to the issues of administrative liability of foreigners and stateless persons. Given the rule of Article 16 of CUAO, administrative penalties are applied to foreigners and stateless persons as defined in part 1 of Article 24, including a warning, a fine, etc. In addition to the indicated general sanctions, the current legislation of Ukraine also provides for the application of special (special) sanctions against foreigners and stateless persons, which include forced expulsion and forced return.

In the CUAO, administrative expulsion refers to administrative expulsion, which may be prescribed by law in the case of administrative offenses that grossly violate the rule of law. This provision is specified in Law No. 3773-VI, which provides for the use of forced expulsion of foreigners and stateless persons in the presence of an administrative offense, which grossly violates the rule of law. Additionally, Law No. 3773-VI establishes another special sanction in the form of the forced return of foreigners and stateless persons. At the same time, in the Instructions on the forced return and forced expulsion of foreigners and stateless persons from Ukraine, the terms “forced return” and “forced expulsion” mean a system of administrative and legal measures aimed at forcing foreigners who stay illegally in Ukraine to leave Ukraine despite their will and desire.

The administrative expulsion is classified as administrative sanctions in the CUAO because it is defined in Article 24 “Types of administrative penalties.” At the same time, the forced expulsion and forced return of foreigners and stateless persons is defined as a system of administrative and legal measures in the Instructions on the forced return and forced expulsion from Ukraine of foreigners and stateless persons.

Thus, the problematic issues that should be addressed are the following ones. Firstly, the differences between

1477 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online the CUAO norms and the Instructions: in the CUAO, the forced expulsion is classified as penalties, in the In- structions, the forced expulsion at the level of forced return is an administrative and legal measure. Secondly, if the forced expulsion is classified as the administrative sanction in the CUAO, then there is a need for a rule that determines the composition of the offense, as a result of which a foreigner or stateless person will be for- cibly expulsed. The solution of problematic issues is possible by bringing the norms of the Instructions on the forced return and forced expulsion from Ukraine of foreigners and stateless persons to compliance with the requirements of the CUAO, as well as predicting the norms in the CUAO, which determine the composition of the offense, upon the occurrence of which administrative (forced) expulsion will be applied. It should also be emphasized that the design of “administrative expulsion” is used in the CUAO, which is called “forced expulsion” in Law No. 3773-VI. It is more advisable to use the same definition in order to avoid doubts about the content of such concepts.

Conclusions

Effective management of social risks determines their consideration as complex objective-subjective phenomena characterized by uncertainty, ambiguity and diversity. The study of unemployment social risks using a managerial approach made it possible to identify certain positive consequences of their implementation, in particular for the development of the private sector and the introduction of special innovations. The main areas of managerial influence, aimed at reducing the likelihood of negative social consequences due to the actualization of social risks in the labor sphere, were identified as follows: management through direct influence on the causes of risks; management through the impact on causation; combining these two approaches.

The increase in labor migration from Ukraine is gradually exacerbating the imbalance prevailing in the Ukrain- ian labor market. Simplifying employment process and immigration conditions for foreign workers is one possible solution to this problem. Over the past five years, a number of measures have been taken in Ukraine in order to facilitate the application procedures for temporary and permanent residence permits and to simplify the employment process for foreigners.

Procedures for acquiring citizenship and obtaining permits for foreigners must be consistent with the principles of respect for human rights and non-discrimination. However, on the other hand, they demonstrate the existence of procedural shortcomings that create certain barriers and additional filters for persons who comply with the laws of Ukraine and want to obtain temporary and permanent residence permits, and subsequently acquire Ukrainian citizenship. Problems such as the complexity of supporting documents, queues and shortcomings in communication with relevant authorities need to be solved in order to develop a foreign-friendly immigration policy.

Creating conditions for the comprehensive integration of foreigners is an integral part of migration policy. A comprehensive assessment of integration policy according to the international MIPEX methodology (Migrant Integration Policy Index) has never been conducted in Ukraine, which in turn makes it difficult to compare Ukrainian integration policy with the relevant policies of EU member states. The results of the study indicate the existence of the language integration problem of foreigners, but it is equally important to conduct a comprehensive assessment of migrants’ access to the Ukrainian labor market, education, health, participation in political life according to MIPEX methodology, which in turn will allow to adopt the best practices of integration from the EU member states.

In the case of an administrative offense, in accordance with the provisions of the Code of Administrative Of- fenses, administrative sanctions are applied to foreigners and stateless persons, as defined in Part 1 of Article 24, including a warning, a fine, etc. In addition to the indicated general sanctions, the current legislation of Ukraine also provides for the application of special sanctions to foreigners and stateless persons, including: administrative expulsion; forced return; reduction of the period of temporary stay in Ukraine. It is important to pay attention to the difference between the forced expulsion and the forced return: firstly, the ground for the forced expulsion is an administrative misconduct that grossly violates the rule of law; secondly, for the application of forced expulsion of a foreigner or stateless person by authorized bodies (State Migration Service of

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Ukraine, State Border Service and bodies of the Security Service of Ukraine), an administrative court order on forced expulsion is required; thirdly, in the case of forced expulsion, the ban on the continued entry of foreigners and stateless persons into Ukraine for a period of five years.

With regard to criminal liability, the basis for bringing to this type of legal liability is the commission by a person of a socially dangerous act containing the offense provided for by the Criminal Code of Ukraine. For- eigners and stateless persons are held criminally liable on a common basis. At the same time, there are rules that criminalize foreigners and stateless persons as special entities for espionage, for violation of the laws on the continental shelf of Ukraine.

The extension in matters of liability of the national regime to foreigners and stateless persons does not preclude the onset of civil liability in civil claims filed against them. Civil liability for foreigners and stateless persons occurs for obligations arising from harm.

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Chehabeddine, M., Tvaronavičienė, M. 2020. Securing regional development. Insights into Regional Development, 2(1), 430-442. http://doi.org/10.9770/IRD.2020.2.1(3)

Code of Ukraine on Administrative Offenses (1984). As amended up to Act of March 18, 2020. URL: https://zakon.rada.gov.ua/laws/ show/80731-10

Constitution of Ukraine (1996). As amended up to Act of January 01, 2020. URL: https://zakon.rada.gov.ua/laws/show/254%D0%BA/96- %D0%B2%D1%80

Convention on the Reduction of Statelessness (1961). URL: https://www.unhcr.org/ibelong/wp-content/uploads/1961-Convention-on- the-reduction-of-Statelessness_ENG.pdf

Convention Relating to the Status of Stateless Persons (1954). URL: https://www.unhcr.org/ibelong/wp-content/uploads/1954-Conven- tion-relating-to-the-Status-of-Stateless-Persons_ENG.pdf

Eurostat Database. URL: http://ec.europa.eu/eurostat/web/population-demography-migration-projections

Hrabylnikov, A.V. (2015). Constitutional legal status and legal regime of foreigners and stateless persons in Ukraine: correlation of concepts. Aktualni problemy vitchyznianoi yurysprudentsii, 6, 59-66.

Hula I.L. (2018). Personal expression from Ukraine of foreigners and universal membersas a west of administrative approach. Poriv- nialno-analitychne pravo, 4, 252-255.

Law of Ukraine № 3773-VI On the Legal Status of Foreigners and Stateless Persons (2011). As amended up to Act of February 13, 2020. URL: https://zakon.rada.gov.ua/laws/show/3773-17

Levenets, A.V. (2017). Municipal legal status of foreigners in Ukraine. The thesis for the degree of candidate of legal sciences, spe- cialty 12.00.02. Karazin Kharkiv National University, Kharkiv. URL: http://dspace.univer.kharkov.ua/bitstream/123456789/12602/6/ diss-Levenec.pdf

Lincényi, M., Čársky, J. 2020. Policy trusts in public policy in the Slovak Republic. Insights into Regional Development, 2(1), 456-468. http://doi.org/10.9770/IRD.2020.2.1(5)

Reznik, O., Muzychuk, O., Andriichenko, N., Yakushchenko, Y., & Korzh, S. (2020). Fight Against Doping: Experience of Ukraine and European States. Amazonia Investiga, 9(27), 34-41. https://doi.org/10.34069/AI/2020.27.03.4

State Migration Service of Ukraine. URL: https://dmsu.qov.ua/divalnist/statistichni-dani/statistika-z-osnovnoi-diyalnosti.html Statelessness in the EU (2016). EMN INFORM. URL: https://ec.europa.eu/home-affairs/sites/homeaffairs/files/00_inform_stateless-

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Turetska, Y. (2018). Theoretical and practical aspects of the constitutional and legal status of refugees in Ukraine. Visegrad Journal on Human Rights, 2, 126-131.

Tvaronavičienė, M., & Ślusarczyk, B. (2019). Energy transformation towards sustainability. Energy transformation towards sustainability (pp. 1-333) http://doi.org/10.1016/C2018-0-02510-4 Retrieved from www.scopus.com

Tymchyk G.S. (2014). Administrative and legal status of foreigners and refugees in Ukraine: a comparative legalanalysis. Yurydychnyi naukovyi elektronnyi zhurnal, 2, 82-84.

Vasylchenko, O.P. (2014). Features of the legal status of foreigners and stateless persons while ensuring the principle of equality of rights and freedoms in Ukraine. Yevropeiski perspektyvy, 10, 23-28.

Oleg REZNIK ORCID ID: orcid.org/0000-0003-4569-8863

Oleksandr MUZYCHUK ORCID ID: orcid.org/0000-0001-8367-2504

Oleksandr YUNIN ORCID ID: orcid.org/0000-0003-4846-2573

Svetlana KALIUZHNA ORCID ID: orcid.org/0000-0003-3796-6960

Oleksandr DUBENKO ORCID ID: orcid.org/0000-0002-0443-7168

This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/

1480 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 https://doi.org/10.9770/jssi.2020.9.4(30)

FINANCIAL SECURITY MANAGEMENT OF ENTERPRISES OPERATING IN THE DEFENSE INDUSTRY

Oleksandr Sydorov¹, Serhii Tarasov², Nelli Tsybulnyk3, Tetiana Tsybulnyk4, Anatolii Rusetskyi5

1*Dnipropetrovsk State University of Internal Affairs, Ave. Gagarina, 26, 49005, Dnipro, Ukraine 2Central Research Institute of the Armed Forces of Ukraine, 28b Povitroflotsky Ave., Kyiv-49, 03049, Ukraine; 3 Kharkiv National University of Internal Affairs, Lviv Landau avenue, 27, Kharkiv, 61000, Ukraine; 4Novobavarskyi District of Kharkiv City Council, Poltavsky Shlyakh Street, 11, Kharkiv, 61000, Ukraine; 5M.S. Bokarius Kharkiv Research Institute of Forensic Examinations, Zolochevskaya street, 8a, Kharkov, 61000, Ukraine

E-mail: 1*[email protected] (Corresponding author)

Received 19 October 2019; accepted 15 May 2020; published 30 June 2020

Abstract. The article investigates the specifics of the military-industrial complex functioning in Ukraine. Theoretical analysis has shown that the development of the country’s defense industry and the state of enterprise`s financial security within this industry have a dual impact on various components of the national security system: is a realization tool of the national interests, which in turn creates opportunities for its strengthening, and it can also be a source of threats to the state`s economic security by its components due to the accumulation of internal negative elements on enterprises (insufficient development and low level of military products competitiveness, obsolescence of fixed assets at enterprises, etc), as well as due to the low ability of enterprises to respond adequately to the challenges arising from changes in external conditions and factors (disruption of sustainable cooperation, increased competition between different military products in domestic and foreign markets, etc). The activity legal framework, legal status and structure of the state concern “Ukroboronprom” have been defined. The strategic growth priorities of defense industry of Ukraine have been cleared up. The financial security of enterprises operating in the defense industry can be ensured not only by using passive mechanisms to resist internal and external destructive factors, but also by mechanisms of efficient interaction with the environment. This in turn allows the company to avoid the need to invest capital in sources of raw materials, production or creation of distribution channels. Access to certain technologies or knowledge, the advantages of narrow specialization and the possibility of increasing consumer value, these all are important reasons for establishing strategic cooperation between different companies.

Keywords: national security, financial security, national interests, product competitiveness, defense-industrial complex.

Reference to this paper should be made as follows: Sydorov, O., Tarasov, S., Tsybulnyk, N., Tsybulnyk, T., Rusetskyi, A. 2020. Fi- nancial security management of enterprises operating in the defense industry. Journal of Security and Sustainability Issues 9(4), 1481-1493. https://doi.org/10.9770/jssi.2020.9.4(30)

JEL Classifications: F35; F42

1. Introduction

The significance of financial security issue as a component of economic security of defense industry enterprises can be proved by the fact that financial security has an exclusive role in ensuring sustainable development and is a prerequisite for achieving and maintaining sustainable financial performance of the enterprise. World experience has shown that this contributes not only to the formation of the country’s defense industry, but also to economic growth, improving its technological level, manufacturing development of dual-use goods, as well as industries oriented on the military services.

The remilitarization of the economy reveals significant opportunities for Ukraine, due to the increasement in the manufacturing of military goods and the expansion of the corresponding export potential. In the future, the JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online development of military technologies in the enterprises of the defense industry and their usage for the benefit of the civil sector can ensure economic growth and create positive macroeconomic, scientific and technological, financial effects in the country.

The need to adapt to radical changes in the orientation of domestic production and export-import policy since 2014 has led to the usage of anti-crisis management tools of the defense industry and situational solutions to problems related to its development and functioning.

The development of a global market system requires the national economy of a country to integrate into the world economic space by creating stable goods/money relationships. In a market economy, competitiveness holds an important place among the key categories. At that, the level of competitiveness is determined not only by the success or failure in the activity of a certain economic entity, but also, ultimately, the positioning of the country itself in today world market.

At the same time, in the conditions of modern integration into the world economic space, the possibility for many external challenges and threats to influence the economic development of the country is not ruled out. Therefore, special attention is paid to solving the issues of ensuring the protection of national interests of manufacturers of products and the whole society, national security of the state as a whole. An important component of a national security and defense strategy in many industrialized countries is the presence of a powerful and modern defense industrial complex capable of functioning even in the event of threats to national security and possible crisis situations.

The development and maintenance of the scientific, technical, technological and intellectual potential of the defense industrial complex of Ukraine requires the integration of national production processes into a complex global system through technological changes and modernization of industry in accordance with world standards. At the same time, today in Ukraine there appears relevant to solve the issues regarding the improvement of the efficiency of use of production, scientific, experimental capabilities and material and technical base of the defense industry; to attract foreign investments in the defense industrial complex; to provide favorable conditions for expansion of the markets of defense products taking into account the national security interests of the country.

