Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) 1

Twice a Year Scientific Journal ISSN 2217-9739 COBISS.SR-ID 192516620 PUBLICHER Faculty of Business Economics and Entrepreneurship 8 Mitropolita Petra str 11000 Belgrade, Serbia EDITOR- IN-CHIEF Academician Prof. Dr. Mirjana Radović-Marković, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia ASSOCIATE EDITOR Academician Prof. Dr. Radmila Grozdanić, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia EDITORIAL OFFICE Faculty of Business Economics and Entrepreneurship 8, Mitropolita Petra str., Belgrade, Serbia Tel. +381 11 2762-194; fax:+381 11 2762-194 www.vspep.edu.rs, [email protected] BUSINESS SECRETARY MA Slađana Vujičić, Faculty of Business Economics and Entrepreneurship, Belgrade, [email protected] PERSON RESPONSIBLE FOR PUBLISHING

Prof. Dr. Goran Kvrgić, Director of Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia

EDITORIAL BOARD Prof. Dr. Carl Edwin Lindgren, American School of Genealogy, Heraldry and Documentary Sciences,USA Prof. Dr. Brenda Nelson-Porter, Brigette's Technology Consulting and Research Firm, USA Prof. Dr. Alexander Gungov, University Center of Conflict Management and Organizational Research, Sofia University "St. Kliment Ohridski,Bulgaria Prof. Dr.Plama Hristova, University Center of Conflict Management and Organizational Research, Sofia University "St. Kliment Ohridski,Bulgaria Lecturer Dr. Imani Silver Kyaruzi, Department of Business, London Graduate School of Management, Great Britain Prof . Dr. M. A. Omolaja, President of International College of Management and Technology, Nigeria Prof. Dr. Ballet Jérôme, Center of Ethocs and Economics for Environment and Development in Madagascar, University of Antananarivo, Madagascar Prof. Dr. Raghu Bir Bista, Professor, Tribhuvan University, Nepal 2 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) Academician Professor Slavko Karavidic PhD, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia Prof. Dr. Sreten Miladinoski, MIT University, Skopje, Former Yugoslav Republic Macedonia Prof. Isiaka Esema, Pebble Hills University and Coordinator of International Community Education Association, Nigeria Chapter, Nigeria Prof.Dr. Nezameddin Faghih, Editor-In-Chief „Journal of Global Entrepreneurship Research“ (JGER), Faculty of Entrepreneurship, University of Tehran, Iran Prof. Dr. Radovan Pejanovic, University of Novi Sad, Serbia Prof. Dr. Cane Capragoski, MIT University, Skopje,The Former Yugoslav Republic Macedonia Ass. prof. Dr. Agrawal Reena, Jaipuria Institute of Management, Luckow, Uttar Pradesh, India MSc. Aidin Salamzadeh, teacher of Entrepreneurship, Rules and Regulations, marketing and Sale Management, Labor and Social Security Institute of Iran (LSS), Iran Lecturer MSc. Dusan Markovic, Belgrade Business School, Belgrade, Serbia Milos Vucekovic, IT expert, Singidunum University, Belgrade,Serbia Prof. Dr. Marijan Stevanovski, MIT University, Skopje, Former Yugoslav Republic Macedonia Ass. prof. Dr. Almir Pestek, School of Economics and Business in Sarajevo and deputy director of Economic Institute Sarajevo, Bosnia and Herzegovina Prof. Dr.Milan Krstic, Faculty for Business Economics and Entrepreneurship, Belgrade, Serbia Ass. prof. Dragan Milosevic, Faculty for Business Economics and Entrepreneurship, Belgrade, Serbia Prof. Dr. Slavoljub Sljivic, Faculty for Business Economics and Entrepreneurship, Belgrade, Serbia PUBLISHING BOARD Prof. Dr. Goran Kvrgic, Director of Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia Academician Prof. Dr. Mirjana Radović-Markovic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia MSc. Dusan Cogoljevic, president of Faculty of Business Economy and Entrepreneurship, Belgrade, Serbia Academician Prof. Dr. Radmila Grozdanic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia Academician Prof. Dr. Slavko Karavidic, Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia Prof. Dr. Sofronija Miladinoski, Faculty of Tourism and Hospitality, Ohrid, Former Yugoslav Republic Macedonia

Printing 300 copies Copyright© 2013 by Faculty of Business Economics and Entrepreneurship, Belgrade. All rights reserved. Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) 3 Foreword from the Editor-in-Chief

Editor-in-Chief

International review (IR) peer Journal belongs to that rare group of scientific magazines, which encourage multidisciplinary approach because of the various theme areas. Therefore, in its content one can find most current topics which are being analyzed from the economic, social, psychological, political and other aspects. That makes this scientific peer Journal interesting and useful reading material for scientists, experts and other readers, which operate within the similar scientific disciplines.

This Journal is an international one, considering its international editorial staff and authors. It comes out twice a year in English and it is published by Faculty of Business Economics and Entrepreneurship from Belgrade. Although the magazin oes not have a long history, it has gained the trust of international and domestic scientists and it is included in several significant international magazine bases in a short period of time. Editorial staff is open to all interested parties that want to participate in the role of reviewer, as well as to those willing to contribute to the Journal by their suggestions. We also invite everybody interested to have their paper published in this Journal to follow the author's guide and to send in their papers to the e-mail of the International review. All papers are blindly reviewed. At the end of this foreword, I would like to thank all my associates, who participate in building this issue and show exceptional motivation for it to become better and of higher quality with each its publication.

25 April, 2013. Editor-in-Chief Prof.Dr Mirjana Radovic-Markovic, academician

Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) 5

CONTENTS

Serbian Modern Economy – regional comparative analysis ...... 7 Vladimir Knezevic ...... 7 Goran Kvrgic ...... 7 Dragan Ivkovic ...... 7

Solvency and Profitability of Serbian Industry ...... 29 Slavoljub Sljivic ...... 29 Dragana Vojteski-Klijenak ...... 29 Milenko Pavlovic ...... 29

An impact of Free Zone on the More Rapid Development of The Presevo Municipality ...... 50 Edita Kastratovic ...... 50 Milan Dragic ...... 50 Vesna Cilerdzic ...... 50

Effect of Global Economic Crisis on Life Insurance Market- Countries of the Former Yugoslavia from 2008.to 2011...... 59 Natasa Vujadin ...... 59 Radomir Vujadin ...... 59 Ivan Piljan ...... 59

Organizational Behavior-Creative Tool for Creating Value ...... 74 Tamara Stojanovic ...... 74 Aleksandar Djokic ...... 74 Snjezana Djokic ...... 74

Effect of Firm Organizational Structure and Management Style on Business Success: An evidence of Nike Inc...... 89 Rebecca Milos ...... 89

Performance Measures for Social Entrepreneur Institutions: Case of Iranian National Commission for UNESCO ...... 96 Behrad Seyyed Zare ...... 96 6 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) Establishing Hospital Information Systems and Creating Patient Loyalty through Improvements in Services: Evidence from Iranian Hospitals ...... 110 Masoomeh Yousefirad ...... 110 Mohammad Ali Sarlak ...... 110 Tahereh Feizi ...... 110

Managing the Impact of Climate Changes in Serbia-case study ...... 128 Marko Protic ...... 128

Political Influence and Activity of the Masonic Organizations ...... 140 Katarina Majstorovic ...... 140 Milos Stanojevic ...... 140

From Knowledge to Financial Management ...... 156 Edita Kastratovic ...... 156

UDC: 338:339.137.2(497.11) ; 339.137.2 ; 339.727.22(497.11) ID: 199123212 Scientific Review

Serbian Modern Economy – regional comparative analysis

Srpska savremena ekonomija‐regionalna komparativna analiza

Vladimir Knezevic1 Goran Kvrgic2 Dragan Ivkovic3

ABSTRACT

This paper is about finding an adequate approach for the analysis of the current economic difficulties in Serbia as a first step to take measures to mitigate and overcome those difficulties. Starting from the current position and foreign direct investments as a key factor for the onset of recovery, it is proposed to build an enabling environment for investment. For specific solutions idea should be found in business and beyond, primarily in legal and political system, economic and development policies of neighbouring countries which are more successful in transition than Serbia, and some have already become members of the EU. Therefore, Serbian economy can be appropriately perceived and solutions can be found in a comparative analysis of the neighbouring countries. Perceiving conditions and results achieved in the implementation of identical targets it was found that those countries are the best example for comparison and study. We hope that this approach will encourage more realistic view of the current economic moment of our country, as well as ways of further progress made by Serbia which are actually available in the near future. KEYWORDS: FDI, economic system, economic and development policies, market economy, Serbia JEL: P5

1Corresponding author Vladimir Knezevic, e-mail: [email protected], Faculty of Business Economics and Entrepreneurship, Belgrade,Serbia 2 Faculty of Business Economics and Entrepreneurship, Belgrade,Serbia 3 Faculty of Business Economics and Entrepreneurship, Belgrade,Serbia 8 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

Introduction

Serbia's economy in recent years has not been in a state that can be described as satisfactory. Numerous economic difficulties reflected in the situation of the whole society and conditioned political instability as well as the deterioration of the country's international position. In this century, in our economic profession, politics and public is common to compare the economic performance of Serbia to the EU average, and it is not uncommon to take economically strongest country in Europe as the parameter. In this way, the economic situation looks demoralizingly bad and sets goals so hard to match, which makes the entire approach unhelpful. Because of this, we want to propose a completely different perspective.