2. Literature Survey

The specifics of the formation, operation, current state and horizons of development of the defense industrial complex (DIC) have repeatedly aroused scientific interest regarding the study of these issues. In the context of the subject under study, we consider it necessary to consider scientific approaches to defining the essence of the concept of DIC.

While studying the state and the horizons of development of the defense industry of Ukraine in the system of formation of national sovereignty, Kamianetska (2015) defines DIC as a sector of economy intended for the development and production of defense products. The scientist argues that DIC is in fact the foundation of the country security and defense, so maintaining a high level of its development for many developed countries is one of the priority military and economic objectives of national policy in the system of providing the sovereignty of the state.

According to Avanesova et al. (2018), DIC is a generator of advanced scientific, technical, technological advances and developments. According to scientists, this provides the opportunity to create not only high-tech equipment, but also high-tech conversion products.

Momot et al. (2015) understand by the term DIC a group of enterprises, institutions and organizations of industry and science that develop, produce, modernize and dispose of military products, perform services in the interests of defense for equipping and provision of material needs of security and defense forces, as well as supply military and dual use goods, provide military services at the time of military-technical cooperation activities of the country with foreign countries.

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According to Potomkina (2018), DIC is an integrated system that includes enterprises, institutions, organizations, which are considered: (1) on the one hand – as facilities (engaged in the development and production of weapons, ammunition, military equipment, special accessories to them); (2) on the other hand – as economic entities subordinated to organizational-economic authorities in accordance with the powers conferred on them by law, which are involved in the placement, execution of the state defense order, have the functions to regulate and control the activity of the economic entities in the area of DIC, in respect of which they exercise regulatory, management, administrative, and control functions.

Kravchenko V. (2019) states that the notion of “defense industrial complex” used in Ukraine in other states is known as “military industrial complex”. With that, the author defines the military industrial complex as a group of defense enterprises of all forms of property, research, design and testing organizations, training grounds, institutions and organizations, top military leadership, and political elite, which provide military and national security of the country. The DIC of Ukraine provides the execution of the state defense order, and also carries out deliveries of weapons for export.

Indeed, if we refer to foreign scientific literature on defense industry research, the term “military industrial complex” (MIC) is generally used.

Thus, in particular, Weber (2020) defines MIC as a network of persons and institutions engaged in the production of weapons and military technologies. Usually, the MIC of a country tries to mobilize political support to continue or increase military spending by the national government.

According to Qureshi (2018), the MIC should be understood as events, processes, a structure and a multitude of agreements that take place between the military and the industry of the country concerned. The scientist states that there is a structural network between the armed forces and the political-economic complex where both regulated and intensive flows of technologies, finances, services and products take place.

The scientists Nzeribe & Imam (2018) define the MIC as an informal alliance between the military and the industry that supply weapons and is also viewed as a vested interest that influences the public policy and thought. It is important to note that such a relationship between the government and defense-oriented corporations is a driving factor as both parties benefit by it: one party receives weapons and the other party pays for its supply.

Insufficient scientific research of these issues necessitates the solution of the scientific task, which is to ensure the financial security of defense enterprises, taking into account the threats and opportunities for the development of their interaction with the environment on the basis of the development of conceptual, methodological and applied components.

3. Methods

The following methods of scientific cognition were used in the work: statistical analysis, comparison, economic-mathematical and graphic methods - when determining the conditions and factors that affect the financial security of enterprises involved in the defense industry of Ukraine, as well as systematization and statistical analysis - during the substantiation of scientific and methodological approaches to the application of the value concept of pricing for military products and its dual usage by defense industry enterprises.

With the purpose of studying the specifics of operation of the DIC in the leading countries of the world and in Ukraine, in particular, as regard the activities of corporations in the structure of the DIC and research institutions in the area of defense industry, and the interpretation of the basic principles of strategic planning documents, etc., a complex of general scientific and special legal methods. They are: dialectical, epistemological, formal legal and system-structural methods.

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The dialectical method was used to define the concepts of “defense industrial complex” and “military industrial complex” by studying the scientific approaches to interpreting their essence.

The epistemological method of research allowed to find out the specifics of PESCO activities in the area of defense cooperation between the EU member states, as well as the essence of the main principles of the implementation of the Project of Property Policy of the state concern “Ukroboronprom”.

By using the formal legal method, there was explained the essence of some provisions of the current regulatory legal acts, which define the powers of the Ministry of Defense of Ukraine, the Ministry for Development of Econ- omy, Trade and Agriculture of Ukraine in the field of defense and national security of the state; the legal status and structure of the state concern “Ukroboronprom”; strategic growth priorities of the DIC of Ukraine and so on.

As a result of the conducted study on the specifics of operation of the DIC in the leading countries of the world and in Ukraine and using the system-structural method, the obtained results were systematized according to the following criteria: country, main corporations in the structure of DIC; research institutions in the area of defense industry; basic strategic planning documents.

The information basis of the work consists of: laws of Ukraine, regulations of the Ukrainian Cabinet of Minis- ters, mandates of the President, official documents of public administration authorities, statistical data provided by the State Statistics Service of Ukraine, defense enterprises, materials of analytical institutions, scientific works of domestic and foreign scientists in the defense sphere and economic security of the state, as well as the results of expert surveys, materials from the Internet, the results of author`s personal researches.

4. Results

In modern economic conditions, regardless of the form of ownership and organizational and legal form of management, the activities of enterprises are subject to constant risks and threats, which are due to increasing influence of external and internal factors on their functioning. The constant increase in business risk can lead to a significant reduction in the level of financial condition of the enterprise, and as a consequence - to bankruptcy, and therefore requires each business entity to develop and implement its own special financial security system.

Defense companies involved into the production of military products can not exist and develop without some certainty in the development of these products for both domestic needs and for the foreign arms market. This fact is a necessary condition for ensuring the rationality of the military-technical policy of the state related to the development of the armament system of the armed forces, other military institutions of the state, scientific, technical and production-technological base of the defense industry, as well as to the improvement of the military-technical cooperation with foreign countries.

In 1966 an independent international institute was established to conduct research in the fields of conflicts, arms, arms control and disarmament – Stockholm International Peace Research Institute (SIPRI). SIPRI provides indicators, analysis and recommendations based on open sources to policy makers, researchers, the media and the public concerned. Based in Stockholm, SIPRI is regularly ranked among the most respected think tanks around the world.

SIPRI monitors, measures and analyzes international arms transfers and is one of the world’s leading centers of research in this field. In particular, within the framework of its activities SIPRI conducts studies into arms transfers to or from certain regions, subregions, states or non-state actors focused both on enhancing the fundamental understanding of the impact of arms transfers and supporting policy development and implementation. An important purpose of SIPRI studies is to promote the improvement of transparency as a method of providing responsible international arms transfers, thereby helping to prevent violent conflicts, reduce tensions, prevent potentially destabilizing accumulation of weapons and stand against the misallocation of limited resources. Ac- cording to the recent published data on the official website of SIPRI, the top ten exporters of defense products

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Nowadays, Ukraine demonstrates positive dynamics in the development of the defense industry. During the period from 2015 to 2018, funding for the development, production, repair and modernization of armaments and military equipment was significantly increased, international cooperation was established through defense institutions, and sustainable development of the defense industry was identified as one of the priorities in strategic and program documents, and systemic restructuring of the Ukrainian defense industry is recognized as an indicator of its achievement.

At the same time, there is a major (primary) objective contradiction between the development strategy of enterprises, including their operating activities, and the possibilities for its financial support. The impact of this contradiction is the main driver of the enterprise`s financial security.

Features of the activities of enterprises involved in the defense industry and, accordingly, certain risks and threats to their financial security, affect the nature of their financial activities. The main comprehensive characteristic of the enterprise`s economic activity is its financial condition, which characterizes competitiveness, potential in business cooperation, as well as assesses the realization of economic interests of the enterprise and its partners in financial and production terms.

Аnd on the other hand, in exchange for subsidies, MIC enterprises are expected to return their savings to the state through reduced prices for their products in the future (Usachenko, 2019).

In the conditions of the current integration into the world economic space, strategic goals to ensure the protection of national interests of manufacturers of products and the whole society, national security of the state as a whole are a priority. National security and defense protection is one of the priority, strategically significant areas for the country development, its positioning in the world community (Reznik et al., 2020).

The DIC of Ukraine is represented by the state concern “Ukroboronprom” created in 2010. The purpose of creation of “Ukroboronprom” was defined as improving the efficiency of operation of state-owned enterprises that carry out economic activity in the area of design, production, implementation, maintenance, modernization and disposal of arms, military and special equipment and ammunition and participate in military-technical cooperation with foreign countries. According to the existing legislation, as of October 4, 2018, 125 state-owned enterprises were included in the state concern “Ukroboronprom”. It is important to note that, in addition to state-owned enterprises, “Ukroboronprom” includes 9 joint stock companies. Since 2013, the enterprises of the state concern have been grouped into 5 main divisions, namely: (1) aircraft industry and aircraft maintenance; (2) precision weaponry and munition; (3) armored vehicles, automotive equipment, engineering and special equipment; (4) shipbuilding and marine facilities; (5) radar, radio communications and air defense systems (ADS) (Resolution of the Cabinet of Ministers of Ukraine № 1221, 2010).

The activity of the state concern “Ukroboronprom” is regulated by the provisions of the Statute approved by the resolution of the Cabinet of Ministers of Ukraine “Some issues of the state concern Ukroboronprom” of 2011. The activities of “Ukroboronprom” are focused on providing the efficient operation and management of public sector economic entities that carry out economic activities in the area of design, production, implementation, maintenance, modernization and disposal of arms, military and special equipment and ammunition and participate in military-technical cooperation with foreign countries. The structure of governing bodies of “Ukroboronprom” includes:

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(1) the Supervisory Board as the supreme governing body that protects the interests of the state, controls and regulates the activities of other governing bodies of the concern; (2) the Board of Directors as the collegial governing body comprising CEO (Head of the Board of Directors) and his deputies, as well as the representatives of the concern participants; (3) CEO (Resolution of the Cabinet of Ministers of Ukraine № 849, 2011).

In 2018, the Strategy for Development of the Defense Industrial Complex of Ukraine for the period up to 2028 was developed and approved by the resolution of the Cabinet of Ministers of Ukraine. The development of the Strategy was conditioned by the need for the state institutions of Ukraine to review the role of the DIC in the context of neutralizing internal and external threats to national security, as well as intensifying the economic growth of the state. The Strategy is the basis for developing new and revising existing regulations (including state target programs) in the area of development and operation of the DIC. The strategy defines the long-term priorities of the state military-industrial policy, as well as the directions of implementation of the state target programs of reforms and development of the DIC in the medium term (Strategy for development of the defense- industrial complex of Ukraine for the period up to 2028, 2018).

The “Ukroboronprom” reform strategy aims to integrate the Ukrainian DIC into the global high-tech market. The reforms are focused on close international cooperation within the framework of innovative tendencies and provides for simultaneous work in the legal, technological and industrial directions. An important component of effective reforms is improving the legal framework and bring up legislation to world-class standards (The official website of Ukroboronprom).

Among the recent reform events, special attention is required by the draft ownership policy of the state concern “Ukroboronprom” – the fundamental document that defines the purpose of existence of the concern in state ownership, key objectives, financial and non-financial performance indicators. This darft document was developed by experts of the Ministry for Development of Economy, Trade and Agriculture of Ukraine. The proposed version of the ownership policy stipulates that the Concern has a key client and the purpose of existence – to create modern and high-quality arms and military equipment for the defense and security forces of Ukraine, in particular, two ministries – the Ministry of Defense of Ukraine and the Ministry of Internal Affairs of Ukraine.

The ownership policy proposes to assign to the Concern a key role in the field of design, production, implementation, maintenance, modernization and disposal of weaponry, military and special equipment and munition, through the formation of a long-term state defense order for the products of the Concern participants and joint stock companies in respect of which the Concern exercises management authorities of the participatory interests of the state. According to the draft document, as the main directions of activity, it is proposed to define the management of the Concern participants and the participatory interests of the state in the authorized capital of joint stock companies, which are placed under management of “Ukroboronprom”.

Central Scientific Research Institute of Armament and Military Equipment of Armed Forces of Ukraine (CSRI AME AF of Ukraine) is the main research institution of the Armed Forces of Ukraine engaged in the study of the problems of military-technical policy in the field of development of weapons and military equipment, which carries out its activity through conducting fundamental, exploratory and applied studies focused on the scientific substantiation of the priority directions of military-technical policy regarding the problems of creation of new weapons, development and modernization, service life extension and disposal of WME, weapons of destruction and munitions, special-purpose vehicles and equipment, prospects of development of WME of the Armed Forces of Ukraine, defense technologies and defense industrial complex, scientific-methodical support for development and implementation of MTP, state target defense programmes of development of WME, state defense order and activities of the international MTC, scientific-technical support for development and modernization, service life extension and disposal of WME, as well as providing the operation of the intellectual property protection system during scientific studies (The official website of the Central Scientific Research Institute of Armament and Military Equipment of Armed Forces of Ukraine).

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Nowadays, Ukraine demonstrates positive dynamics in terms of the defense industry development. During 2015-2018, the amount of funding for the development, production, repair and modernization of armaments and military equipment was significantly increased, as well as international cooperation was established through defense institutions. In the strategic and program documents of the state, the sustainable development of the defense industry was recognized as one of the priority areas, and the systemic restructuring of the Ukrainian defense industry was identified as a way to achieve it.

In modern conditions, a number of external and internal negative conditions and factors significantly affect the financial security of Ukrainian defense industry enterprises, which deepen the contradictions in the practice of Ukrainian defense companies, which in turn complicates their financial security.

The strategic goal of ensuring the financial security of enterprises involved into the defense industry is to ensure the realization of their interests, including using the opportunities provided by the external environment, and the implementation of a preventive response to emerging threats. Instead of passively adapting to external challenges and threats, public sector defense companies should conduct a strategy of actively promoting their own interests, taking into account the interests of other subjects in the environment.

Nowadays, foreign partners have shown a willingness to import military technology. Thus, at the international arms exhibition “Eurosatory-2012” authorized Ukrainian and Thai representatives confirmed the possibility of common production (with transfer of production technologies ownership) of armored personnel carriers model ZE-1 in Thailand. The estimated value of the contractual relationship amounted to more than 110 million dollars. In addition, recently the authorized representatives of our state have declared their readiness to produce armored personnel carriers in common with the representatives from Kazakhstan. According to the estimation of experts, the cost of these contractual relations may be about 50 million USD (http://myfin.net/ukraine/ economy-and-finances-ua/eksport-voennyx-texnologij-komu-eto-vygodno-09125774.html.).