Indicators of the economic situation of Serbia and possible courses of action

The national economy must be viewed from several different angles, if we want to have a more complete and objective picture. Selection of criteria for the assessment of the situation depends on many factors such as the primarily goal of the research, the availability of comparable data and affinity of researchers. Besides this, the complexity of the case study itself and its implications on society hinders decision as well. However, the following set of indicators could be the most representative: economic growth, economic efficiency, market stability, openness, equality in the distribution of population and standard of living (Bajec, Joksimovic, 2003). The increase in export would most certainly contribute to the improvement of the general economic situation. But how to get export growing? Leaving aside the inappropriate conduct of exchange rate policy in the long run (overestimated national currency), we believe that the main problem is that Serbia currently has little to export. What is exported is characterized by a low degree of processing. In the year 2011 we have a situation that 66.4% of exports makes raw materials (SBS, 2012), and it was similar in the previous years. Technological level of our economy and therefore the potential of export supply is rather low which combined with relatively high rates negatively affects the competitiveness of export. On the other hand, given the long-term deficit in the trade balance, it should be worth considering options of re-orientation in the choice of foreign trade partners. In fact, due to the long political orientation towards EU membership, it is possible that Serbian Modern Economy – regional comparative analysis 9

Serbia unjustifiably neglected other potential markets. In the year 2011 the export to the EU constitutes 48%, while import from that group is 48.79% share in the foreign trade of Serbia. It would certainly be worthwhile to review a relatively one-sided political orientation and foreign trade, which are always closely linked, and think about other resources that have so far been neglected export markets, notably Russia and China. This is not a political issue (however it is certainly to some extent) but purely economic, both today and maybe even more in the future. Serbia mostly imports from Russia, and given the structure of import (energy) that trend will continue. Despite the favourable treatment of our merchandise export to that country Serbia has a long growing deficit. Somewhat is similar to the situation in China, the second world economy, which is the fourth in the value of import into Serbia, behind Italy (SBS, 2012). And with this important country we have large foreign trade deficit, and it would certainly be wise to think about this redirection, not just because of politics, but primarily due to a reduction in the trade deficit. However, the Russian market which would be for our exporters at this point much more operational, in addition to appropriate policy approach, certainly requires a much better economic approach. Given the increasingly fierce global competition, it is no less demanding than other attractive markets regarding quality and quantity. Regardless of the necessity for diverting exports from Serbia, we are currently facing a problem of small, technologically backward and expensive production, which combined with inadequate market access, offers just listed foreign trade results. Question is which way to go to improve economic results? Answer to the solution is a kind of new investment cycle that will revitalize the Serbian economy in quantitative and qualitative terms, and fit into the international division of labor in a better way than is currently the case (Savic, 2010). However, we are faced with the problem of lack of capacity which can be provided from internal and external sources, but both options are difficult in terms of the global economic crisis. Because domestic savings is insufficient, measures must be taken to increase its share in the distribution of national income. It's inevitable, but it is currently hampered because of the unstable political situation in the country, as well as the low level of national income. It is undisputed that in addition to domestic accumulation we must rely on the use of foreign sources of funding. The use of foreign sources of funding, though necessary, is a very risky solution if is used recklessly. Our experience with loan capital and donations testifies about that. In the first decade of this century on this basis, with the privatization income and workers' remittances traditionally great, Serbia got significant support from a total of about $ 70 billion (Dusanić, 2011 ), which, however, did not have satisfactory effect in export growth and economic development, but also spilled over into consumption by putting pressure on the growth of import demand. If we take this fact into account, as well as a realistic situation where we just cannot count on substantial inflows of funds from borrowing, grants and privatization in the near future, the obvious solution must be sought elsewhere. 10 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

All this suggests that the solution is in foreign direct investment (FDI) inflows as the most desirable form of the accumulation in the domestic economy, as itself do not impair the balance of payments of the country and state debt, and have multiple positive effects on export growth and economic development. The key effect required in the Serbian economy in the second decade of transition, which is reflected in the introduction of new technologies, increasing production and exports and penetrate new markets, (Dragutinovic, Mitrovic & Ivancev,2010) is impossible to achieve in any other way. This would certainly add to the positive macroeconomic effect that is reflected in the introduction of modern methods of management companies in our business practices.

Attracting FDI

So, if we came to the conclusion that these investments are necessary for our economic recover as an essential precondition for a way out of the current economic difficulties, there is the question how to attract them. In addition to an appropriate long-term foreign policy positioning of the country, it should not be neglected by no means a classic economic conditions of enrichment of capital. Specifically, the capital that cannot be characterized as speculative is attracted by the conditions that are conducive to long-term profit maximization, and that conditions are favourable business climate, competitive free market, simple bureaucratic procedures, legal certainty, and macroeconomic and political stability. On the other hand, it is very dangerous to do this primarily through subsidizing foreign investment (Dušanić, 2011 b) Experience in transition economies, not just in Europe, warns that directly or indirectly stimulating foreign financial investors as the only policy for attracting FDI is unhealthy and unsustainable in the long term. If investor came only because of subsidies, he will be withdrawn as soon as it dried up, and it cannot and should not be permanent. On the other hand, the question is, why would stimulate only foreign capital to invest, why not at least make the same privileges enjoyed by domestic capital as well if it is feasible and reasonable? This means that a prerequisite for further development of Serbia is in creating such an environment which is favourable for investing domestic and even more foreign capital which scope should be significant. It is necessary to improve the competitiveness of the Serbian economy. Only in this way the number of Serbian companies can be increased which are capable of successful performance in the global market. To increase domestic savings and its productive investment in the domestic economy, and to attract more FDI, it is necessary to provide a suitable favourable market environment in Serbia which is obviously not the case. It is actually about a stalled transition that has negative implications for the current economic situation in our country. The direction of transition is in the construction of modern capitalist economy, with Serbia is on that way late, and now it looks as it stopped. This decade- long delay could be partially explained by the unfavourable external circumstances, and overcoming this deadlock is especially subjective responsibility. Serbian Modern Economy – regional comparative analysis 11

Therefore, delaying and slowing down, or even halt in the Serbian transition towards building a modern market economy is the main cause of the lack of FDI that are absolutely necessary to Serbian economy. As we have already noted, the "healthy" capital seeks primarily stable and free markets for investment. Our market is certainly not like that. For example, according to the research of degree of economic freedom from the year 2012 which was performed by the Heritage Foundation, Serbia is currently on the 98th (Heritage Foundation, 2011) place out of 179 countries surveyed (Heritage Foundation, 2011). All of this leads us to the conclusion that the problem is in the final line related to the transition process. Therefore actual solutions in terms of the development of the economical system as well as the conception of economic development policy should be looked in the experience of countries that are in the process which went further and achieve better business results. This is precisely the terrain on which comparative analysis should be applied. Actual solutions should primarily be sought in practice comparable to us, and with a successful economy.