The value of the above-mentioned export agreements, as a rule, consists of the following three components: the value of products manufactured by the exporting country it-self; the value of products manufactured in common by representatives of the exporting state and the importing state; cost of transferred technology (cost of licenses).

The implementation of these projects will have a positive impact on the development of Ukraine’s military industry, and the average annual volume of military technology exports is expected to be at least 200 million USD (On approval of the Strategy for the development of the defense-industrial complex of Ukraine for the period up to 2028).

The analysis of the state of Ukrainian exports of military technologies allowed to characterize its main indicators (Table 2).

Table 2. Characteristics of exports of Ukrainian military technologies

Indicators Characteristic Geographical structure Persian Gulf States, Southeast Asia, CIS and China. Technologies for the production of aircraft, tanks, armored personnel carriers, warships, Subject structure modernization of already exported equipment. Average annual amount About 30 million USD Low. Ukraine has lost a significant amount of military technology and, as a result, the possibility of Degree of state control concluding contracts for the export of products or production technologies due to an insufficiently effective control system. The degree of export potential Does not exceed 25%. Exports of military technology are unsystematized. One contract is usually realization of the military concluded within two or three years. technologies in Ukraine

Source: developed by the author

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The characteristic mentioned above was compiled on the basis of the analysis of previous years. First of all, it should be noted that despite the significant number of negative factors, Ukrainian companies still tried to export military technologies. However, due to the lack of an effective state policy, Ukraine did not fully use its own export potential, which in turn led to a significant decline in the development of Ukrainian military–industrial complex (MIC).

Investigating Ukraine’s capabilities in the field of geographical diversification of military technology exports, it should be noted that one of the most promising markets for Ukrainian manufacturers are the markets of military technology (MT) in Asia, the Middle East and South America. Futhermore, in modern conditions, Ukraine also has certain prospects for military-technical cooperation with high-developed countries, primarily with EU and NATO member states.

During 2014-2019, the private sector of the defense industry was actively developing, namely: 69% of the volume of the state defense order (SDO) in 2018 was performed by private enterprises. У питанні The rearmament of the defense forces has significantly advanced national missile programs and developments, as well as initiated the development of a number of large weapons. A range of local achievements in the field of rearmament and re-equipment of the defense forces have been recorded. However, despite the increase desire of private enterprises to meet the needs of domestic and foreign markets, there are still some bans at the state level, which do not allow to achieve significant progress in this sphere.

Taking into account the significant international restrictions on the import of military goods and technologies to Ukraine, the re-equipment of the Armed Forces and other military formations is carried out mainly at the expense of own production facilities and developments by private and state enterprises. Table 3 presents the volumes of manufactured military products at defense industry enterprises of all forms of ownership in Ukraine in the period 2014-2019.

Table 3. Volumes of manufactured military products in Ukraine at defense industry enterprises of all ownership forms in the period 2014-2019, million UAH

2014 2015 2016 2017 2018 2019 (1 quarter) Indicator Amount % Amount % Amount % Amount % Amount % Amount % In general, 9613,4 700 13619,1 700 13366,2 700 16365,9 700 25489,5 700 5755,9 700 including: R&D 191,9 2,0 453,5 3.33 352.2 2,64 516,6 3,16 1453,0 5,7 574,0 10.0 purchase of 1141,1 77,9 5907,1 43,36 4920,4 36,8 5570,7 34,0 11358,0 44,6 3228,5 56,1 defense equipment MT utilization 42,2 0,45 117,1 0,86 450,9 3,38 81,4 0,5 58,5 0,3 MT processing 4,3 0,05 0,5 0,01 7,5 0,06 1,0 0,01 198,0 0,8 - - MT Reparation 2207,0 22,9 3283,5 24,17 4740,5 35,47 5820,6 35,6 8625,2 33,8 1953,4 33,9 serial products 6026,8 62. 7 3857,4 28,33 2894,7 21,66 4375,6 26,7 3796,8 14,8 - - For reference: Number of 1450 1937 1756 1572 1753 - contracts

Source: compiled by the author using the resource http://www.dsecu.gov.ua/control/en/index

The results of the data shown in Table 3 allow us to draw the following conclusions: - the main shares of financial resources of enterprises are spent on repair and purchase of MBT, while the modern equipment is not produced enough - in 2015 the share of serial production in the total volume of manufactured military products at defense industry enterprises was 28.33%, and 14.8% in 2018. - there is a low level of R&D funding in the field of new equipment development (including insufficient funding from the Ministry of Economic Development and Trade of Ukraine to prepare the manufacturing process of new military equipment); - in the defense sector, there is an intersection of R&D and serial production functions at the same enterprise,

1488 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online which sometimes either reduces the quality of research and development or increases the cost of production; - financial resources provided to enterprises by the state within the framework of their defense order (advance of the defense order - up to 80% of the cost of products for up to 3.5 years) are not allocated to separate accounting and in the general accounting of the enterprise is sometimes redistributed to other products).

Since 2015, the major markets for Ukrainian products have changed dramatically. Exports to Europe and America increased significantly. Due to the abandonment of the Russian market, exports to Asia and Africa have increased too (Table 4). Countries such as Turkey, Pakistan, Saudi Arabia, Qatar, etc. are also considered as a perspective markets.

Table 4. Exports of certain categories of Ukrainian weapons in the period 2014-2017, units

Quantity and country of final consumer Type of weapon 2014 2015 2016 2017 2018 4 (Ethiopia), 25 (Democratic Republic 11 (Ethiopia), Battle tanks 11 (Nigeria), of the Congo), 16 (Thailand) 13 (Thailand) 12 (Nigeria) 5 (Thailand) 10 (Thailand) Armored combat 1 (USA), 17 (Thailand), 34 (Thailand), 20 (Thailand) - 2 (Thailand) vehicles 10 (Nigeria) 5 (Indonesia), 108 (UAE) Large caliber artillery 6 (Nigeria) 12 (Nigeria) - - - systems Fighter planes 5 (Croatia), 1 (Chad) - - - - Combat helicopters 6 (Belarus), 2 (Nigeria) 5 (South Sudan) - - - Warships 1 (Китай) - - - - Missiles and 3 (Indonesia), 40 9 Algeria, 18 (Algeria) 2 (Indonesia) - rocket launchers (Poland) 6 Kazakhstan 2 (Democratic Republic 1 USA, Small arms: revolvers of the Congo), 2 2 (UAE) 4 (Turkey) 1 (Jordan) 1 Malaysia, and pistols (Moldova), 4 (Peru) 580 (Peru) 200 Turkey 10166 (USA), 100 (Georgia), 10400 (Canada), 10000 (USA), 10000 (USA), 10 5068 USA 20 rifles and carbines 5000 (Czech Republic), 10 (Mongolia) 2544 (Zambia) (Mongolia) Mongolia 1 (Democratic Republic of the Congo), 3000 (Uganda) 2 (Democratic Republic assault rifles 104 (Zambia) of the Congo) 15040 submachine guns USA, 2000 (Uzbekistan) 1 (Democratic Republic 46(Turkey), light machine guns of the Congo), 17 (Zambia) 170 (South Sudan) 830 (South Sudan) Light weapons: 62 (South Sudan) - 88 (South Sudan) - 177 USA heavy machine guns hand grenade - - - 2 (Jordan) launchers portable rifles and 89 (USA), 18 790 (USA) grenade launchers; (Belarus) portable missiles and 950 Saudi 1 (Belarus) 85 (USA) 22 (Jordan) missile systems; Arabia triggers 10 (Germany) 3 (USA), 8 (UAE) 3 (Turkey) missiles 226 (USA), 8 (UAE)

Source: compiled by the author using the resource http://www.dsecu.gov.ua/control/en/index

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Although even after the change in the vector of foreign policy, the geography of Ukrainian exports coincides with areas of military conflict. This situation shapes the change in the structure of Ukrainian exports.

Ukrainian companies operate in the global arms market in the segment of aircraft construction, armored vehicles and ammunition. However, the presence in the markets of shipbuilding and air defense has recently been lost. Nowadays, Ukraine’s role in world exports of defense products and services is significant not only due to the formation of its national and international security policy, foreign policy, but also due to the strengthening of arms control and export control regimes.

The problem of military products pricing is one of the most urgent in the process of ensuring the financial security of defense industry and the state in general, as in recent years financial resources for the development and purchase of modern defence equipment has significantly increased (Figure 1), and the range of products ordered in defense industry within the framework of the state order of Ukraine contains hundreds and thousands of names.

Figure 1. Expenditures for the development of armaments and military equipment of the Ministry of Defense of Ukraine, million UAH

Source: compiled by the author using the resource http://www.dsecu.gov.ua/control/en/index

In countries with developed market and mixed economies, the scope of state-regulated and controlled pricing makes from 10 to 40% of total output. For example, the share of state-controlled and regulated prices in Austria reaches 10%, Germany - up to 40%, Greece – 20%, Denmark - 5%, Spain - 10%, Italy - up to 30%, China - up to 30%, USA - up to 10%, France - 20%, Finland - up to 40%, Sweden - up to 40%, Japan - up to 20% (Official website of the Department Of Homeland Security USA).

Analysis of regulatory documents on the regulation of public procurement, aimed at improving the objectivity and validity of pricing for MT shows that the existing pricing system for such products in Ukraine is based on the application of traditional method of calculation, which is quite expensive because it involves the summation of total costs and profits. Even the methods of calculating (forecasting) the cost of MT on the method of sample- analogue are also costly, because they are based on data about the complexity and cost of previously performed work. This pricing system in Ukraine hinders the implementation of scientific, organizational, technological and other innovations in the defense industry, which should help reduce production costs and increase the level of enterprises` financial security.

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As a tool for subject-oriented financial security of defense industry enterprises, a value concept of pricing for defense industry products was proposed, which states that the price of products for the customer should be determined taking into account the value of sample products throughout the life cycle of its tactical and technical characteristics (quality, effect from application both in peacetime and in wartime, and also effect from possible application in other, non-military spheres of activity). The value concept of pricing allows to obtain a significant financial effect on the enterprise (e.g. the ability to save costs, increase the price of more innovative products, etc.).

5. Discussion

The conducted study on the operation of the DIC of Ukraine makes it possible to state that as of today legal framework for regulating the activities of DIC enterprises has already been developed in the country. This framework is presented by both legislative acts of general importance and special regulatory documents that directly define the legal status of DIC companies, the specifics of their activities in the field of national security and defense, strategic goals of reforming Ukroboronprom, etc.

At the same time, some problematic issues regarding the operation of the DIC of Ukraine remain unsolved and require special attention. In particular, they include the following: significant dependence on foreign suppliers; predominantly state ownership of enterprises in the structure of DIC; difficult access to credit and investment resources; weak domestic market of high-tech products; weak involvement in international cooperation; lack of management, human and financial resources for development, etc.

The solution of the problematic issues is seen as a possible way of introduction of leading technologies and the use of innovative equipment in the activities of DIC enterprises; development of mechanisms for financing the activities of DIC enterprises, including lending; developing mechanisms for stimulating innovation in the defense industry; intellectual property protection in accordance with international standards; cooperation with private sector companies and more.

Conclusions

The study provides a theoretical generalization and a new solution to the chosen scientific problem, which is manifested through the financial security of defense enterprises, taking into account the threats and opportunities for their interaction with the environment through the development of conceptual, methodological and applied components.

It was found that the existing inefficient and costly pricing system for MT products in Ukraine does not stimulate the implementation of organizational, technological, scientific and other innovations whithin defense enterprises, which in turn could reduce production costs and increase the financial security of enterprises.

The study identified ways to apply the value concept of pricing for MT products by defense companies, which minimizes the total cost of implementation of its entire life cycle during the development of MT and in turn encourages contractors to increase the competitiveness of the sample and eliminates price increases not associated with the quality improvement.

In Ukraine, the documents of the strategic planning for national security and defense protection were presented by the National Security Strategy of Ukraine 2015; Cybersecurity Strategy of Ukraine 2016; Strategy for the Development of the Defense Industrial Complex of Ukraine for the Period until 2028. The Ministry of Defense of Ukraine, the Ministry for Development of Economy, Trade and Agriculture of Ukraine and the state concern “Ukroboronprom”, which activities are regulated by the provisions of the Statute, act as responsible bodies for production and transfer (supply, sale) of arms and military equipment. In 2018 the Strategy for Develop- ment of the Defense Industrial Complex of Ukraine for the period up to 2028 was developed. The Strategy is the basis for developing new and revising existing regulations in the area of development and operation of the

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DIC. Scientific support for exercise of authority in the field of national security of Ukraine by the President of Ukraine and the National Security and Defense Council of Ukraine is referred to the objectives of the National Institute for Strategic Studies established in 2012. The Central Scientific Research Institute of Armament and Military Equipment of Armed Forces of Ukraine (CSRI AME AF of Ukraine) is the main research institution of the Armed Forces of Ukraine engaged in the study of the problems of military-technical policy in the field of development of weapons and military equipment.