Comparative Analysis

A comparative analysis of the Serbian economy and the economy of other more successful countries might find some expedient solutions that have already been proven in practice and adapt them to their own circumstances in order to improve the performance of our economy. In this way potential errors in this domain might be avoided by using the experience of comparable economies that have passed similar economic system problems in the recent past. Such an approach would overcome the traditional problem of most social sciences, including economics, in which you cannot perform experiments. To achieve the best effect in this respect, the comparison with the countries that have the same economic model is necessary, and have all the other relevant terms as closely as possible to our situation and yet have different developmental outcomes. Only then we can be assured that their economy-system, economy- political and development solutions are more effective considering the high comparability of other factors and the diversity of the achieved results. It also opens the possibility that the practical experience can be creatively applied in our practice in order to improve the results of the Serbian economy. There are many reasons which lead us to studying experiences of countries in transition. This is primarily due to a common target model of economic system to which construction we strive for. It is generally accepted model of the capitalist market economy on the model of the European Union. More specifically speaking fulfilling the requirements for admission to this organization is always the main political and economic goal. 12 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

The question is whether it is useful for Serbia to be guided in practice by the experience of former socialist countries that are most successful in this regard? Is the experience of the former socialist countries such as the GDR, Poland, Czechoslovakia and Slovenia from twenty years ago relevant to us? In these comparisons there are many serious limitations, not only with the temporal aspect, given that the conditions in the world economy then were much more favourable for the transition economies in Europe. And the political aspect, which is usually very important in macroeconomics, is totally incomparable with the terms of Serbian late transition. Germany is since 1990 unique state, headquarters of the EU and one of the world's most powerful economies. Czech and Slovak Republics, and after a peaceful separation are its historically and geographically close allies and partners in particular in the fields of economy and beyond. Poland because of its size, location and history also has no comparable points with Serbia. On the other hand, the small Slovenia, after a brief armed conflict (21 days), also in the early nineties, became an independent, and then newly received full member of the EU in the last big expansion as most developed country in 2004. Ideal group for comparison, for the purposes of this analysis, it is a group of countries called the Western Balkans. That would be all states of former Yugoslavia, with the exception of Slovenia, and adding Albania. There is no need to spend a lot of words on closeness and comparability of these countries in this group arising from the disintegration of the SFRY. Not only because of the shared border with Serbia, but also a common history, a similar level of development, similar geographic and demographic characteristics, natural resources... In this environment fits perfectly Albania, which is different from all the other countries of the Western Balkans only it was not a member of the jointed state. In short, we can conclude that mentioned Serbia's neighbours are most appropriate framework for comparative consideration of the possibilities for a successful transition of its economy. However, the above group of countries is meant to be a realistic measure of our current transition (un)success like an example to be followed. If we would like to have a complete range of countries which specific solutions in economy are relevant for the improvement of our market conditions, we would have to add three more neighbouring countries the Western Balkans. Serbia borders with all of the countries that make the group of Western Balkan countries, and we will try to explain why the list should be extended for the purpose of this analysis to the other three neighbours: Hungary, Romania and Bulgaria. For the former socialist countries, it is important to emphasize that they are all EU members, which means that they are more advanced than Serbia in terms of the transformation of the economic system in the direction of significantly allowing the market to influence, and a reduction of state influence on economic activity. Hungary which was accepted in EU in already-mentioned (2004.) major expansion as one of the most successful countries in transition is not most important for the purpose of our comparison, but rather Bulgaria and Romania, which are the youngest member to become the 2007. For the purposes of our analysis, these two Serbian Modern Economy – regional comparative analysis 13 countries may be particularly interesting, especially Bulgaria, which is by its size and other characteristics most similar to Serbia from all countries with which it borders. Particularly the experience of the last three neighbouring countries, and within the parameters of the economic and social development comparable countries, may largely be a guideline and help in the realization of efforts to build a successful market economy. According to the above mentioned ranking of countries by market freedoms, where Serbia is ranked 98th, with it in the group of "mostly unfree" economies are Bosnia and Herzegovina in 104th place, while the other neighbouring countries are placed a little better, in a more advanced group of "moderately free" economies, Croatia in 83th place (although close to the certification of the full membership of the EU), Montenegro in 72th place (candidate), Romania and Bulgaria as the newest members in the 62nd and 61, Albania in 57. place, Hungary in 49th place as the oldest member of the EU in the observed group and even Macedonia in 43rd place, which was unexpected, and thus fully a candidate status under this criteria. This example confirms the justification for the selection of the economies for comparison to Serbian. According to this, for the purposes of our analysis, perhaps the most important criteria is that one of eight comparable countries with Serbia is in the group of mostly unfree economies (B and H), while all others are ranked in the first higher group, moderately free. It is certain that there is no real and immediate benefits to compare the current state of our economy with the leading economies of the world by this indicator which are classified as "free" or "mostly free," without our neighbours, even Macedonia and Hungary. The point is that Serbia can compare with the two of them in efforts to build a free and open market. Some of its solutions and policies are certainly largely applicable and acceptable, but of course, this should not be understood as neither idealization nor as a recommendation of uncritical acceptance.

Serbia and its environment

Our country should increase the attractiveness of investment capital as a basic starting point and idea for improving economic performance in the current moment. The way to do it is without doubt the construction of a free and open market economy, and that all corresponds to the well-known political and economic goals, such as the completion of transition and EU membership. After all Serbia is already at this point surrounded on all sides by countries that are members of this integration (Hungary, Romania, Bulgaria and soon officially Croatia) or are candidates (Montenegro and Macedonia). According to this criteria of the success of transition, we are only ahead of Bosnia and Herzegovina and Albania. In addition to the this common development goal, the factual situation of owning common borders with these countries, mingling ethnic populations, and different forms of association, opens the real possibility of economic cooperation, and certain mutual 14 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) competition. Those countries must have a significant economic, bilateral and multilateral (CEFTA and the like.) cooperation, and they must work together in terms of major international infrastructure projects in the field of transport and energy, but there are also competitors to some extent in attracting FDI into the region.

Size

If we consider number of inhabitants and the size of the territory as a natural economic conditions first, we conclude that these countries are generally not large, even in the European context. These parameters largely determine the size of the national market, which is also an important factor for potential investors (Table 4).

Table 1. Size of Serbia and its neighbours

State Number of inhabitants Area in km2 Romania 21.538.000 238.391 Hungary 10.056.000 93.028 Bulgaria 7.660.000 110.879 Serbia 7.382.000 88.361 Croatia 4.436.000 56.594 Bosnia and Herzegovina 3.843.000 51.209 Albania 3.161.000 28.748 Macedonia 2.044.000 25.713 Montenegro 620.145 13.812 Source: National Bureau of Statistics (2010)., Statistical Yearbook of Serbia 2010. Belgrade: Institute of Statistics and http://sr.wikipedia.org/sr/Crna Gora It is interesting to note that among the countries that are not members of the EU Serbia is the largest and most populated. We can see that Bulgaria has slightly more residents and that Hungary has only slightly larger territory. On the other hand, Croatia which is smaller in territory will be is admitted to membership, and Macedonia and Montenegro which have smallest territories also are candidates. This leads us to think that the we can look upon Croatia in transition effort in some aspects, which is slightly smaller, but it is already practically a member of the EU. Montenegro is the smallest and became a candidate ahead of Serbia which only confirms that the size of our regional economy is not a crucial factor in terms of the transition. All this suggests that the size of the market of Serbia in any case can attract FDI even as the markets of Croatia and Montenegro, and if not, the reasons are subjective. Serbian Modern Economy – regional comparative analysis 15

On the other hand, all of these countries in terms of the world economy have negligible significance. A good illustration is an overview of their share in the total world exports of goods in 2010 (Table 2).

Table 2. Share in world exports 2010th

State % Share of world exports of goods Hungary 0,628 Romania 0,325 Bulgaria 0,136 Croatia 0,078 Serbia 0,065 Bosnia and Herzegovina 0,032 Macedonia 0,022 Albania 0,010 Montenegro 0,003 Source: UNCTAD (2011), UNCTAD Handbook of Statistics 2011, date of access 05.10.2012, http://www.unctad.org

Our selection of comparable countries showed to be a constructive one, because the consideration of the whole group and every single economy in the world rankings would be completely inappropriate to the point of our analysis. In the table above we can see exactly which country is where in the more realistic context. We can conclude that only EU members from these groups have higher participation than one per thousand per year! In this way it is confirmed that most realistic economic situation of Serbia is when compared with neighbouring countries. Given that we are aware of the importance of export for the Serbian economy, this could be interesting for us, as Croatia's export of goods (without tourism!) is bigger and more important than ours. How they managed to fit their economies better into the world’s? The answer to this question may be important for the transition efforts of Serbia.

Economy

The size and power of a national economy and the dynamics of its growth are the main results of an economic system or economic development policy. Of course this applies to more or less comparable countries, especially regarding the size of territory and population, and we have seen that in this respect our selected example is quite uniform. In fact, if we exclude the extreme, half of the countries has about five million residents and fifty thousand square kilometres of space. 16 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

The size an dynamics of the economy will be seen from the following review of nominal gross domestic product with all the limitations and drawbacks which is the first and most commonly used macroeconomic indicator.