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Usachenko, O. (2019). Experience of state regulation of the reform of the US and EU defense industrial complex. Derzhavne upravlin- nia: udoskonalennia ta rozvytok, 7. https://doi.org/10.32702/2307-2156-2019.7.24

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Oleksandr SYDOROV ORCID ID: orcid.org/0000-0002-4126-1894

Serhii TARASOV ORCID ID: orcid.org/0000-0003-5518-4963

Nelli TSYBULNYK ORCID ID: orcid.org/0000-0002-5128-0511

Tetiana TSYBULNYK ORCID ID: orcid.org/0000-0002-1616-6844

Anatolii RUSETSKYI ORCID ID: orcid.org/0000-0003-2234-4392

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1494 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 https://doi.org/10.9770/jssi.2020.9.4(31)

ENSURING ECONOMIC SECURITY OF UKRAINE IN THE SPHERE OF FOREIGN ECONOMIC ACTIVITY

Dmytro Zhuravlov¹, Ivan Lytvyn², Oleksandr Ilchenko3, Ivan Yaromii4, Yuliia Lepekh5

1*Institute of Law and Postgraduate Education of the Ministry of Justice of Ukraine, Silovych Street, 73, Kyiv,04053, Ukraine 2 Kropyvnytskyi Institute of State and Municipal Administration, 73, Nicholas Levitsky, Kropyvnytskyi, 25026, Ukraine 3Sumy State University, 2 Rimsky-Korsakova Street, Sumy, 40000, Ukraine 4Security Service of Ukraine in Lviv Region, Dmytro Vitovskoho Street, 55, Lviv, Lviv Region, 79000, Ukraine 5Interregional Academy of Personnel Management, Hetman Mazepa Street, 29, Lviv, 79000, Ukraine

E-mail: 1*[email protected] (Corresponding author)

Received 18 October 2019; accepted 20 March 2020; published 30 June 2020

Abstract. The nature study of customs regulation in modern conditions has lead to the need for theoretical bases and practical recommendations for the implementation of an effective mechanism of the state economic security, because in the context of improving the challenges of globalization, characterized by a simultaneous increase of scales and expansion of geography of international trade and labor migration, openness of national economies, revitalize the integration processes, there is an increased influence on the economic system of the state and society threats in the external environment. The concept of “customs security” is defined at the doctrinal level by covering the scientific approaches to its interpretation, as well as its interpretation at the level of the current Ukrainian legislation. Particular attention is paid to the issues of codification of EU customs legislation. The legal status of The World Customs Organization (WCO) as an independent intergovernmental body and priority areas of activity under the Strategic Plan for the period 2019-2022 have been determined. Despite the implementation of further steps to harmonize Ukrainian customs law with the European, the creation of favorable business conditions for the subjects of foreign economic activity (FEA) justified the expediency of developing a concept of ensuring economic security in the sphere of FEA on the bases of balancing economic interests, which is based on the search for a compromise between the measures of control of revenue and fees to ensure economic security in the sphere of FEA and providing business simplifications taking into account the economic interests.

Keywords: economic security; customs security; foreign economic activity; customs regulation; economic interests.

Reference to this paper should be made as follows: Zhuravlov, D., Lytvyn, I., Ilchenko, O., Yaromii, I., Lepekh, Y. 2020. Ensuring economic security of Ukraine in the sphere of foreign economic activity. Journal of Security and Sustainability Issues 9(4), 1495-1510. https://doi.org/10.9770/jssi.2020.9.4(31)

JEL Classifications: F35, F42

1. Introduction

In the context of improving the processes of globalization, characterized by a simultaneous increase of scales and expansion of geography of international trade and labor migration, openness of national economies, revitalize the integration processes, there is an increased influence on the economic system of the state and society threats in the external environment (Šincāns et al., 2016; Fakhry et al., 2018; Tvaronavičienė, 2018; Plėta et al., 2020; Chehabeddine, Tvaronavičienė, 2020; Lincényi, Čársky, 2020).

In order to evening-out and form an adequate response to these threats, there are being transformed the content and function of state customs affairs. JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online

In modern conditions, the governments of many countries face the problem of searching a balance to ensure the economic security of the national economy and providing simplifications to subjects of foreign economic activity (FEA). According to international agreements and conventions on issues of international trade, it is planned to further expand the list of simplifications for business, which are aimed at reducing the interference of customs administration officials in the foreign economic activity of economic entities. In this context, at the level of national governments and state integration associations, modern instruments are being developed and implemented to detect and prevent customs violations by unscrupulous FEA entities and to maximize assistance to entities with a high degree of confidence.

The strategic European integration course of Ukraine before joining the European community requires the protection of national interests of the country. From the content of Art. 17 of the 1996 Constitution of Ukraine: ensuring economic security is one of the most important functions of the state (Constitution of Ukraine, 1996). The activities of state bodies to protect the economic interests and economic security of the country are an integral part of ensuring national security. The emergence of external threats to the national security of the state requires not only rapid response, but also existence of effective mechanisms to counteract the possible causes of these phenomena of negative consequences.

Protection requires the vital values and interests of both societies in particular and the state on the whole. In this context, an important area is to ensure the customs security of the state, which provides the protection of society from prohibited, dangerous and substandard products, formation of the adequate level of competitiveness of the country in the world market, promotion of investment attractiveness of Ukraine and its regions, protection of interests of business entities, etc. The implementation of customs security functions rests with the relevant state structures - customs authorities. Based on the above, it is relevant to study the concept of customs security, legal status and features of the functioning of customs authorities in the context of ensuring national security of the country.

2. Literature Survey

The priority task of any state is the protection of its national interests. In the context of globalization and European integration processes, the economic security of the country comes first. This is due to the fact in particular that the financial and economic security of the state ultimately influences its positioning in the world (Reznik et al., 2020). The efficiency of the functioning of state customs authorities, including the organizational aspects of their cooperation with foreign countries in the direction of preventing customs offenses, depends on the legal regulation of these issues at the level of legislation. In this context, special attention is needed to ensure customs security.

Pudrik (2016) defines customs security as a status of protection of customs interests against any threats that arise in the course of state customs affairs. In turn, implementing a state customs policy envisages the regulated by legal norms executive management activities of specially authorized entities implementing state customs policy aimed at maintaning the proper status of customs interests protection against any threats arising in the course of the implementation of state customs business.

According to Levko (2016), customs security is a set of effective economic, legal, political and other mechanisms aimed at protecting the interests of economic entities and the state in the foreign economic sphere, and in particular in the customs sphere. The author draws attention to the fact that this approach determines the place of customs security in economic security, as well as its relationship with foreign economic security. The сustoms security mechanism is aimed at to minimize the negative impact of external and internal threats by establishing effective interaction between security entities, in particular, the customs service, and to ensure compliance by all entities with legislation.

Securing the country’s customs security from the position of Crowtsky (2018) should be defined as a set of tools capable of counteracting internal and external threats and challenges in the field of customs economic relations, as well as providing the ability to achieve the necessary level of security, reliability and perseverance of the customs service by creating effective regulatory economic mechanism.

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Popivniak (2018) is of the opinion that matrimonial security should be considered as a special legal procedure for the activities of authorized entities to ensure compliance with the mandatory rules in the field of state customs business by participants of customs activity.

As a result of the investigation of the concept of customs security in the context of ensuring the national security of Ukraine Razumova (2019) concludes that customs security is a part of national security, which is characterized by a status of protection of customs interests, which is achieved through the implementation of state customs by the revenue and fees bodies. The author notes that customs security is characterized by the following features: 1) it is part of national security; 2) customs interests are a direct object of customs security; 3) security status; 4) the subject of security is the of revenue and fees bodies; 5) it is achieved through the implementation of state customs business.

The concept of customs security is contained in Art. 6 of the Customs Code of Ukraine at the legislative level, it is necessary to understand the status of protection of customs interests of Ukraine according to it. At the same time, customs interests of Ukraine are defined by the legislator as national interests of Ukraine, their security and implementation is achieved through the customs affairs (Customs Code of Ukraine, 2012).

3. Methods

The theoretical and methodological basis of the researches was formed by the general provisions of economic theory, economy and national economy management, scientific works of scientists on the issue of ensuring the economic security of the national economy.

In the process of research, there were used the following general scientific and special approaches and research methods: methods of critical analysis, scientific abstraction and generalization of scientific experience of modern theoretical researches; systematic approach (to develop conceptual provisions for ensuring economic security based on balancing the interests of the state and business); method of economic-mathematical modeling.

The information base of the research consists of legislative-statutory regulations of Ukraine, annual reports of the state fiscal service of Ukraine, the state statistics service of Ukraine, and reporting data of customs of the SFS of Ukraine.

4. Results

Big-bang transformations in the global political and economic space determine the need to develop new approaches to ensuring the economic security of the national economy in the face of a constant increase in threats both internal and external nature. These issues are particularly relevant for the Ukrainian economic system under constant pressure of negative factors, which requires the development and application of effective mechanisms, aimed at neutralizing, minimizing the influence and eliminating phenomena and factors that lead to the creation of external and internal threats to economic security.

It is quite difficult to ensure the effective functioning of the national economy and the economic growth without developing conceptual provisions and effective mechanism of state management in the system of economic relations of the state, aimed at avoiding threats and minimizing the influence. Under these conditions, the issue of protecting the national interests of the state in the sphere of economic security is special. The customs system occupies a special place in the mechanism of implementation of customs policy, and the customs officials of Ukraine are a specific subject of customs relations. On the one hand, they carry out state customs affairs on behalf of the state, on the other hand - they are under the administrative influence of the state.

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According to the results of these transformations, the count of customs offices changed in 2014 due to the formation of the Energy customs (liquidated in 2018), and the termination of the Crimean and Sevastopol customs offices (Figure 1).

200 189 188 180 158 160 154 151 152 145 137 140 125 120

100 units 80 54 60 49 48 48 47 45 40 28 26 26 20

0 2005 2005 2007 2008 2009 2010 2011 2015 2017 count of customs offices count of customs posts

Figure 1. Dynamics of the customs offices count and customs posts in Ukraine

Source: confirmed by the author based on Report on the implementation of the Work Plan of the State Fiscal Service of Ukraine for 2017

These institutional reforms have resulted in a reduction in the count of customs personnel (Table 1), which is significantly smaller than the count of customs administration personnel at the border of a neighboring state.

Table 1. Information on the maximum count of customs offices

On On On On Name/year 01.01.2007 01.01.2009 01.01.2014 01.01.2017 Number of customs offices 48 54 27 26 Personnel number of customs officials 17 958 17 958 15 095 11 019 Personnel number of central apparatus officials 391 391 316 -

Source: confirmed by the author based on Report on the implementation of the Work Plan of the State Fiscal Service of Ukraine for 2017

As we can see from Table 2, the count of customs officials decreased by 36,9 % during 2014-2016. These aspects in the conditions of constant growth of threats of both external and internal nature reduce the security of Ukraine not only economic security of Ukraine, but also national.

Note that structural divisions of the State fiscal service (SFS) in 2016 provided revenues to the state budget in the amount of 518.3 billion UAH (Table 2).

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Table 2. Indicators of customs offices functioning of the SFS of Ukraine during 2015-2017

Absolute deviation Relative deviation Indicators 2015 2016 2017 2016-2015 2017-2016 2016/2015 2017/2016 Receipts (collection) of payments to the General Fund 486,9 518,3 633 31,4 114,7 106,4 122,1 of the state budget, Billion UAH, including: Receipts of tax payments 284,6 283 329,1 -1,6 46,1 99,4 116,3 Receipts of customs paymnents 202,3 235,3 303,8 33 68,5 116,3 129,1 Foreign trade turnover, billion dollars, including:: 74,6 75,2 92,8 0,6 17,6 100,8 123,4 import of goods 36,4 38,9 49,5 2,5 10,6 106,9 127,2 export of goods 38,2 36,4 43,3 -1,8 6,9 95,3 119,0 The amount of additional revenues from the 5,8 4,983 4,219 -0,817 -0,764 85,9 84,7 adjustment of customs value, billion UAH Additional budget revenues due to classification work, 219,2 229,3 236,8 101 7,5 104,6 103,3 mln, UAH Additional budget revenues from control over the classification of goods at the stage after customs 28,3 23,2 5,7 -5Д -17,5 82,0 24,6 clearance amount to mln, UAH Additional revenues from control over the correctness 81 84,3 176,5 3,3 92,2 104,1 209,4 declaring the country of good’s origin, mln, UAH

Source: confirmed by the author based on Report on the implementation of the Work Plan of the State Fiscal Service of Ukraine for 2017

Due to the implementation of effective measures aimed at achieving proper organization of customs control, effective counteraction to customs offenses, ensuring the completeness of tax administration, strengthening the control over the correctness of determining the customs value of goods, classification of goods according to the Ukrainian classification of goods of foreign economic activity (UCGFEA), the country of origin, SFS customs offices received customs payments in the amount of 303.8 billion UAH in 2017, the performance of the indicative indicator is 111.7%, separately (Report on the implementation of the Work Plan of the State Fiscal Service of Ukraine for 2017): – excise tax on excisable goods (products) imported into the customs territory of Ukraine in the amount of 40.5 billion UAH, which is 105.5% of the indicative indicator performance; – value added tax (VAT) on goods imported to the territory of Ukraine in the amount of 250.5 billion UAH, which is 113.2% of the indicative indicator performance; – import duty in the amount of 22.6 billion UAH, which is 102.7% of the indicative indicator performance; – export duty in the amount of 643.5 mln UAH, which is 140.2% of the indicative indicator performance; – single fee that is collected at checkpoints across the state border of Ukraine in the amount of 431.3 mln UAH, which is 108.9% of the indicative indicator performance; fees for customs formalities by revenue and customs authorities outside the location of these bodies or outside work hours, set for them in the amount of 69.9 mln UAH, which is 98.5% of the indicative indicator performance;

One of the most effective instruments for countering customs offenses in modern conditions is cooperation and exchange of information with the competent authorities of foreign states within the framework of mutual administrative assistance, which provides for the prevention and detection of export-import operations in violation of customs legislation. High level of efficiency in detecting illegal foreign economic operations was achieved thanks to international information exchange with the customs administrations of foreign countries (Poland, Germany, the Kingdom of the Netherlands).In particular, according to the results of cooperation with the customs administration of the Kingdom of the Netherlands, it was revealed the illegal import of goods worth 569.3 mln UAH using fraudulent schemes.

It should be noted that the SFS customs offices have the function of facilitating the protection of intellectual property rights at the customs border. During the analyzed period, 2.916 objects and 9.687 cases were registered

1499 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online in the customs register of intellectual property rights. SFS customs offices opened 14 cases of violation of customs rules on the facts of movement of goods with violation of intellectual property rights for a total amount of more than 10.5 mln UAH (Report on the implementation of the Work Plan of the State Fiscal Service of Ukraine for 2017).

Thus, according to the results of the analysis, it can be argued that the SFS customs offices of Ukraine occupy a leading place in the system of state authorities, which are charged with the task of state control over the compliance of economic operators with tax and customs legislation. The analysis of indicators of customs offices functioning of the SFS of Ukraine in the sphere of foreign economic activity (FEA) allowed to determine the place of the customs system in ensuring economic security of Ukraine.

These indicators in general for Ukraine are generalized and do not disclose the specifics of customs activity in countering customs offenses at the same time. It is necessary to analyze in more detail the results of work to identify violations of customs legislation rules on the example of the Kyiv customs office of the SFS of Ukraine, which occupies a significant share in the structure of the total volume of customs clearance of goods in Ukraine.

Note that during 2015-2017 Kyiv customs office of the SFS of Ukraine has drawn up 2.364 records on violation of customs rules for a total amount of 1249.6 mln UAH, as a result of which 1765 decisions were issued on the imposition of administrative penalties (fines) (Table 3). In particular, in 2016 2.1 mln UAH was added to the budget the collection of fines.