Table 3. Nominal GDP (in US $)

State 2007 2008 2009 2010 2011 Romania 169,283 200.071 161.110 161.629 179.794 Hungary 136.102 154.234 126.632 128.632 140.029 Croatia 59.336 69.911 63.436 60.852 63.850 Bulgaria 42.114 51.825 48.569 47.727 53.514 Serbia 38.952 47.761 40.148 38.444 45.043 Bosnia and 15.281 18.543 17.083 16.648 18.088 Herzegovina Albania 10.705 12.969 12.119 11.858 12.960 Macedonia 8.160 9.834 9.314 9.138 10.165 Montenegro 3.669 4.520 4.141 4.111 4.551 Source: web.data.worldbank.org, retrived date 8.01.2012. And according to this criteria Serbia is located right in the middle, which again shows that we have selected an appropriate framework for a realistic view of the performance of its economy. Would it make any sense at all to have such a choice of groups for comparison in which our country would be by all criteria the first or the last? It is important that Serbia is behind (again) economically successful Croatia, but also quite a bit behind Bulgaria, also members of the EU, which is by the territory and population of all other countries in the group closest to Serbia. It is interesting to note, and this is certainly interesting especially for studying, that Serbia felt much more of a crisis of the economy than it’s most similar economy. This implies two important conclusions. First, it is recommended that we can look upon Croatia and Bulgaria in the economic sense. On the other hand and from the point of our research more importantly, improving the institutions of the free market will most effectively improve the economic results, as we have already noted that the market freedoms are smallest in Serbia comparing with other countries (with the exception of Bosnia and Herzegovina). It is important to note that on a developmental scale of comparable countries we are ranked higher than in the market freedoms. There is a large hidden reserve for economic development, which should be activated as soon as possible, especially as the activation depends mainly on domestic social factors and subjective material-not financially demanding. These findings persist even if we resort to more subtle analysis and rearrange the gross domestic product per resident. In this way we get an indication which unlike the previous, which mainly illustrates the size of the economy, more reflects the quality of work (Table 4). Serbian Modern Economy – regional comparative analysis 17

Table 4. Nominal GDP per US $

State 2007 2008 2009 2010 2011 Croatia 13.376 15.767 14.323 13.774 14.488 Hungary 13.535 15.365 12.635 12.863 14.044 Romania 7.856 9.300 7.500 7.539 8.405 Montenegro 5.842 7.183 6.569 6.510 7.197 Bulgaria 5.498 6.798 6.403 6.335 7.158 Serbia 5.277 6.498 5.484 5.273 6.203 Macedonia 3.984 4.791 4.528 4.434 4.925 Bosnia and 4.044 4.913 4.534 4.427 4.821 Herzegovina Albania 3.377 4.076 3.796 3.701 4.030 Source: web.data.worldbank.org, retrived date 8.01.2012.

According to this more subtle indicator of economic development Croatia is the first in the group, ahead of Hungary and thus fully justifies joining the EU in terms of economic criteria. More educative is the case of Montenegro, which is placed ahead of Bulgaria which is member of EU, and Serbia, with which was part of a same state by 2006. This is an example how market improvement and proper conduct of foreign policy and the improvement of the legal system may be important for economic development. However, if we want the analysis of economic success to be complete we can not in the time of global economic crisis which has just started in the financial sector, so we can call it the debt crisis, to circumvent the problem of external indebtedness which is currently in Europe. This will tell us the extent to which these countries, and Serbia among them, are self-sufficient in terms of economy, and how their growth and development is based on foreign accumulation. As in the previous case, due to the existing differences in the size of the countries in the region, the data do not give the most accurate picture of performance of national economies important for comparative analysis. It is expected that Romania as the largest has the maximum total debt and Montenegro the smallest. Debt per resident is more valuable indicator. Only then we can notice with more certainty which country is the most indebted in the region, and which is the least (Table 5). 18 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

Table 5. External debt pc in 2010.

State Debt $ pc Croatia 13.435 Hungary 10.539 Bulgaria 6.373 Romania 5.667 Serbia 4.418 Macedonia 2.816 Montenegro 2.461 Bosnia and Herzegovina 2.249 Albania 1.447 Calculations made by the author based on data from web.data.worldbank.org, retrived date 8.01.2012

We can see that Croatia and Hungary are far most indebted countries, and that Serbia is of the mid-range in the comparative regional analysis, but as the most indebted country outside the EU. From this we can draw several important conclusions for contemporary Serbian economy. It turns out that three phenomena are correlated: the level of economic development (Table 4), membership in the EU and foreign indebtedness.

Figure 1: Transition economies of Serbia and its neighbours

EU

GDP p.c. DEBTH

Source: Authors Economic development is undisputed goal, but we have an example that Serbia is almost equal to Bulgaria. On the other hand, the question of EU membership seems primarily political, not an economic issue for Serbia. It is more clearly when we see an example of Montenegro, which has a more efficient economy, not only from Serbia, but also from Bulgaria, which is a member of the EU since 2007 (according to the latest data from Table 4). Serbian Modern Economy – regional comparative analysis 19

On the other hand, we note that for a selected group of countries correlation between the degree of economic development and the size of the debt per resident of these countries is much stronger than between their development and EU membership. If we put in GDP pc ratio in Table 4 and the amount of foreign debt pc obtained from Table 5 than we have the correlation that is 0.948. This knowledge can also be very important for Serbia and its future development policy.

Figure 2: The development and debt

GDP p.c. DEBTH

Source:Authors What is the perspective of countries in the region and Serbia among them to continue to base its development on the debt? The answer to this question depends primarily on the possibility of regular service of debts. One of the important measures of that possibility is a relationship between external debt and GNI (gross national income) which can be seen from Table 6.

Table 6. Relative indebtedness in 2010.

State External debt as% of GNI Bulgaria 104,80 Croatia 97,58 Serbia 84,30 Hungary 81,99 Romania 76,40 Macedonia 63,10 Bosnia and Herzegovina 48,80 Albania 40,50 Montenegro 39,10 Source: web.worldbank.org, retrived date 10.01.2012.and author's calculations 20 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

The first thing we notice is that almost half of the countries surveyed had exceeded the limit of 80%, which is commonly considered critical. Since the position of Serbia under this criterion is unfavourable, we can conclude that it is not advisable to continue with the policy of increasing the foreign debt in the future. This is important due to the fact that so far the effects of debts are in every way unsatisfactory. Having in mind that other heavily indebted countries in the region (Bulgaria, Croatia and Hungary) achieved some of its political and economic goals which we might call completion of transition, we see no reason for Serbia to continue to increase its debt while lagging behind in economic development not just behind over-indebted neighbours by this criterion, but also behind Romania and Montenegro. Particularly interesting is the example of the least indebted countries in this review - Montenegro which achieved most of its economic and political goals, and it came from a same state with Serbia just a few years ago.

Stability

In the short time that we chose as interesting for our observation, no significant differences are seen in the oscillations of the average annual growth rate of real gross domestic product for selected group of countries. A similar response to the effects of the global crisis is yet another argument for choosing this group of countries for a comparative study of economic success. Due to the great similarities they largely share a common economic destiny (Table 10).

Table 7. The economic growth rate (%)

State 2007 2008 2009 2010 2011 Albania +5,9 +7,7 +3,3 +3.5 +3,0 Montenegro +10,7 +6,9 -5,7 +2,5 +2,5 Macedonia +6,1 +5,0 -0,9 +1,8 +3,0 Bosnia and +6.8 +5,4 -2,9 +0,8 +1,7 Herzegovina Hungary +0,1 +0,9 -6,8 +1,3 +1,7 Bulgaria +6,4 +6,2 -5,5 +0,4 +1,7 Serbia +5,4 +3,8 -3,5 +1,0 +1,8 Romania +6,0 +9,4 -8,5 +0,9 -0,4 Croatia +5,1 +2,2 -6,0 -1,2 -0,0 Source: web.worldbank.org, retrived date 10.01.2012. Perhaps surprisingly, Albania and Montenegro have the highest and most stable rates of economic growth, which is important for Serbia because they are not Serbian Modern Economy – regional comparative analysis 21 members of the EU. Although that these economies are much smaller than ours, their experiences can be significant. So, it might be easier to achieve economic stability outside of European integration, especially for small countries in the region according to these results. There has been an impact of the global economic crisis on the entire group in recent years. Also, we see that the crisis has hit larger, more developed and more open economies, mainly EU countries, which is not a surprise and that is the most illustrative example of Romania. The current economic crisis in the EU can not leave out one single country member, and it is especially felt in the weaker economies, such as all of the region. And this is important for Serbia, especially as it is very likely that in this regard it would not achieve better results and that it is closer to this organization what we witnessed with examples of Hungary and Croatia. Otherwise, by this criteria, our country is just behind Bulgaria.

Openness

In the current era of globalization, especially in transition as its most interesting part for us, openness is a must, in the long term the only way of survival and development of any economy, especially small European countries we studied. The necessity for an increase in export, of which we have already discussed, influenced that these countries are achieving good results measured by the annual percentage increase in the value of exports of goods until the advent of the global recession. Not only that, a similar trend was the increase in exports measured relatively as part of the gross domestic product - Table 8.