Table 3. Counteraction to customs offenses of the SFS of Ukraine

There have been Based on the results of consideration of Temporarily seized items drawn up records on administrative proceedings according to of offenses in the amount violation the records were made on the imposition of of mln, UAH SFS customs of customs rules administrative penalties (fines) office in the in the added to the budget Food products number of Industrial number amount amount (from the collection decisions goods in the amount including mln UAH mln UAH of fines) mln UAH mln UAH tobacco products 2015 Kyiv customs 758 63,4 606 10,4 1,4 25,6 1,0 0,1 office SFS 2016 Kyiv customs 777 497,7 630 408,9 2,0 39,3 3,0 0,1 office SFS 2017 Kyiv customs 829 688,5 529 25,8 2Д 55,6 6,3 0,3 office SFS 2015-2017 Kyiv customs 2 364 1 249,6 1 765 445,2 5,5 120,5 10,3 0,5 office SFS

Source: confirmed by the author based on Report on the implementation of the Work Plan of the State Fiscal Service of Ukraine for 2017

One of the most effective indirect methods of customs control is the interaction with the customs authorities of foreign states, namely sending requests to other state authorities, institutions and organizations, authorized bodies of foreign states to establish the authenticity of documents submitted to the customs authority (Table 4).

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Table 4. Interaction with customs authorities of foreign states of SFS of Ukraine

Number of permanent residence Year Sent requests Get answers Amount, mln UAH (permanent residence) 2015 73 (+4directly customs office) 79 2 700 2016 75 113 11 392.0. 2017 104 126 29 552.6

Source: confirmed by the author based on Report on the implementation of the Work Plan of the State Fiscal Service of Ukraine for 2017

Generally, for the period of 2015-2017, the Department for countering customs offenses prepared 256 requests to the customs authorities of foreign countries, as well as processed 318 responses, the results of which were compiled 42 records on PR in the amount of 951.6 mln UAH.

During customs clearance of goods using customs declarations on the form of a single administrative document, customs officials use an Automated system for customs clearance of goods. It is used to create a database of customs declarations and documents submitted together with them, check documents and information submitted to the revenue and customs authorities during the movement of goods, and commercial vehicles across the customs border of Ukraine, as well as to make appropriate marks in the electronic customs declaration or an electronic copy of the customs declaration submitted on paper, the fact of performing certain customs formalities. The automated customs clearance system is the part of the Unified automated information system of State fiscal service (UAIS SFS), which operates in accordance with the provision approved by the Ministry of Finance of Ukraine.

The introduction and development of such systems is associated with the effective use of such systems by the world leading customs administrations, the provisions of international conventions and customs legislation of Ukraine regarding the selectivity of customs control and the application of risk management systems.

Ensuring economic security in the sphere of FEA of Ukraine, including customs security, namely, it is indicated that the Ukrainian customs system during 2012-2017 has undergone significant organizational and structural changes, as a result of which, it was lost practice in such important areas of customs offices functioning as post- audit, customs statistics, protection of the Ukrainian market, etc. Despite a significant reduction in the number of customs officials and an unbalanced system of customs regulation, the customs offices of SFS of Ukraine provide about 45 % of payments to the General Fund of the state budget.

In order to codify the rules of EU customs legislation, a Customs Code was adopted in 1992, replacing a large number of laws, thereby increasing the level of legislation transparency. The following amendments have been made in the period since the adoption of the Code: 1. The amendments adopted in 1997 have simplified the Code to improve effectiveness of its implementation in Member States. They relate to customs debt and free zone control, as well as the simplification of formalities around the customs declaration. 2. The amendments made in 1999 mainly concerned the customs transit. They clarify and improve the rules on the transit procedure and responsibilities of those entitled to use the procedure. They also cover financial guarantees and debt recovery procedures arising from Community transit operations. 3. The 2000 Amending Act introduced measures to: introduce fraud prevention procedures; simplification and rationalization of customs rules and procedures; facilitating the use of electronically filed declarations; facilitating the use of internal processing procedures, customs-controlled processing, temporary importation and free zones; defining a new concept of “good faith” protection for those who import goods on preferential terms. 4. The 2005 amendments aimed at strengthening the security requirements for the movement of goods across international borders. Economic operators are now obliged to provide the customs authorities with the requi- sites of goods before they are imported into or exported from the EU. The new concept Authorized Economic Operator (AEO) facilitates trade (Council Regulation (EEC) No 2913/92, 1992).

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On October 9, 2013 in accordance with Regulation (EU) No 952/2013 of the European Parliament and of the Coun- cil, a new Customs Code (hereinafter referred to as the EU CC) was adopted, which entered into force on October 30, 2013, The EU’s customs territory began on May 1, 2016. In Art. 5 of the EU CC customs authorities are defined as the customs administrations of the Member States responsible for the application of customs legislation and any other authority empowered by national law to apply certain customs legislation. Art. 3 of the EU CC defined the mission of the customs authorities. According to the indicated provision, the customs authorities are primarily responsible for overseeing the EU’s international trade, thereby promoting fair and open trade, implementation of external aspects of the internal market, the common trade policy and other common EU policies related to trade and the general security of the supply chain. The customs authorities take measures aimed in particular at: (a) protection of the financial interests of the Union and its Member States; (b) protecting the EU from fraudulent and illegal trade by supporting legitimate business activities; (c) ensurng safety and security of the EU and its inhabitants and the environment, where appropriate, in close cooperation with other authorities; and (d) maintaining a proper balance between customs control and facilitation of legal trade (Regulation (EU) No 952/2013, 2013).

An independent intergovernmental body whose mission is to improve the efficiency and effectiveness of customs administrations, is The World Customs Organization (WCO), which was established in 1952 as the Cus- toms Co-operation Council (CCC). Today, WCO represents 183 customs administrations worldwide that together processes approximately 98% of world trade. As a global center of customs expertise, the WCO is the only international organization with competence in customs matters and can rightfully call itself the “voice” of the international customs community (The official website of the WCO).

In 2019 EU members approved a new Strategic Plan for the period 2019-2022 at the WCO Council sessions. It identifies nine priority areas for the implementation which should be focused by the WCO Secretariat: 1) Co- ordination of border management; 2) Security and Protection; 3) Revision of the Kyoto Convention; 4) E-commerce; 5) Harmonized System; 6) Strategy for capacity building; 7) Productiveness measurement; 8) Integrity and digital customs; 9) Data Analytics (WCO Strategic Plan for the 2019-2022, 2019).

It is important to note that within the framework of continuous efforts to strengthen customs border management, modernize customs operations and improve the institutional trading platform of Ukraine, the State Fiscal Service has undertaken a number of activities and detailed planning to achieve these goals. As part of this future planning, the WCO Strategic Planning Mission was conducted from May 21 to May 23, 2019. Representatives of the State Fiscal Service of Ukraine and one representative of the Ministry of Finance worked with WCO facilitators to develop the Strategic Plan Framework. Discussion and group work were about revising the vision, mission, values and strategic priorities to meet future needs. This review also covered risk responses, specific steps, timetables and performance indicators agreed with each of the strategic priorities (Ukraine State Fiscal Service Reviews Strategic Plan, 2019).

Within the framework of the investigated topics, we consider it appropriate to reveal the European experience of building a system of customs authorities, whose activity is aimed at ensuring the economic interests and security of the state, based on the example of Germany, UK and France.

In Germany, for example, financial issues are primarily at the constitutional level, and they are governed by the provisions of Section X of the Basic Law for the Federal Republic of Germany, 1949. The division of powers on the tax law is established by Art. 105, under which the Federation has the exclusive power to legislate on customs duties and fiscal monopolies (Basic Law for the Federal Republic of Germany, 1949).

Art. 108, which defines the issues of financial management of the Federation and lands, establishes the exclusive competence of Federal Financial Authorities in the management of customs payments, tax on the activity of financial monopolies, excise tax, which are regulated at the federal level, as well as income tax, value added

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The organizational structure of financial management is governed by the provisions of a separate legislative act - Gesetz über die Finanzverwaltung (Finanzverwaltungsgesetz - FVG) 1971. The federal tax authorities have a three-tier structure: Level 1 - Federal Ministry of Finance (as the highest authority); Level 2 - Federal Central Tax Administration and the Main Customs Administration (as higher authorities); Level 3 - Major Customs Institutions, including their departments (customs) and customs investigations departments (as Local Authorities) (Finanzverwaltungsgesetz, 1971).

Customs institutions (HZÄ) as local authorities are the basis of the Federal Customs Administration. Subordi- nate Customs and Customs Authorities are the first point of contact for citizens and economic operators on all customs matters. The organizational structure is based on the tasks that HZÄ must perform. HZÄ employees cover the following activities: 1) general management - organization, staff, paying agent, other services; 2) customs duties and excise duties - market regulation, foreign trade legislation, origin of goods and privileges, bans and restrictions, remedies, deferred payments, and control over cash and money laundering; 3) customs clearance (adjustment of customs procedures of economic importance, adjustment of simplified procedures for the release of goods for free circulation), subsequent collection and refunds, processing of goods subject to excise duty; 4) external audit and tax oversight, mobile control groups and audit groups to combat illegal employment; 5) financial control over undeclared work - employees and employers’ supervision in violation of trade and tax laws; 6) criminal cases and penalties - punishment for revealed violations of legal norms of customs and excise tax legislation, issuance of penal notices, preparation of punitive orders; 7) enforcement and penalty - taxes collection which are not paid voluntarily by the debtor (Hauptzollamt München).

The UK tax, payment and customs authority is HM Revenue & Customs (HMRC), created under the Commis- sioners for Revenue and Customs Act (CRCA) in 2005. HMRC is a ministerial department subordinated to the Parliament and under the control of the Ministry of Finance. HMRC is responsible for both tax receipts (environmental, value-added, from capital, from inheritance, from insurance payments, land, oil, etc.) and duties payment. There are only 2 “Customs” departments from 72 ones in the HMRC structure: The Customs Depart- ment and the Customs Transformation Department. The main activities are: 1) collection of proper payments, including state fees, and reduction of cases of persons evasion from their payment; 2) changes in taxes and payments for clients; 3) development and maintenance of professional and efficient organization of activities (HM Revenue & Customs).

The Direction generale des douanes et droits indirects (DGDDI) operates in France subordinated to the Ministry of Public Accounts. DGDDI performs three main tasks: 1) combating fraud; 2) support for economic activity; 3) promoting taxation. Customs is responsible for protecting the territory and citizens, national and public economic and financial interests (mobilization against drug trafficking, counterfeiting, tobacco, weapons, combating terrorism and financing criminal activity, combating environmental threats). Thanks to a deep knowledge of international flows to protect the country, DGDDI also supports the national economy and the French business. Based on the rules established for international trade, DGDDI monitors trade flows through procedures tailored to the needs of the business in three ways: speed; security; quality (L’essentiel de la douane).

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Customs promotes the protection and security of citizens by: 1) ensuring compliance with the quality / safety standards for industrial products imported from outside the EU (control of documents and products, laboratory tests); 2) fight against trade in narcotic drugs, weapons, cultural property, protected species of animals and plants; 3) monitoring the movement of toxic waste within the EU and preventing entering France strategic, radioactive, hazardous or non-standard products or counteracting marine pollution.

The customs collect in tax matters: 1) duties on imports into the European Union; 2) VAT, if it concerns products imported from third countries into the European Union; 3) excise duties, ie indirect taxes on tobacco, alcohol and petroleum products; 4) environmental taxation with General Tax on the Polluting Activities (TGAP) or internal tax on final electricity consumption (TICFE) (L’essentiel de la douane).

The organizational structure of the General Directorate for Customs and Indirect Taxes is as follows: 1) general management located in Montreuil; 2) decentralized services in mainland France and abroad: 12 interregional departments with territorial jurisdic- tion over administrative regions and 42 regional offices (each interregional department includes 3 or 4 territorial offices or coastguards); 3) specialized bodies: - Directorate-General of Customs and Indirect Taxes (DNRED), responsible for the fight against major fraud and against criminal organizations; - Judicial Finance Investigation Service (SEJF) specializing in tax crime repression - DGDDI / DGFiP Joint Service; - National Customs Coast Guard (DNGCD), which implements the strategic guidelines established by the Customs in the maritime and air sectors; - Joint Laboratory Service of DGDDI / DGCCRF (SCL); - Analysis and Risk Orientation Service (SARC); - National Directorate for Recruitment and Vocational Training (DNRFP); - National Directorate of Foreign Trade Statistics (DNSCE); - Customs and Computing center (CID); - National Customs Museum in Bordeaux (MND) (Organization de la direction générale des douanes et droits indirects).

The Customs Code of Ukraine 2012 (hereinafter referred to as the CC of Ukraine) is the main codified normative legal act, which defines the principles of organization and implementation of customs affairs in Ukraine. The provisions of CC of Ukraine are intended to provide protection of economic interests of the state, creation of favorable conditions for the development of its economy, protection of the rights and interests of business entities and citizens, as well as ensuring compliance with Ukrainian customs legislation.

According to paragraph 34-1 of Part 1 of Art. 4 of CC of Ukraine Customs Authorities is the central body of executive power that implements state customs policy, customs and customs posts. The organizational structure, legal status and peculiarities of the activity of customs authorities are specified in section XX of the Customs Code of Ukraine. Customs authorities are directly responsible for the implementation of the customs affairs. The legislator defines the main tasks performed by the customs authorities in the course of customs affairs. Among them: 1) ensuring the correct application, strict compliance and prevention of non-compliance with the requirements of the customs legislation of Ukraine;

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2) ensuring fulfillment of the obligations stipulated by the international agreements of Ukraine on customs affairs concluded in accordance with the law; 3) creation of favorable conditions for facilitating trade, transit, increasing trade and passenger traffic across the customs border of Ukraine, taking measures together with the customs authorities of other countries to improve the procedure for the passage of goods, vehicles through the customs border of Ukraine, their customs control and customs clearance; 4) risk analysis and management to determine the forms and scope of customs control; 6) ensuring the customs payments, control of the calculation correctness, timeliness and completeness of their payment, application of measures for their enforcement; 7) application of the measures of customs-tariff and non-tariff regulation of foreign economic activity envis- aged by law, control over the compliance with all established by law prohibitions and restrictions on the movement of certain types of goods across the customs border of Ukraine by all subjects of foreign economic activity and citizens; 8) perfoming control over compliance with rules for the movement of currency values across the customs border of Ukraine; 9) promoting the protection of intellectual property rights; 10) prevention and counteraction to smuggling, fight against violations of customs rules throughout the customs territory of Ukraine; 11) control over the activity of enterprises providing services on goods declaration, transportation and storage of goods moving across the customs border of Ukraine or under customs control; 12) conducting the Ukrainian classification of goods of foreign economic activity; 13) maintenance of customs statistics accounting and exchange of customs statistics with customs authorities of other countries; 14) verification (authentication) of certificates of origin of goods from Ukraine and issuance of certificates of origin in cases established by current international treaties; 15) exchange of documents and information (including electronic) with other state bodies of Ukraine, customs, law enforcement and other bodies of foreign states; 16) introduction, development and technical support of information, telecommunication and information-telecommunication systems and technologies in the customs affairs, automation of customs procedures; 17) implementation of international cooperation in the field of customs affairs, attraction of external resources to support the activities of customs authorities; 18) dog training of the customs authorities activity; 19) management of the objects of the customs authorities’ infrastructure, construction of the customs border; 20) executing other statutory powers conferred on the customs authorities (Customs Code of Ukraine, 2012).

The central executive body, which implements the state customs policy, directs, coordinates and controls the activities of customs, performs other powers stipulated by the CC of Ukraine and other laws of Ukraine, within its powers it issues orders, organizes and controls their implementation (Customs Code of Ukraine, 2012). Such a body is the State Customs Service of Ukraine.

The legal status of the State Customs Service of Ukraine is separately regulated by the Regulation approved by the Cabinet of Ministers of Ukraine (Resolution of March 6, 2019). The activities of it are directed and coordinated by the Cabinet of Ministers of Ukraine through the Minister of Finance. The chairman heads the State Customs Service, who manager its activities, represents in relations with other bodies, enterprises, institutions and organizations in Ukraine and abroad. The approval of the maximum number of civil servants and employees is within the competence of the Cabinet of Ministers of Ukraine. In its turn, approvement the structures of the State Customs Service’s apparatus are authorized by its Chairman, but it is obligatory in agreement with the Minister of Finance (Regulations on the State Customs Service of Ukraine, 2019).

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The territorial bodies of the State Customs Service include customs and specialized bodies. Customs is a customs body which ensures the fulfillment of the tasks assigned to the customs authorities within the area of its activity. Customs is a territorial body of the central body of the executive power, which implements the state customs policy, has a separate balance, accounts in the bodies that carry out treasury services of budgetary funds, stamp and stationery with the state emblem of Ukraine and with its denomination. Managers of customs are appointed to positions and dismissed from them by the head of the Central Body of Executive Power, realizing the state customs policy, in accordance with the legislation on civil service. Customs operates their activity on the territory of one, two or more administrative-territorial units of Ukraine. Areas of customs are determined by provisions on these customs. Creation, reorganization and liquidation of customs shall be carried out in the manner prescribed by law (Customs Code of Ukraine, 2012).

The customs post is a customs body which is a part of the customs as a structural unit and ensures the fulfillment of the tasks assigned to the customs authorities in the area of its activity. Zones of customs posts are determined by Regulations on these posts. Regulations on customs posts are approved by the leaders of the respective customs in agreement with the Central executive body, implementing the state customs policy. Creation, reorganization and liquidation of customs posts is carried out by the Central executive authority, implementing the state customs policy, in the manner prescribed by law. Leaders of customs posts are assigned to positions and are exempt from them by the head of the Central executive authority, realizing the state customs policy, in the manner prescribed by the legislation (Customs Code of Ukraine, 2012).

The current Ukrainian legislation establishes that the implementation of the State policy in the field of State customs, in the sphere of combating offences in the application of tax, customs legislation, and legislation on the payment of a single contribution of the State Fiscal Service of Ukraine (SFS). The legal status of the SFS is determined by the regulations on the State Fiscal Service of Ukraine approved by the Cabinet of Ministers of May 21, 2014, No 236. The competence of the SFS Chairman includes appointment and dismissal of heads of customs posts (Resolution of the Cabinet of Ministers of Ukraine no No 236, 2014).

Therefore, the current legislation stipulates that customs posts are territorial bodies of the State Fiscal Service in the respective regions of Ukraine. Creation, reorganization and liquidation of customs posts is carried out by the SFS, and appointment and dismissal of heads of customs posts is made by the chairman of the SFS.

It is important to emphasize that the process of establishing the State Customs Service in Ukraine was completed by 2020, which was marked by the adoption of the Regulation on the State Customs Service of Ukraine. Thus, the Cabinet of Ministers transferred the functions of customs policy implementation to the newly created State Customs Service in December 2019. The official launch of the “New Customs” was held on December 8, 2019, at the same time appropriate authorities of the SFS were transferred to the State Customs Service (New Customs).

The employees of the customs authorities, which are responsible for the organizational, legal, personnel, financial, logistical support of the activities of these bodies, are officials. Customs officials are civil servants. Customs authorities are employed by Ukrainian citizens who are 18 years old and able by their business and moral qualities, educational level and health status to perform the tasks assigned to these bodies. Tests may be established with admission to the service in accordance with the Law of Ukraine «On Civil Service». The legislator has also set some restrictions that make it impossible for a person to be employed by the customs authorities. In particular, these persons are: 1) recognized as incapacitated; 2) persons having a criminal record for a premeditated crime; 3) persons who, during the year preceding their application to the customs authority for employment, were held administratively responsible for committing corruption and other corruption-related offenses.

The system of professional education in the field of customs affairs includes: 1) training of specialists with higher education; 2) retraining of customs officers; 3) training of scientific and scientific-pedagogical personnel;

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4) improving the qualification of customs officers; 5) organization of training of employees of customs bodies without break from work.

Training, retraining and advanced training of customs officers is carried out in specialized educational institutions of the customs authorities and in a specialized body for specialized training and cynological support of the central body of executive power, which implements the state customs policy. Training of higher education specialists for customs authorities in particular areas can also be carried out at higher educational institutons of other sectoral subordination under the state order (Customs Code of Ukraine, 2012).

It is important to note that the CC of Ukraine contains a separate rule, which defines the peculiarities of cooperation of customs authorities of Ukraine with customs authorities of neighboring countries. In accordance with international treaties concluded according to the law, the customs authorities of Ukraine together with the customs authorities of the neighboring states may: 1) conduct joint customs control at the border crossing points of Ukraine; 2) harmonization in the procedure established by the law of time of customs control at border crossing points of Ukraine, procedures of customs control, customs clearance and mutual recognition of documents used by customs authorities to complete customs formalities; 3) carrying out joint actions aimed at preventing, detecting and stopping smuggling and violation of customs rules; 4) carrying out joint actions in accordance with the procedure established by law aimed at preventing, detecting and terminating offenses in the sphere of official activity of employees of the customs authorities of Ukraine and customs services of neighboring states; 5) carrying out other joint one-off or permanent measures on issues that, in accordance with the СC of Ukraine and other acts of the legislation of Ukraine, belong to the powers of the customs authorities; 6) exchange of information, including using information technologies and systems (Customs Code of Ukraine, 2012).

Among the recent events, it is important to note that a Single state information web portal “Single Window for International Trade” was created in March 2020 in order to allow the population accessing information on the activities of the State Customs Service of Ukraine. Individuals can use the following options on this portal: 1) view news; 2) to find information about customs statistics, queues at customs points, importation of a car, integrated customs tariff, classification of goods, data on invoices for payment of customs duties, etc.; 3) to check the customs declaration; 4) to file a complaint about the work of customs, etc. (The only state information web portal “A Single Window for International Trade”).

5. Discussion

The long process of establishing the State Customs Service in Ukraine was completed by 2020, which was marked by the adoption of the Regulation on the State Customs Service of Ukraine. Thus, the Cabinet of Min- isters transferred the functions of customs policy implementation to the newly created State Customs Service in December 2019. The official launch of the “New Customs” was held on December 8, 2019, at the same time appropriate authorities of the SFS were transferred to the State Customs Service (New Customs).

Part 5, Art. 547 of the CC of Ukraine notes that leaders of customs posts are assigned to positions and are exempt from them by the head of the Central executive authority, realizing the state customs policy, in the manner prescribed by the legislation (Customs Code of Ukraine, 2012). The central executive body implementing state customs policy today is designated the State Customs Service of Ukraine. Thus, the heads of customs posts should be appointed by the Head of the State Customs Service of Ukraine. At the same time, the Regulation on the State

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Fiscal Service of Ukraine is in force, according to subitem 18 of item 11 appointment and dismissal of heads of customs posts are within the competence of the head of the State Fiscal Service. Therefore, there is a discrepancy between the rules of the Regulations on the State Customs Service and the State Fiscal Service of Ukraine on the appointment of heads of customs posts, which needs to be resolved at the legislative level by eliminating the norm about appointment of heads of customs posts from the text of the Regulation on State Fiscal Service.

Conclusions

In the framework of the concept formed the theoretical and methodological aspects of economic security, systematized categorical-conceptual apparatus, developed principles, developed appropriate instrument and mechanism of balancing the interests of the state and business in the system of ensuring economic security in the sphere of FEA.

In the context of the research of the effectiveness of the economic security system in the sphere of SFS of Ukraine the author concludes that the results of organizational and structural changes in the tax-customs system of Ukraine during 2012-2018 resulted in a decrease in the effectiveness of the customs regulation system (lost practice in such important areas of customs offices functioning as post-audit, customs statistics, protection of the Ukrainian market) as well as an imbalance in the system of providing of simplification to SFS entities with security measures. It is summarized the modern instruments of the SFS customs offices aimed at identifying and preventing external threats to the economic security of the state.

In order to codify the rules of EU customs legislation, a Customs Code was adopted in 1992, replacing a large number of laws, thereby increasing the level of transparency of legislation. On October 9, 2013, a new Customs Code was adopted, defining in particular the concept of customs authorities and their mission. An independent intergovernmental body whose mission is to improve the efficiency and effectiveness of customs administrations, is the World Customs Organization (WCO), which was established in 1952 as the Customs Co-operation Council (CCC). Today, WCO represents 183 customs administrations worldwide that together processes approximately 98% of world trade. As a global center of customs expertise, the WCO is the only international organization with competence in customs matters and can rightfully call itself the “voice” of the international customs community.

Within the framework of the investigated topics, the European experience of building a system of customs authorities, whose activity is aimed at ensuring the economic interests and security of the state, was considered, on the example of Germany, UK and France. Customs institutions in Germany (HZÄ), including their departments and departments of customs investigation are engaged in the three-tier structure of the Federal tax authorities, where they occupy the third (lower) level. In the United Kingdom, HM Revenue & Customs (HMRC) is the only public tax, payment and customs service which is sumultaniously responsible for both tax and customs duties. But there are only 2 “Customs” departments from 72 ones in the HMRC structure: The Customs Department and the Customs Transformation Department. Direction generale des douanes et droits indirects (DGDDI) operates in France in three main tasks: 1) fight against fraud; 2) support for economic activity; 3) promoting taxation. Customs is responsible for protecting the territory and citizens, national and public economic and financial interests.

The Customs Code of Ukraine 2012 (hereinafter referred to as the CC of Ukraine) is the main codified normative legal act, which defines the principles of organization and implementation of customs affairs in Ukraine. According to the CC of Ukraine Customs Authorities are the central body of executive power that implements state customs policy, customs and customs posts. The organizational structure, legal status and peculiarities of the activity of customs authorities are specified in section XX of the Customs Code of Ukraine. The central executive body implementing the state customs policy is the State Customs Service of Ukraine, whose legal status is separately regulated by the relevant Regulation. The territorial bodies of the State Customs Service include customs and specialized bodies. Customs is a customs body which ensures the fulfillment of the tasks assigned to the customs authorities within the area of its activity. Customs is a territorial body of the State

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Customs Service. The customs post is a customs body which is a part of the customs as a structural unit and ensures the fulfillment of the tasks assigned to the customs authorities in the area of its activity. Among the recent events, it is important to note that a Single state information web portal “Single Window for International Trade” was created in March 2020 in order to allow the population accessing information on the activities of the State Customs Service of Ukraine.

Promising direction for improving customs regulation in Ukraine is the development of a mechanism for balancing interests in the system of ensuring economic security in the field of SFS, which should be understood as a consistent set of appropriate organizational procedures, organizational-economic and legal measures, economic instruments to ensure economic security in the sphere of SFS on the bases of balancing the interests of the state and business. This mechanism is based on an approach according to which economic entities will be able to receive appropriate simplifications in exchange for openness and transparency of the SFS, that is: the higher the confidence degree, the less the intervention level of customs authorities in the process of foreign economic operations performance.