Table 8. Exports of goods and services (% of GDP)

State 2007 2008 2009 2010 2011 Hungary 81 82 78 87 92 Bulgaria 59 58 48 58 63 Macedonia 52 51 39 48 49 Croatia 42 42 35 28 38 Montenegro 43 39 33 36 39 Bosnia and 43 41 32 36 42 Herzegovina Serbia 31 31 29 35 37 Romania 31 31 33 23 22 Albania 29 30 28 30 30 Source: web.worldbank.org, retrived date 10.01.2012. 22 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

All the countries in this period had a dynamic export growth measured by value before the crisis, which has caused a decline, however, when the growth "intersects" with the movement of GDP, we see that Hungary and Bulgaria at the top and Albania and Serbia at the bottom of the scale at the end of the period had a more open economy than at the beginning measured in this way, while others have become somewhat more closed economy. Serbia in this aspect, dynamically speaking, achieved satisfactory results, certainly better than at other economic indicators. However, this improvement is still not enough, because only Romania and Albania exported minor part of their gross domestic product. For successful integration into the international economic flows this is insufficient. Surely it would be good to consider an aggressive approach for some currently neglected export markets such as the already mentioned Russia and China, but why not other countries. It is obvious that all the countries in the previous medium term made great efforts to increase export and had success. However, to fully comprehend the quality of their involvement in the international division of labour and we take into consideration terms of trade that these countries have made in the previous period, we conclude that from the qualitative aspects of a dynamic success is partial (UNCTAD 2010). Specifically, in this century less than half of the countries only slightly improved trade relations than those that were achieved at the beginning of the century.

Standard and quality of life

Besides all economic indicators that we dealt with so far, comparing some countries in the economic and broader social context, we have to look at the standard and quality of life in particular. This is the most important measure of economic success, but because of its very nature it is difficult to quantify it accurately. The standard does not only depend on the amount of gross domestic product, and even not on national income (net domestic product) but also on its utilized distribution and uniformity of the distribution of income intended for final consumption. There are also safety, preservation of nature, education, political freedom, and other numerous immeasurable factors of quality of life. Here we have chosen the expectancy of life duration for the period 2005-2010 according to the statistics of the United Nations - Table 9. Serbian Modern Economy – regional comparative analysis 23

Table 9. Expectancy of life duration

State Years of life Croatia 76 Albania 76 Bosnia and Herzegovina 75 Macedonia 74 Serbia and Montenegro 73 Bulgaria 73 Hungary 73 Romania 73 Source: UNCTAD (2010), UNCTAD handbook of statistics 2010,retrived date 8.03.2011, http://www.unctad.org According to this indicator, the whole group selected in the given medium term seems quite balanced, and for accurate differentiation a wider research in this area might be accounted. In any case, this much uniformity seems to support the thesis of the sense of mutual comparisons of these countries for the purposes of macroeconomic analysis. It is interesting, too, that Serbia under this criterion is as successful as members of the EU, and Croatia is in the lead. It is possible that the higher life duration in Croatia had the impact on changes in the age structure of the population as a result of movement of the Serbian population in the last two decades, but there is still no relevant demographic research.

Problems of balance payments

Resulting from all of this the most appropriate framework for the analysis of our current economic problems and finding solutions is our neighbours society. One of the main economic problems of all countries is surveyed trade deficit. According to this indicator Serbia in regional framework is third from the bottom (Table 10). 24 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

Table 10. The current account deficit (in US $)

State 2007 2008 2009 2010 2011 Hungary -9.962 -11.119 -107 +1.515 +2.033 Macedonia -606 -1.236 -610 -200 -274 Albania -1.151 -2.018 -1.851 -1.353 -1.595 Montenegro -1.363 -2.003 -1.333 -966 -802 Bosnia and -1.648 -2.605 -1.088 -946 -1.588 Herzegovina Croatia -4.328 -6.083 -3.067 -963 -466 Serbia -6.890 -10.395 -2.867 -2.820 -4.113 Bulgaria -11.437 -11.875 -4.256 -591 -579 Romania 23.080 -23.719 -6.955 -7.284 -8.541 Source: web.worldbank.org,retrived date 10.01.2012. and author's calculations If we are realistic, from this point of view we cannot be completely satisfied because we are in a very similar position as Bulgaria and Croatia. The fact is that all countries from this group have significant account deficit problem except from Hungary for which it could be said that from this aspect it is one of the most successful countries in Europe. Particularly worrying is that all observed countries, including our own, in this period have a deficit, with the exception of Hungary. Romania seems to have largest deficit by far, but if we take into account the size of the country, its situation is not more severe than the average of the group. We can also see that all countries after the crisis in 2008. have taken measures and reduced the current account deficit, but half of countries had the negative tendencies in the 2011. again. According to discussed problems and significant debt that is present in the group in recent years, foreign direct investment could be significant for the development of these economies. However, for most of them the global economic crisis has affected the absolute decline in capital inflows in this form. According to what we have so far said there, it is a very important indicator, and it should be given special attention. FDI in countries outside the EU are mostly insignificant, which means that measures to improve the market in Serbia are far behind those applied by neighbouring countries that have already gained full membership in the EU. Especially interesting is the development path of Hungary, where there has been a net outflow of capital from the country in 2010. which requires a special analysis. We get more realistic picture if we use relative indicators instead absolute. Because of different sizes of economies in the group FDI in gross domestic product can tell us a lot (Table 11). Serbian Modern Economy – regional comparative analysis 25

Table 11. Relative measures of FDI in 2011

State FDI to GDP (%) Hungary 17,10 Montenegro 11,67 Albania 7,69 Serbia 5,99 Macedonia 3,92 Bulgaria 3,40 Bosnia and Herzegovina 2,39 Croatia 2,30 Romania 1,53 Source:Calculations performed the author Here the image of Serbia as an attractive destination for foreign capital that occupies the middle portions. The only surprise is the position of Croatia, which is generally highly regarded by the criteria of market freedom and European integration. Please note that the ranking of countries is almost identical if conversion of FDI per capital is implemented. And what is especially important, if we consider the 2008. as the last prosperous year for countries in this group before they were almost all hit by the global crisis in full intensity, we can identify a high correlation between GDP per capita and FDI of up to 0.712 pc. Besides expected Hungarian leading position, we see again an instructive example of Montenegro, which in many ways can be a role model regardless of the size of the economy. This analysis tells us that the improvement of market conditions considers activation of powerful but neglected resource as we are in the middle of the group by observed parameters, and at the bottom of the market freedoms. So comparison with neighbours reveals our true position, and recommends operational course of action - the construction and improvement of the market.

Conclusion

After a thorough review of basic economic indicators of Serbia in the last few years, we can see that they are generally unsatisfactory both in absolute and in relative terms. Since it is a small open economy due to the economic crisis in the world in recent years there has been a negative trend in the economy in many aspects of the observations. However, if we make a comparative analysis with our immediate neighbours, which in our opinion is the only meaningful parameter for comparison, we see that the Serbian economy is certainly not the most successful, but not the worst either. 26 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

We note that most of these countries struggle with similar economic problems, regardless of whether they completed their transition and become members of the EU or as Serbia were slower in the process for objective and subjective reasons. This delay on one hand may help Serbia in formulating new strategies of economic development as they are available to it. The current problems of the Serbian economy to be solved we certainly need a new development strategy that is not based on the growth of debt, but on increasing the competitiveness of the economy for the sake of improving the trade balance and attracting FDI which is certainly not an easy task in the global economic crisis. The experience of our neighbours shows that candidacy for membership in the EU, or even membership in that organization, does not mean much to the national economy by themselves. It seems that in the case of the leading economies expansion of EU member countries with which we have borders and with which we can compare can count on a certain economic growth mostly through borrowing, and to a lesser extent, on the basis of FDI, while the recession might face even with the possibility of national bankruptcy. Self-reliance, economic cooperation with its neighbours, the EU, Russia and China, while strengthening the competitiveness are our proposals for the future of the Serbian economy. This includes the formulation and conduct of appropriate economic and development policies, as well as further improvement of the system in the direction of the market.