References

Basic Law for the Federal Republic of Germany (1949). As amended up to Act of March 28, 2019. URL: https://www.gesetze-im-internet. de/englisch_gg/englisch_gg.html#p0598

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Finanzverwaltungsgesetz – FVG (1971). As amended up to Act of December 21, 2019. URL: http://www.gesetze-im-internet.de/ fvg_1971/BJNR014270971.html

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Popivniak, O.I. (2018). On the definition of customs security in theory and legislation. Visnyk NTUU «KPI», 1(37), 87-91. https://doi. org/10.20535/2308-5053.2018.1(37).152864

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Šincāns, E., Ignatjeva, S., Tvaronavičienė, M. (2016), Issues of Latvian Energy Supply Security: Evaluation of Criminal Offences in Latvia’s Electricity Market, Economics and Sociology, 9(4), 11-25. http://dx.doi.org/10.14254/2071-789X.2016/9-4/1

The official website of the World Customs Organization (WCO). URL:http://www.wcoomd.org/

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Tvaronavičienė, M. (2018). Preconditions of sustainable entrepreneurship: estimating of Brexit scenarios’ impact on macroeconomic environment. Polish Journal of Management Studies, 17(2), 222-234 https://doi.org/10.17512/pjms.2018.17.2.19

Ukraine State Fiscal Service reviews Strategic Plan to prepare for changes and implementation of the WTO Trade Facilitation Agreement (2019). The official website of the WCO. URL: http://www.wcoomd.org/en/media/newsroom/2019/may/ukraine-state-fiscal-service- reviews-strategic-plan.aspx

WCO Strategic Plan for the 2019-2022 (2019). URL: http://www.wcoomd.org/-/media/wco/public/global/pdf/about-us/administrative- documents/wco-strategic-plan-2019-2022.pdf?db=web

Dmytro ZHURAVLOV ORCID ID: orcid.org/0000-0002-2045-9631

Ivan LYTVYN ORCID ID: orcid.org/0000-0002-4180-7500

Oleksandr ILCHENKO. PhD in Law, Head of the Department of the Special Unit for Combating Corruption and Organized Crime of the Security Service of Ukraine in Lviv Region. ORCID ID: orcid.org/0000-0003-4885-2205

Ivan YAROMII ORCID ID: orcid.org/0000-0002-3801-3742

Yuliia LEPEKH ORCID ID: orcid.org/0000-0003-4530-4924

This work is licensed under the Creative Commons Attribution International License (CC BY). http://creativecommons.org/licenses/by/4.0/

1510 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online 2020 June Volume 9 Number 4 https://doi.org/10.9770/jssi.2020.9.3(32)

DIAGNOSTICS OF CORPORATE FRAUD AND COUNTERACTION MEASURES

Miguel Аngel Poquioma Tulumba1, Liudmila Kashirskaya2, Malvina Karabasheva3, Liudmila Khoruzhy4, Ekaterina Marmilova5, Elena Perepechkina6

1CIBERTEC Institute, Av. Carlos Izaguirre 233, Independencia 15311, Lima, Peru 2, 3Financial University under the Government of the Russian Federation, Moscow, Russian Federation, Leningradsky Prospekt, 49, 125993, Moscow, Russian Federation 4Russian State Agrarian University - Moscow Timiryazev Agricultural Academy, Timiryazevskaya street, 49, 127550, Moscow, Russian Federation 5Actuaria & Finanzas Consulting, Mexico City, Mexico, Col. Napoles, Alcaldia Benito Juarez, Av. Del Parque 42, 03810Mexico City, Mexico 6 Astrakhan State University, Tatischeva, 20A, 414056, Astrakhan, Russian Federation

E-mails: *[email protected] (Corresponding author)

Received 16 November 2019; accepted 15 April 2020; published 30 June 2020

Abstract. The article is devoted to the problems of identifying, improving areas of prevention and combating corporate fraud. The article explores the dynamics of corporate fraud, and analyzes their classification. The article provides an analysis of the stages of development of international legal regulation of the specified subject area, which allowed to determine the composition and structure of information subject of economic control. In addition, the main methods of corporate fraud are identified. The research methodology was based on the main regulatory legal framework controlling the specified subject area. Based on the results of the study, a refined procedure for detecting fraud and distortion was developed and a model for detecting fraud was developed. A study conducted by the authors revealed that only the regulator and then the law enforcement agencies can give an unambiguous interpretation of actions on fraud and falsification of data in the financial statements of financial sector organizations. But at the same time, the presence of “stop factors” in the organization’s work, signaling signs of fraud and falsification of data in the financial statements, allows to quickly pause the production and business activities of investors and counterparties with this financial institution and avoid larger losses. It is concluded that in the current system of economic control, a number of areas that need significant changes are clearly distinguished.

Keywords: control; economic crime; corporate fraud; red flags; financial investigations; fraud triangle; forensic

Reference to this article should be made as follows: Kashirskaya L., Poquioma Tulumba Miguel Аngel, Karabasheva M., Khoruzhy L., 2020. Diagnostics of corporate fraud and counteraction measures. Journal of Security and Sustainability Issues, 9(3), 1511-1522. https://doi.org/10.9770/jssi.2020.9.3(32)

JEL Classifications: M 41, М 42, G22.

Additional disciplines economic.

1. Introduction

Analysis of the dynamics of economic crime in Russia shows its significant changes. Crimes are being modified and improved simultaneously with the arising of new technologies and ways to protect them, as a result of which their growth is ahead of their prevention, and the damage they cause is estimated at billions of rubles. Thus, analyzing economic crimes in Russia, it can be noted that in 2019, compared with 2018, the number of crimes in the field of corporate fraud is increasing (table 1, Fig 1). JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online

Table 1.The dynamics of corporate fraud in Russia for 2018-2019

Indicators 2018 1 2019 2 Growth rate, % Registered cases 215036 257187 119,6 Pre-investigated cases 57418 64378 112,1 Unsolved cases 145686 175070 120,2

Source: 1. The state of crime in Russia for January-December 2018 (according to the data of the Ministry of Internal Affairs of the Russian Federation) URL:https://liteks.pro/images/stat/crime_rf_12_2018.pdf 2. The state of crime in Russia for January-December 2019 (according to the data of the General Prosecutor’s Office of the Russian Federation) URL:https://genproc.gov.ru/

Figure 1. Diagrams of the ratio of the number of registered and solved corporate fraud cases

Source: authors’ research

Thus, the number of detected frauds increases in 2019 compared to 2018 by almost 20%, of which the number of unsolved crimes increases with the same progression. According to experts, most of the cases of fraud are connected with the use of electronic means of payment, their number increased by almost 8 times compared to the same period in 2018 (Dergachev, 2019).

The given analysis reveals only those economic crimes that “go beyond the frames” of the organizations and become the subject of inspections of the above mentioned authorities. In accordance with Article 159 of the Criminal Code of the Russian Federation (Criminal Code of the Russian Federation), fraud is defined as “the theft of another’s property or the acquisition of the right to another’s property by fraud or breach of trust.” Many of the actions that inherently relate to corporate fraud are defined in other articles of the Criminal Code (for example, commercial bribery or abuse of authority) or not defined at all (for example, distortions in the financial statements referred to in article 15.11 of the Administrative Code offenses of the Russian Federation) (Code of Administrative Offenses / Administrative Code of the Russian Federation, 2011).

Therefore, in this article we will rely on the definition given in international auditing standards (ISA). In accordance with ISA 240, “Auditor’s Responsibilities Conscientious in Conducting an Audit of Financial Statements,” “the intentional action of one or more persons among management, management personnel, employees, or third parties involving the use of fraud to obtain unlawful or illegal gain” refers to corporate fraud Such interpretation is broader and more applicable than the interpretation given in the Criminal Code of the Russian Federation.

The phenomenon of corporate fraud and corruption in business within corporations was first brought to the attention by the American sociologist Edwin Harding Sutherland in 1939, calling the phenomenon “white-collar crime”. By this phenomenon, Sutherland meant “business-related crimes committed by respectable and high- ranking individuals of society.” Among the main features, the presence of a high intellectual component of

1512 JOURNAL OF SECURITY AND SUSTAINABILITY ISSUES ISSN 2029-7017 print/ISSN 2029-7025 online crimes was highlighted (Shengelia, 2017).

2. Methodology

Specialists in conducting financial investigations, the heads of enterprises, government entities and the regulator, as well as the media are interested in reliable information about the annual losses of the economy and business from cases of fraud. There are numerous methods for calculating the total amount of damage caused by unlawful actions of criminal persons. Firstly, it is practically not possible to accurately determine the number of undetect- ed and undisclosed cases of corporate fraud. Secondly, statistics based on disclosed cases of fraudulent activities are underestimated, since often the affected parties (employers, organizations) do not disclose the actual amount of damage caused to them. Nevertheless, attempts to determine the damage from fraud are important, as awareness of the severity of the problem increases awareness of the impact of fraud, decision-making by managers in investing in internal controls and risk analysis procedures (ACFE: “Report to the nations 2016”, 2016).

There are three main categories of corporate fraud: misappropriation of assets, corruption, and falsification of financial report. Each of these categories is divided into several subcategories (Figure 2-4).

Overstatement of Cash theft transaction amounts

Theft of cash Cash theft receipts

Cash In billing and payment

In payroll

Illegal payment Overstatement of Asset transactions accountable costs misappropriation

Check fraud

In accounting Misuse for refunds Assets and stocks Theft during the purchase Misappropriation and transportation

Figure 2. Fraud tree “Asset misappropriation”

Source: made up by the author according to (ACFE: “Report to the nations 2016”, 2016)

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Each of these categories has unique characteristics that distinguish it from other categories. This is important because comprehensive knowledge of the categories and their specific characteristics is a key point for the successful development of programs aimed at preventing and detecting fraud.

Procurement Conflict Sales fraud of interests Fraud

Illegal Gifts

Corruption

Extortion

Bribary Trading Fraud Kickbacks

Figure 3. Fraud tree “Corruption”

Source: made up by the author according to (ACFE: “Report to the nations 2016”, 2016)

Falsification of financial report

Overvaluation of assets / profits Asset / Profit Undervaluation

Temporary display of costs / Temporary display of costs / profits in another reporting period profits in another reporting period

False overestimation of profit Understatement of profit

Concealment of liabilities and expenses Overstatement of liabilities and expenses

Asset misstatement Asset misstatement

Inappropriate information Inappropriate information

Figure 4. Fraud tree “Falsification of financial report”

Source: made up by the author according to (ACFE: “Report to the nations 2016”, 2016)

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Let us define the main methods of corporate fraud (Figure 5):

Corporate Fraud Methods

Information leak

Cybercrimes

Commercial bribery

Use of property for one’s own interests

Asset theft

Simultaneous business

Illegal use of IT

Indicator distortion

Reporting fraud

Distortion of primary accounting documents

Figure 5. The main methods of corporate fraud

Source: authors’ research

The most common way today is “commercial bribery.” This is due to a number of circumstances, namely: it is easily applicable and used in any industry and regardless of the form of ownership; it is difficult to identify and prove the fact of the commission of this action; considered the established “business rule” (Hilkevics and Semakina, 2019).

Most cases of internal corporate fraud are associated with misrepresentation of information, including in primary documents and financial report.

Thus, fraud in falsification of financial report can be divided into five types (table 2). Fraud that does not fall into one of five types and can be committed for purposes other than financial gain is simply marked as different fraud.

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Table 2. Classification of types of fraud in falsification of financial record

Types of Fraud Victim Intruder Explanation Employee waste Employees directly or indirectly steal from or professional Employers Employees their employers, so they resort to falsification fraud of financial statements to hide traces of a crime Shareholders, lenders Top management provides misleading company Management and others who rely on Senior management stakeholders, as a rule, in financial information, which Fraud financial statements serves to form a positive picture of the company Falsification of financial statements is done to trick Investment fraud Investors Employees investors into investing in fraudulent investments Employees who sell financial Organization who buy services or senior manage- Company financial The company refuses to provide services, financial services comment of a financial company services fraud even if payment is made pany that is interested in increasing turnover Clients (as a rule, these are also financial companies, Organizations that sell for example, insurance, investment companies) are Customer fraud services to financial Clients of financial companies deceiving with their financial statements, creating a companies false impression of the cost of services and forcing to pay a higher price

Source: authors’ research

As indicated in the table, financial reporting fraud is intentional fraud committed in the management system, which damages the investor and creditor by providing substantially inaccurate financial record (Sarno et al., 2020;

Schyff et al., 2020; Zhang et al., 2020). Fraud in financial record is, on the contrary, a deliberate act committed with the participation of employees of the financial company management system, which causes material damage to investors and creditors through the adoption of incorrect decisions under the influence of misleading financial record. Except investors and lenders, external auditors are among the victims of fraud in financial record. They may suffer financially, incurring financial losses (for example, loss of position in the ranking, fines, etc.) and / or have a loss of reputation (Frolova et al., 2019; Gerasimov et al., 2018).

Falsification of financial record can be committed by absolutely any employee at any level who has the ability to manipulate documents on the basis of which the financial statements of the company are built. There are two main groups, arranged in order of probability of participation in falsification schemes of financial record: – Top management (chief executive officer, chief financial officer, etc.). – Employees of middle and lower levels of management. These employees are responsible for subsidiaries, divisions, or other units, and they may commit financial reporting fraud to conceal their poor performance or earn bonuses based on higher performance.

In general, it should be noted that fraud, like other crimes, can best be explained by three factors: criminal motivation, the availability of suitable facilities and the lack of competent control.

Therefore, as a rule, fraud includes three characteristics that are known as the “fraud triangle” by D. Cressy; it represents an important understanding of motivation for committing illegal actions. This “triangle” is often used in criminal science and is a diagram that reflects the main components (factors) that create the conditions for internal corporate fraud (Figure 6).

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Impetus / Motive Pressure

Fraud in Fraud falsification triangle of financial report Favorable Opportunity Fraud Justification opportunities to commit Attitude

Figure 6. The “Fraud tringle” by Donald Cressy1 and the falsification of financial report2

Source: 1. Albrecht C., Albrecht C., Dolan S. & Malagueno R. Financial statement fraud: Learn from the mistakes of the U.S. or follow in the footsteps of its errors// Corporate Finance Review – 2008. - January/February – P. 5-13. 2. Made up by the author on the basis

Accounting data allows to find traces and signs of a crime based on an analysis of violations of the links between economic indicators (Timchenko, 2013). However, since there are fewer quantitative economic indicators than records on accounting accounts, it is advisable to start the detection of signs and traces of crime in accounting information precisely from the analysis of economic indicators (Korableva et al., 2018). This will allow you to search for signs and traces of a crime in accounting documents and records more purposefully and with less time.

In the scientific and professional literature, there are many variations of the definition of the term “financial investigations (Forensic)”. From the point of view of the professor of the department of accounting, analysis and audit of Lomonosov Moscow State University, Suits V.P., forensic is a set of independent initiative services provided by audit, consulting and specialized companies for owners, the board of directors of companies of various legal forms (Suits et al., 2015). However, this definition assumes that forensic is a service provided from outside that does not take into account the possibility of internal financial investigations.

According to the approach of the consulting company “Korpus Prava”, a financial investigation is a thorough examination, a detailed analysis of the financial and economic activities of the organization, aimed at a comprehensive study of circumstances in order to identify unlawful or malicious actions of employees or third parties connected with an infringement on the financial resources of the organization (International Law Firm “Korpus Prava”, 2015). The above given definition also does not fully reflect the essence of forensics, since it does not include the fact of conducting behavioral factors of employees, the use of information technologies.

The well-known forensic specialist George A. Manning, in the annotation to the publication of his book “Finan- cial Investigations and Judicial Records”, notes that “Financial investigations and judicial records, revealing the mechanisms for committing financial crimes and the methods used to identify and investigate them, are an interdisciplinary concept, combining accounting, financial analysis and law enforcement” (Manning GA).

It should be noted that the content endowed by the experts of this sphere in the USA with the concept of “financial crimes” has more expanded semantic character in comparison with the usual in Russia. This includes not only crimes that occur in the financial sphere, but also crimes that use the financial sphere. So, in the practice of the Internal Revenue Service (IRS), a financial crime is the financial component of the drug business (Narcotics

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Related Financial Crimes). At the same time, the director of the United States Financial Crimes Enforcement Network (FinCEN), William Fox, believes that the primary task of the financial analysts of the Network is to assist law enforcement agencies in identifying the financial component of “dirty” money (Lebedev and Efimov, 2008). Consequently, in Western countries, especially in the USA, the financial component of criminal activity is included in the subject of forensics as a specialized economic analysis.