Serbian Modern Economy – regional comparative analysis 27 References:

[1] Bajec, J.,Joksimović, Lj. (2003) Savremeni privredni sistemi, Ekonomski fakultet Beograd, Beograd [2] Dragutinović Mitrović, R.,Ivančev, O. (2010) Driving forces of economic growth in the second decade of transition. Economic anals,185, pp. 7-32. [3] Dušanić, J. (2011). Može li se zaustaviti dalje urušavanje privrede Srbije? Nova srpska politička misao. www.nspm.rs [4] Dušanić, J. (2011) Ostaju dok mogu da koriste stimulacije. Politika, 11.02.2011. http:/www.politika.rs [5] Heritage Foundation (2012).2012 Index of economic freedom, http://heritage.org [6] http://sr.wikipedia.org/sr, Crna Gora, retrived date 09.03.2012. [7] NBS (2011) Republic of Serbia-Stock of External Debt by Debtors and Creditors, http//www.nbs.rs [8] Novaković, A.,Pešić M. (2010) Srbija u tranzicionom ekvilibrijumu - Imperativ prevazilaženja stanja blokiranih reformi - Politička revija, 2/2010, Beograd: Institut za političke studije, pp. 235-260. [9] Republički zavod za statistiku (2010.), Ekonomska kretanja u Republici Srbiji 2010, Beograd: Republički zavod za statistiku [10]Republički zavod za statistiku (2010.), Statistički godišnjak Srbie 2010, Beograd: Republički zavod za statistiku [11]Republički zavod za statistiku (2011), Spoljnotrgovinska robna razmena, www.stat.gov.rs [12]RZS (2012), Statistički kalendar republike Srbije 2012. Beograd: Republički zavod za statistiku. [13]Savić, Lj. (2010) Izvozno orijentisana industrijalizacija kao osnova novog modela razvoja. Ekonomske teme, 2, Niš: Ekonomski fakultet Niš,pp. 311-326. [14]UNCTAD (2010), UNCTAD handbook of stastistics 2010, http://www.unctad.org [15]web.data.worldbank.org

28 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) APSTRAKT

Ovaj rad se bavi iznalaženjem adekvatnog pristupa za sagledavanje aktuelnih privrednih teškoća Srbije kao prvog koraka za preduzimanje mera za njihovo ublažavanje i prevazilaženje. Polazeći od postojećeg stanja i stranih direktnih investicija kao ključnog faktora za početak oporavka, predlaže se izgradnja ambijenta povoljnog za investiranje. Za konkretna rešenja trebalo bi naći ideju u privrednom, ravnom i političkom sistemu, ekonomskoj i razvojnoj politici susednih zemalja koje su tranziciono uspešnije od Srbije, pa su neke već postale članice EU. Stoga je ekonomiju Srbije najcelishodnije sagledati, i rešenja tražiti u komparativnoj analizi susednih zemalja. Sagledavanjem, uslova i postignutih rezultata u realizaciji identičnih ciljeva, ustanovljeno je da su te zemlje najbolji primer za poređenje i izučavanje. Očekujemo da ćemo ovim pristupom potaći realnije sagledavanje sadašnjeg privrednog trenutka naše zemlje, kao i puteve daljeg napretka koji su Srbiji na raspolaganju u vremenu koje neposredno predstoji. KLJUČNE REČI: FDI, privredni sistem, ekonomska i razvojna politika, tržišna privreda, Srbija.

Article history:

 Received 25 March 2013  Accepted 26 April 2013 UDC: 338.45.027(497.11)"2008/2011" ID:199123468 Scientific Review

Solvency and Profitability of Serbian Industry

Solventnost i profitabilnost industrije Srbije

Slavoljub Sljivic 4 Dragana Vojteski-Klijenak 5 Milenko Pavlovic6

ABSTRACT

After several decades of the economic destruction of Serbian industry, awareness about the importance of this branch of the economy strengthened more and more in recent years. The key question is how much are the perspectives of Serbian industry real? The hypothesis is that this perspective depends on the quality of vision, but also on the long-run financial performances of this branch of economy. The paper deals with the analysis of solvency and profitability of the three Serbian industrial branches in the period from 2008 to 2011. These are: mining, processing industry, and supply of electricity, gas, steam and climatization. A framework for analysis is represented by collective data from the balance sheet and profit & loss statements of those branches. The assessment of solvency and profitability is based on ratio indicators. The paper points out the need for establishing a special regulation body at the level of the Government of the Republic of Serbia, whose task would be to formulate and control the implementation of the industrial development strategy of Serbia in the long-run.

KEYWORDS: industry, perspective, solvency, profitability, strategy JEL: L52

4Corresponding author Slavoljub Sljivic, e-mail: [email protected], Faculty of Business Economics and Entrepreneurship, Belgrade,Serbia 5 Faculty of Business Economics and Entrepreneurship, Belgrade,Serbia 6 Faculty of Business Economics and Entrepreneurship, Belgrade,Serbia 30 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) Introduction

Competitive industry represents a cornerstone of the development of modern market economies. Trade with tradable goods improves the balance of payments, secures employment and higher level of living standard. Products and services based on knowledge and innovations have higher degree of value-added than those created by classical technologies. These are basic reasons why modern market economies improve their industries. The advancement of industries is a continuing process which has a widespread support from their governments and regulation bodies. For several decades backward, industrial development in Serbia is a question that has equally been neglected among political, academic, and business spheres. In recent time, however, awareness about industry importance is changing. In an academic sphere things are rather clear: structural imbalances, uncompetitiveness, and economic policies based on price stability, instead on output growth, lead economy to even deeper crisis. In a political sphere, interest for industry is mainly linked to possibility for opening new jobs. Business sphere raises expectations that awoke awareness about the importance of industry that will bring financial relaxation. The change of awareness imposes a logical question: what are the real development perspectives of Serbian industry? Hypothesis in this paper is that perspective depends on the quality of vision, but also on the long-run financial performances of Serbian industry. The object of this paper is the analysis of long- term financial performances of the three industrial branches in Serbia in 2008- 2011. According to business classification, these are: B-mining, C-processing industry and D- supply of electricity, gas, steam and climatization. Those three branches account for 20% in total number of enterprises, and 38% in total number of employees at the level of Serbian economy in 2011. The products of those branches are tradable products and reports on their industrial production are made on a regular basis (Republic office of statistics, 2012). The sources of data which are used in analysis are regular annual financial reports of enterprises and entrepreneurs. Those reports are published by Agency for business registers Belgrade, according to the codes of financial accounting and revision. The assessment of long-run financial performances is based on the analysis of solvency and profitability. Analysis framework is represented by collective data from the balance sheet and profit & loss statements of these three industrial branches. The assessment of solvency and profitability is based on ratio indicators which are standard management accounting tools. The choice of ratio indicators in this paper is determined by the available sources of financial data. , The paper s aim is to point out the need for establishing a special regulation body whose task will be to formulate the Serbian strategy of industrial development. A task for this body would be to take care of strategy implementation Solvency and Profitability of Serbian Industry 31 in the long-run. The paper consists of five parts. The first part contains the review of literature. The second part is an introduction to financial analysis and consists of basic information about industrial branches and data from their balance sheet and profit & loss statements, with brief comments. The third part treats the ratio indicators of solvency. The fourth part deals with profitability analysis. The fifth part concludes.

Review of literature

In 2008. Serbia went into global economic crisis under the burden of transition and recession. Among other things, transition and recession are the consequences of carrying out so called orthodox economic ideology. In the essence of this ideology is a neoliberal concept which consists on the deregulation of goods and financial markets and free trade based on competitive advantage. The government carries out this ideology by macroeconomic policies whose main goal is to preserve price stability. Output and employment become the „hostages“ of inflation targeting. Namely, price stability (if and when it is achieved), is not followed by sustainable output growth and employment. Orthodox economic ideology is known as „Washington consensus“ in literature. Until now, it is not known that any transition economy made a shift from a recession towards recovery, on the basis of the Washington consensus recommendations. Consequently, the question of alternative economic platforms is opening. One such a platform could be named heterodox line of reasoning. In this approach, output is in the centre of economic policies, instead of inflation. Macroeconomic policies (fiscal and monetary), are important, but industrial policies are important too. Industrial policies in transition countries need to be directed towards reindustrialization. The main goals of reindustrialization would be creating competitive sectors with tradable goods end export-led economic growth. Examples of successful reindustrializations are Taiwan and South Korea (1960), and China in a recent period (1990). Output growth based on competitive advantage is a formula for the success of modern economies. Serbia has comparative advantages in energy sector, agriculture, telecommunications, transport and logistics. The task of industrial policies is to transform comparative advantages into competitive advantages. That is why Serbia needs dynamic micromanagement, concentrated on investments in public and private sectors and well coordinated with macro management. Output growth of tradable goods based on the ground of industrial policies is a way for reducing systemic risk in Serbia (Djuricin &Vuksanovic, 2012). Transformation the comparative advantages of some sectors into their competitive advantages is a hard question for reindustrialization policy in Serbia. In 2008-2011. Serbian economy is constantly positioned near the bottom of the scale of global competitive index (Sljivić, Moreblessings &Stefanovic, 2012). The 32 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) key problems of Serbian economy uncompetitiveness are inefficiency of goods and labor markets, and the quality of business sector (for example, low capacity for absorbing new technology, low level of business sophistication and insufficient capacity for innovation). Global competitive index is universal measure which reliefs each country to identify the main sources of uncompetitiveness. A problem for countries such as Serbia is that uncompetitiveness, as a rule, is a consequence of the impacts of multiple factors. From an economic and political standpoint, it is very expensive, if not even impossible in the short-run, to eliminate the consequences of performing all factors. Diagnostics of the uncompetitiveness problem can be simplified in such a way to ask a question: what does prevent a particular country, in a particular time, to achieve higher sustainable economic growth? Methodology for growth diagnostics would find out just those factors with the key influences on growth dynamics in a particular country. Diagnostics is fast, accurate, and need no „waste“ economic and other limited resources. Implementation of this diagnostics on Serbian economy discovers several the most important factors of uncompetitiveness and insufficient growth. Those are: unreal, i.e. appreciated foreign exchange rate, limited access to finance and high real costs of financing, expensive and inefficient state, and inefficient (often unprofessional), management and unproductive labor force (Vujovic, 2012). Situation in Serbian economy is difficult, but the position of industry as one of its most important sectors has become alarming. In 2010. volume of industrial production accounted for only 45,9% of the volume in 1990. In the past two decades cumulative growth of industrial production accounted for 2,5%, and the number of industrial workers have reduced from nearly one million to only 312 thousands. Serbian industry has lost its human capital not only in quantitative terms, but also in qualitative. Namely, ability to successfully manage and innovate business systems in order to be more competitive in the market is lost. Serbia is far behind developed market economies in terms of the level of technology development. Less and less sense has a comparison with own technology basis in 1990. Industry destruction during the last two decades has led to silent death of traditional industrial centers in Serbia. Unemployment has become a massive feature. Managing industrial sectors has reduced on a question how to attract foreign investors. Because of all of that, Serbia needs reindustrialization. The first step involves identification of the key sectors of the future revitalized industry. Those sectors are: petrochemical industry, agricultural industry, automotive industry, textile and industry of construction materials. The second step in reindustrialization would be development of those branches based on knowledge and modern technologies. For example, telecommunications, bioengineering, and „green“ energies. Reindustrialization needs to be phased. Instrument for stimulating new development spiral should be technology platforms. This solution has proven to be good in international practice (Popovic, 2012). Solvency and Profitability of Serbian Industry 33