Forensic in the CIS specializes exclusively in fraud issues. Corporate fraud, investigations, and asset recovery practices exist in many other law firms. The peculiarity is as follows: if a professional law firm employs accountants, engineers and other specialists to provide non-legal, but closely related services, this is forensic. If there are no such specialists in the law firm, we are talking about legal services in the field of combating fraud. Some projects that require forensic skills can be difficult to separate into legal and financial components, which is why good forensics are often universal specialists who are fluent in both legal and financial matters (Tleubaeva, 2015).

From our point of view, financial investigations (Forensic) are an independent financial investigation conducted both within the company and outside it, including various methods of processing information, including analysis of the company’s financial indicators and accounting data, identifying red flags (behavioral indicators), using IT auditing, conducting interviews with targeted individuals and others, in order to identify facts and factors of abuse, reduce risks and ensure economic security of the company.

In general, it should be noted that fraud, like other crimes, can best be explained by three factors: criminal motivation, the availability of suitable facilities and the lack of competent control.

3. Results

The previously mentioned signs of the commission of economic crimes in accounting information are only information that may accept a status of evidence, or may not be accept it (Timchenko, 2013). This circumstance depends on the processing of this source of information by a special person (group of persons) with the use of special knowledge in the field of economics, accounting, forensics and more. This processing is advisable to carry out in stages.

Firstly, a comprehensive analysis of the production, economic and financial activities of the company should be carried out in dynamics over a number of reporting periods, broken down into quarters. Based on the results of this analysis, it will be possible to identify objects and business transactions of particular interest in terms of their negative impact on the company’s performance. The following is the identification of factors that have had the most significant impact on the deterioration of the most important performance indicators of the company. Among them, it is necessary to highlight those that could appear due to illegal actions. The use of red flags and fraud detection in financial reporting has also been widely developed in scientific literature and practice.

Red flags are defined as conditions or circumstances that indicate potential fraud in the financial statements. They can also be defined as a set of circumstances that are unusual in nature or deviate from ordinary activities. The use of red flags is also supported by audit standards in assessing the risks of fraud (ISA 240 and ISA 315). The use of red flags in the detection of fraud in financial statements is also supported in the scientific literature (Arzhenovsky, 2016). Red flags are only indicators of possible fraud, but they do not automatically mean that fraud in a financial company is really happening, and red flags are too difficult to operationalize in empirical research. “The red flag” method is not considered to be effective because it focuses on specific features, which, in turn, encourage internal and external auditors to identify other causes that cause financial reporting fraud. The red flags are designed to assess the overall risk of fraud without assessing the possible schemes used by financial management to commit and conceal fraud. Actually, red flags are nothing more than a set of circumstances that are unusual in nature or signal a deviation from normal activities and require increased suspicion and attentiveness of the auditor. If the symptoms of fraud are often observed, then the presence of such problems is not necessarily an indicator of fraud, and the investigation of such anomalies usually leads to the conclusion that fraud was not the main cause. Due to the attempt by criminals to hide their actions, red flags can be relatively small in frequency and small in number, at least in the early stages of financial reporting fraud.

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Secondly, an analysis is made of the conditions conducive to illegal actions. It should be borne in mind that the cause of economic crime is getting the material benefits, i.e. self-interest as a motive for committing a crime (Suits et al., 2015).

Thirdly, it is necessary to establish the circle of company employees who, in connection with their official rights, could use their position to commit a crime.

Fourth, a study is being made of the personal factors of established individuals on the basis of the “fraud triangle”, their lifestyle. With the help of the information received, the circle of persons possibly involved in the commission of unlawful acts is narrowed to the persons most involved.

The final stage is the analysis of accounting information (given earlier, as well as using a number of methods), to which the persons most involved in the commission of illegal actions could have access or influence.

4. Discussion

Based on the studied approaches and methods for detecting fraud and falsification of financial organizations’ accounts, a refined procedure for detecting fraud and distortion was developed and a model for detecting fraud was developed (figure 7).

Start of diagnosis

Formation of a statistical Formation of the diagnostic information base (information about a financial diagnostic base (financial record company, its management and shareholders, litigation with its participation for a number of years) and participation of management, publications in the media, etc.)

Verification of financial record by statistical methods

Bankruptcy Using a logistic Check for ratings, Comparison of financial indicators of Probability model to detect credit histories, individual financial organizations with Analysis signs of fraud and sudden changes indicators of a similar group and study of trends

Diagnostics using the “red flags”

Checking the presence of “red Checking the presence Assessing the adequacy of the flags” in the activities of “red flags” in the assets organizational management system of of the management and liabilities of a a financial organization to the volume of a financial company financial company and type of operations performed

Diagnostics of illegal and “shady” financial schemes

Analysis of disputes, information of Federal Service Analysis of the dynamics and quality Counterparty for Financial Monitoring informants, indicating of overdue loans, the presence Status suspicion of illegal and “shady” financial schemes of affiliates among borrowers Monitoring

Conclusions on the risk of fraud and falsification of financial statements of a financial institution

Figure 7. Model for the diagnosis of fraud and falsification of data in the financial record of a financial company

Source: authors’ research

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Thus, let us offer measures to combat corporate fraud:

Corporate Fraud Prevention

Establishment of an economic security service

Establishment of an internal audit service

Verification of employment information

Counterparty selection system

Implementation of a compliance control service

Development of a method for checking counterparties

Implementation of trade secrets

Management and control of corporate information flows

Implementation of a system for monitoring employee actions

Anti-corruption audit of documents and reports

Monitoring the risks of corruption fraud

Creation of a corporate “trust”-website

Personnel rotation and redistribution of powers

Figure 8. Corporate Fraud Prevention

Source: authors’ research

Conclusion

An unambiguous interpretation of actions on fraud and falsification of data in the financial record of financial sector organizations can only be given by the regulator, and then by law enforcement agencies. But the presence of “stop factors” in the organization’s work, signaling signs of fraud and falsification of data in the financial statements, allows to quickly suspend the production and business activities of investors and counterparties with this financial institution and avoid larger losses.

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The text of the article should be printed with single References according to the Harvard citation style, intervals on 210x297 mm format pages with the print e.g. http://libguides.library.uwa.edu.au/harvard. CONTENTS VOLUME 9 NUMBER 4 JUNE 2020 ISSN 2029-7017 PRINT Pál Michelberger, Pál Fehér-Polgár. BYOD SECURITY STRATEGY (ASPECTS OF A MANAGERIAL DECISION) 1135 ISSN 2029-7025 ONLINE Krzysztof Michalski, Marcin Jurgilewicz, Mariusz Kubiak, Anna Grądzka. THE IMPLEMENTATION OF SELECTIVE PASSENGER SCREENING SYSTEMS BASED ON DATA ANALYSIS AND BEHAVIORAL PROFILING IN THE SMART AVIATION SECURITY MANAGEMENT – CONDITIONS, CONSEQUENCES AND CONTROVERSIES 1145 https://doi.org/10.9770ssi.2020.9.4 Iman Harymawan, Nadia Klarita Rahayu, Dyah Ayu Larasati, Abdul Ghofar, Dian Agustia. INSIGHTS INTO RESEARCH ON CARBON DISCLOSURE 1157 Kaisar Serikuly Alpysbayev, Yеlena Evgenevna Gridneva, Gulnar Shaimardanovna Kaliakparova, Abdizhapar Djumanovich Saparbayev, Sara Sarsebekovna Assanova. ECONOMIC SECURITY MANAGEMENT AT INDUSTRIAL ENTERPRISES: A CASE STUDY 1165 My-Linh Thi Nguyen, Dinh Tran Ngoc Huy, Nga Phan Thi Hang, Toan Ngoc Bui, Hang Xuan Tran. INTERRELATION OF TAX STRUCTURE AND ECONOMIC GROWTH: A CASE STUDY 1177 Borash Smailovich Myrzaliyev, Maira Baltabayevna Onbayeva, Gulmira Zharylhasynovna Azretbergenova, Lesbek Tuzelbekovich Taizhanov, Ulmeken Rahmatullaevna Makhanbetova. 1189 IMPORT SUBSTITUTION AS A FACTOR OF FOOD SECURITY Putu Nidia Midiantari, Dian Agustia. Journal of Security IMPACT OF INTELLECTUAL CAPITAL ON FIRM VALUE THROUGH CORPORATE REPUTATION AS A MEDIATING VARIABLE 1203 Muryani, Desti Ratna Widyaningrum. THE EFFECT OF FDI, LABOR AND WAGE ON REGIONAL ECONOMIC DEVELOPMENT: A CASE STUDY 1215 Sagituly Gaziz, Almagul Oteshova, Natalia Prodanova, Natalia Savina, Dmitry O. Bokov. DIGITAL ECONOMY AND ITS ROLE IN THE PROCESS OF ECONOMICS DEVELOPMENT 1225 Roy Setiawan, Anis Eliyana, Tatik Suryani. GREEN CAMPUS COMPETITIVENESS: IMPLEMENTATION OF SERVANT LEADERSHIP 1237 and Sustainability Indrė Dailydytė, Ieva Bužienė. BLACK FRIDAY AND OTHER EFFECTS - ARE THEY STILL SUSTAINABLE IN FINANCIAL MARKETS? 1243 Bayu Arie Fianto, Uci Wulansari, Irine Ardiyanti, Meryem Tlili. THE GADE CLEAN AND THE GOLD WASTE BANK: SOCIETY’S ECONOMIC EMPOWERMENT BASED ON ENVIRONMENTAL HYGIENE 1257 Novia Wijaya, Kashan Pirzada, Chelsea Fanady. DETERMINANTS OF EARNINGS MANAGEMENT: AN EMPIRICAL ANALYSIS 1265 Issues Vladas Tumalavičius, Alina Danilevica, Irena Kokina. ISSUES OF PECULIARITIES OF MILITARY EDUCATION ON DIFFERENT LEVELS: THE MODERN NOTION OF LEGAL PREPARATION FOR CADETS 1275 Nguyen Thi Phuong Hong, Dinh Tran Ngoc Huy, Nguyen Thi Thuong. EXPECTATION GAP IN AUDITOR RESPONSIBILITIES: A CASE STUDY 1283 Thanaporn Sriyakul, Sudarat Rodboonsong, Kittisak Jermsittiparsert. IMPROVING QUALITY OF EDUCATION: ROLE OF HUMAN DEVELOPMENT, PUBLIC SPENDING ON EDUCATION AND TRAINED TEACHERS’ AVAILABILITY 1297 Tran Hung Nguyen, Thu Hien Do Thi, Thuy Hang Vu Thi, Huyen Trang Tran Thi, Duy Hai Le, Minh Duc Nguyen. A STUDY ON FACTORS AFFECTING DECISION TO USE 4G SERVICES: A CASE STUDY 1309 Firda Nosita, Kashan Pirzada, Tina Lestari, Rosadiro Cahyono. 9 (4) 2020 IMPACT OF DEMOGRAPHIC FACTORS ON RISK TOLERANCE 1327 Marlena Lorek, Teresa Piecuch, Jolanta Itrich-Drabarek, Mirosław Minkina. MANAGEMENT OF THE POLICE OFFICERS TRAINING SYSTEM AND THE EFFECTIVENESS OF INTERNAL SECURITY 1337 Boonthai Keawkunti, Chaithanaskorn Phawitpiriyakliti, Chompoo Saisama, Watcharin Sangma. THE RELATIONSHIP BETWEEN SUPPLY CHAIN MANAGEMENT AND ORGANIZATION PERFORMANCE: A CASE STUDY 1349 Somdech Rungsrisawat, Thitinan Chankoson. UNDERSTANDING SOCIAL MEDIA EFFECTS ACROSS DIFFERENT PARTIES’ INTERACTIONS 1363 Somdech Rungsrisawat, Thitinan Chankoson. ENGAGEMENT WITH ONLINE MEDIA 1379 Aina Caplinska, Manuela Tvaronavičienė. TOWARDS SUSTAINABILITY OF FINANCIAL SYSTEM VIA COMPLEX ASSESSMENT OF BORROWER’S CREDITWORTHINESS 1393 Nikolai Gelashvili, Tatiana Pritvorova, Elena Petrenko, Begarshyn Zhumanova, Azhar Kizimbaeva. SUSTAINABLE DEVELOPMENT OF ECONOMY VIA SOCIALY ORIENTED ACTIVITIES 1405 Lidiia Karpenko, Oksana Zhylinska, Hennadii Dmytrenko, Nataliia V. Poprozman, Viktoriia Koltun. SYNERGETIC MANAGEMENT TOOLS FOR ENTERPRISE ECONOMIC SECURITY 1421 Michal Krajčovič, Jozef Čentéš, Michal Mrva. FRAUDULENT CONDUCT IN THE MANAGEMENT OF APARTMENT BUILDINGS: A CASE STUDY 1431 Nodar Chinchaladze. THE IMPACT OF VARIOUS CURRENCY REGIMES ON ECONOMIC DEVELOPMENT FACETS: CASE OF GEORGIA 1445 Natalya V. Osokina, Mariana Petrova, Natalia V. Kudrevatykh, Evgeny E. Zhernov. CHINA: INSIGHTS INTO PECULIARITIES OF DEVELOPMENT 1459 Oleg Reznik, Oleksandr Muzychuk, Oleksandr Yunin, Svetlana Kaliuzhna, Oleksandr Dubenko. MIGRATION RISK MANAGEMENT AS A FACTOR OF NATIONAL SECURITY 1469 Oleksandr Sydorov, Serhii Tarasov, Nelli Tsybulnyk, Tetiana Tsybulnyk, Anatolii Rusetskyi. FINANCIAL SECURITY MANAGEMENT OF ENTERPRISES OPERATING IN THE DEFENSE INDUSTRY 1481 Dmytro Zhuravlov, Ivan Lytvyn, Oleksandr Ilchenko, Ivan Yaromii, Yuliia Lepekh. ENSURING ECONOMIC SECURITY OF UKRAINE IN THE SPHERE OF FOREIGN ECONOMIC ACTIVITY 1495 Miguel Аngel Poquioma Tulumba, Liudmila Kashirskaya, Malvina Karabasheva, Liudmila Khoruzhy, Ekaterina Marmilova, Elena Perepechkina. DIAGNOSTICS OF CORPORATE FRAUD AND COUNTERACTION MEASURES 1511