Quantitative loss of human capital which Serbian economy has experienced can only be compensated by new investments. For qualitative recovery there is a solution-development of corporate entrepreneurship. In our country and in the world, the term entrepreneurship is usually associated with starting new businesses, or activities of small and medium enterprises. „Corporative entrepreneurship“ refers to different types of entrepreneurial behaviour in existing large enterprises. The aim is to achieve competitive advantage through different types of encouraging innovations at all levels: corporate, divisional, business units, and project teams. Corporative entrepreneurship can be a solution for those enterprises that became bureaucratic, conservative, and less risk-taking through time. In literature there are four types of corporate entrepreneurship: corporate venturing, entrepreneurship, „bringing the market inside“, and entrepreneurial transformation (Paunovic, 2012). For reindustrialization in Serbia can be useful the experiences of Great Britain, a cradle of industrial development in the world. In a period from the end of the II world war to the 1960., industry of Great Britain was supported by four policies: (1) regional policy, (2) competition policy, (3) policy to stimulate investments and provide funds for industry, and (4) policies to encourage the commercialization of innovations. Government has used different instruments for the implementation of those polices, such as: grants and subsidies, tax credits for investments, investments in infrastructure, building industrial zones in large cities, etc. From the 1960. it became clear that success in trade and technology advancements has to become the key goal of industrial policy. Ideas on introducing the system of indicative planning, which successfully has operated in France, has appeared for the first time. In 1965. the first National economic plan was adopted. The plan was based on a 4% per annum growth target. Great attention was devoted to the quality development of industrial management through additional education and professionalization of personnel. Raising productivity was also one of the key targets. Measures for increasing productivity included additional investments in industry (especially foreign investors), and active labor market measures. Great , Britain s industry needed to concentrate and rationalize in order to promote greater efficiency and international competitiveness. Development of a scale economy, investing in new methods of production and in new products had to become a key for reaching international competitiveness. Credibility of National plan was questioned with a sterling crisis in 1966. The period of 1980s designated domination of the ideas of supply-side economy. This was a period of the massive privatization of state-owned enterprises and deregulation of economy. The state has lost intervening character, and the role of free market became dominant. During 1990, interests towards sources of competitive advantage renewed both in Great Britain and EU. Current industrial policy of Great Britain starts from the key identified problem: productivity gap in respect to the most important global competitors. Productivity gap is a consequence of the lower level of skills, smaller volume of 34 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) investments in development and lower potential for innovation. This gap can be closed by introducing knowledge economy. The main goals should be improving competition, technology development and education and training. Lesson on the basis of the industrial policy of Great Britain is that goals remained the same as they have been a several decades ago. What changed in the meanwhile are the tools for implementing these goals, which have become more sophisticated (Beat, 2002). Financial analyses show that the most important problems of Serbian industry are: illiquidity, indebtedness, decreased equity, financial imbalance and lack of net working capital, low profit margins, negative financial leverage, and limited access to finance. These problems are not caused only by global economic crisis. Economic destruction of Serbian industry has begun much earlier and because of greater number of various causes. Consequently, a challenge is to explore the causes and to propose appropriate solutions. Illiquidity is a chronic problem for Serbian economy in general, and for industry in particular. The causes of illiquidity are fall in competitiveness, reducing profitability and disordered financial structure. These causes have a long-run character and also need long-run systematic measures. In the short-run, however, some solutions are nevertheless possible. Multilateral compensation is acceptable, but incomplete solution. This solution can reduce the level of mutual financial liabilities of enterprises to a certain degree. The problem is that there will remain huge unsettled mutual debts after performing multilateral compensation. Reason for that is negative cash flow from operations which exist in many enterprises. Strengthening financial discipline is a step in good direction for alleviating illiquidity problems. Introducing deadlines for payment liabilities is especially important for small suppliers who deal with large companies and state-owned enterprises. Beside that, conditions for establishing certain type of legal form of enterprises, such as limited liability companies, need to be reexamined. These companies can be established with minimum sum of capital. An easy way for establishing such companies is not the same thing as an easy way for doing business. Limited liability companies often have large financial problems and limited access to finance. In the case of bankruptcy, creditors have almost no chances to collect their receivables. , Cash-flow management is the weak feature of our managers. Enterprise s need for cash can be lowered by more efficient inventory management and by shortening , collection period. Smaller cash gap means lower pressure on bank s financing sources and lower cost of servicing financial liabilities. Management quality in industrial enterprises also need to be improved. That implies different measures and activities. For example, raising the level of knowledge and skills and continuing professional development. The whole range of modern management tools are available for day-to-day use in practice, such as: calculation of full cost price, value chain analysis, activity based costing etc. Solvency and Profitability of Serbian Industry 35

Relationship between banks and enterprises is complicated. Banks reluctantly invest in industrial enterprises, ascertaining high risks as a basic reason for such practice. Costs of financing are extraordinary high and are not appropriate to the real capabilities of these enterprises. An average cost of debt goes between 12% and 22%. Bank management seldom bears the consequences of wrong investments. Practice that costs of such bad investments are shifted to clients in a form of raising interest rates is unacceptable. Financial system of Serbia is bank-centric. Bank monopoly can be wiped out only through strengthening capital markets. For strategically important enterprises in industrial sector, the solution can be attracting strategic partners and recapitalization. The state can be a strategic partner, and different forms of public-private partnerships are also available (Malinic & Milicevic, 2012). For enterprises who make losses and are in a process of privatization and restructuring, solutions need to be find in structural reforms framework of the Government of the Republic of Serbia (The Government of the Republic of Serbia, 2012).

Framework for analysis

This part of work exhibits basic data on the size and structure of the sample of industrial branches, which will be the object of further analysis. Framework, also, contains collective balance sheet and profit & loss statement of these branches, with a brief comment. Data from financial statements are used as a basis for ratio analysis in the next part of the work. Structure and dynamics of the number of enterprises are exhibit in Table 1.

Table1: Structure and dynamics of the number of enterprises

2008 2009 2010 2011 Industrial branch

Mining 296 309 316 308 Processing industry 19.125 18.641 18.088 17.259 Supply of electricity, gas, steam and 333 377 338 428 climatisation Total 19.754 19.327 18.742 17.995 Participation in total number of 21,30% 21,56% 19,73% 19,58% enterprises Source: Agency for Business Registers of the Republic of Serbia, 2012, and other issues, calculated by the author In 2011. total number of enterprises in these three industrial branches amount to 17.995, or 19,58% enterprises at the level of whole economy. Processing industry dominates in a structure with 96% of enterprises. Mining and supply of 36 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) electricity, gas, steam and climatization take part with 1,7% and 2,3%, respectively. Number of enterprises continuing declines for 1.759 enterprises, or 9% in 2008-2011. In 2011. number of workers in these branches amounted to 385.671, or 38,13% of employees at the level of the whole economy. Processing industry dominates in a structure with 83% of employees. Similar to the number of enterprises, number of workers also declines, around 100 thousand, or 21% in 2008-2011. Decline in employment is registered in all industrial branches in a sample (Table 2 and Figure 1). Table 2: Structure and dynamics of the number of employees

Industrial branch 2008 2009 2010 2011 Mining 41.151 39.756 37.618 36.643 Processing industry 395.150 354.179 325.489 319.479 Supply of electricity, gas, steam and climatisation 49.206 48.737 29.961 29.549 Total 485.507 442.672 393.068 385.671 Participation in total number of employees 43,19% 41,82% 37,97% 38,13% Source: Agency for Business Registers of the Republic of Serbia, 2012, and other issues, calculated by the author

Figure 1:Number of employees in a period 2008-2011.

Source: Author

The period from 2008 to 2011. was marked by various happenings in Serbia. The year of 2008. was the first in the range of years during which begun to show the negative effects of global crisis. Economy as a whole achieved a negative financial result, and a positive trend of doing business and employment was stopped. In 2009. double-digit fall in industrial production (12,1%) was achieved, double-digit rate of inflation (10,4%), and foreign exchange rate was depreciated (8,2%). Again, economy as a whole had losses, and employment rate dropped too. Solvency and Profitability of Serbian Industry 37

According to all indicators, 2010. was a „repetition“ of the previous year. In 2011. economy as a whole achieved positive financial results after longer time, thanks to reduced negative foreign exchange rate differences. Generally, the period from 2008 to 2011. is characterized by worsening financial structure of the economy. Own capital has decreased its part in the sources of financing, at the charge of raising liabilities. Besides losses from current doing business, Serbian economy has been burdened with the losses over own capital in all observed years. Net working capital of the Serbian economy was negative in a whole observed period. Table 3 contains the balance sheet of industrial branches from a sample. Debit side of balance sheet contains property. Property is the generator of future economic gains and the guarantee of financial stability of those branches. That is why it is useful to make an insight into the value and structure of that property.

Table 3: Balance Sheet 2008-2011.

ASSETS 2008 2009 2010 2011 Total Total Total Total A Fixed Assets 2.008.200.900 2.028.480.703 2.282.255.872 3.023.851.701 Intangible I Assets Property, Plant and II Equipment 1.764.933.256 1.772.844.058 1.701.029.502 2.434.587.171 Long-term financial III investments 154.261.751 184.882.999 498.257.931 509.780.469 B Current Assets 1.182.614.872 1.275.230.147 1.473.437.535 1.567.780.319 I V Inventories 441.748.852 428.456.493 478.028.930 499.800.227 Short-term receivables, Investments and V Cash 729.386.599 832.287.139 976.279.696 1.046.185.229 Deferred Tax C Assets 9.864.159 10.676.078 14.969.407 18.778.701 Total Assets D (A+B+C) 3.200.679.931 3.314.386.928 3.770.662.814 4.610.410.721 Loss over E Capital 207.942.438 263.797.919 318.819.242 385.463.168 Total Assets and Loss over F Capital (D+E) 3.408.622.369 3.578.184.847 4.089.482.056 4.995.873.889

38 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

2008 2009 2010 2011 CAPITAL AND LIABILITIES Total Total Total Total

A Capital 1.643.902.803 1.636.512.337 1.775.290.452 2.430.194.064

Nominal paid-in I capital 1.326.960.929 1.311.979.307 1.550.686.646 1.597.134.969

Subscribed II capital unpaid 35.688.632 21.396.582 22.944.694 13.721.453

III Reserves 55.123.127 55.187.102 56.002.605 57.615.934

Revaluation IV reserves 437.733.839 447.309.711 400.229.863 944.089.611

Unrealized gains on V securities 2.940.031 3.494.288 2.548.347 1.642.302

Unrealized losses on VI securities 2.338.995 3.087.207 3.316.564 10.518.765

Retained VII earnings 349.917.527 391.592.523 436.741.530 565.708.972

VIII Loss 560.315.922 589.459.602 687.472.008 736.221.399

Stock IX repurchases 1.824.519 1.900.367 3.074.661 2.979.013

Long-term B provisions 28.972.307 42.118.780 48.347.760 45.147.712

Long-term C liabilities 502.837.252 573.555.628 700.728.301 798.535.042

Short-term D liabilities 1.194.203.647 1.290.576.253 1.529.619.633 1.627.254.394

Deferred tax E liabilities 38.706.360 35.421.849 35.495.910 94.742.677

Total capital and liabilities (A+B+C+D+ F E) 3.408.622.369 3.578.184.847 4.089.482.056 4.995.873.889

Source: Agency for Business Registers of the Republic of Serbia, 2012 Solvency and Profitability of Serbian Industry 39

In an average for observed period, the structure of assets consist of fixed assets (60%), current assets (32-35%), and loss over capital (5-8%). The most important part of fixed assets are property, plant and equipment. This part determines production capacities. Data show that production capacities did not increase significantly in observed period. The year of 2011. is an exception, not because of increased investing, but because of revaluation effects. The stagnation of production capacities is followed by the poor growth dynamics of inventors that belong to current assets. These trends show on sharp demand constraint to which industrial branches have confronted. Problems with sales are multiplied because of hardened collection of receivables that record significant increase in observed period. Losses over capital are an item that has recorded the fastest growth dynamics in observed period. In December 31, 2011. losses over capital accounted for 385,5 billions of dinars, or 7,7% of total assets. These losses show that some enterprises have lost own capital entirely and that excess of losses over capital is charged in a whole on the burden of creditors. Financial difficulties of these enterprises are of such a nature, that there is nothing left for them except bankruptcy ( Rankovic, 2011). Total capital and liabilities contain sources of financing. In an average for observed period, these sources consist of capital (50%) and liabilities (50%). Capital consist of nominal paid-in capital and different items that increase or decrease its value. Revaluation and other reserves have a function to protect capital and to improve financial structure of enterprises. Retained earnings also increase the capital of industrial branches from a sample. In December 31, 2011. retained earnings account for 566 billions of dinars. These retained earnings represent the part of total earnings, net of tax and separating for other reserves, which is available for distribution to stockholders, but is reinvested in enterprises. Loss is deductable item that show how much capital enterprises have lost in their business. In December 31, 2011. losses accounted for 736 billions of dinars. Liabilities show the future outflow of financial assets. In the structure of liabilities the largest part have short-term liabilities from business operations and short-term financial liabilities. Short-term liabilities are larger than current assets in a whole observed period. This trend shows on the chronic illiquidity of industrial branches from a sample. Amount of long-term liabilities is approximate to the size of realized losses. Profit & loss statement is a financial report that contains revenues, expenses and profits, or losses. That is why profit & loss statement is the most directly connected to the goals of enterprises. Owners want to know whether their capital is preserved and whether profit exists, which is a basis for payment owners returns. Profit & loss statement also represents a basis for risk assessment. The reason is in the fact that profitability represents primary criteria for the assessment of safety of , enterprises and creditor s interests protection. Table 4 contains the items of profit & loss statement of the industrial branches from a sample. 40 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

Table 4: Profit & loss statement 2008-2011.

2008 2009 2010 2011

Total Total Total Total Positions Operating revenues and A expenses Operating I revenues 2.173.154.879 1.965.371.278 2.357.808.345 2.646.307.479 Operating II expenses 2.138.357.196 1.922.235.168 2.254.622.258 2.529.770.593 Operating income III (loss) 34.797.683 43.136.110 103.186.087 116.536.886 Financial revenues and B expenses Financial IV revenues 88.918.769 72.028.418 91.681.374 101.236.341 Financial V expenses 179.030.032 150.122.693 201.878.859 162.927.267 Net financial revenues VI (expenses) -90.111.263 -78.094.275 -110.197.485 -61.690.926 Net other gains and C expenses 11.189.529 -59.112.111 -25.430.227 -27.112.088 Income (loss) before D taxes -44.124.051 -94.070.276 -32.441.625 27.733.872 Income tax, and other E liabilities 4.259.644 2.503.742 537.764 8.230.612 Net income (loss) after F taxes -48.383.704 -96.574.018 -32.979.339 19.503.260

EBIT G (D+B 5) 134.905.981 56.052.417 169.437.234 190.661.139 Source: Agency for Business Registers of the Republic of Serbia, 2012 Solvency and Profitability of Serbian Industry 41 Issues

In the period from 2008 to 2011. industrial enterprises continually realized net losses. The year of 2011. is an exception, when a net income was realized. Looking at the structure of profit & loss statement, balance of operating revenues and expenses is positive in all of the observed years. Cumulative growth of operating revenues has accounted for 22%, while operating expenses have had lower growth dynamics, accounted for 18%. In 2009. operating revenues were reduced in an absolute terms, but operating expenses were lowered too. Operating income , nevertheless wasn t enough to cover losses in balances of financial revenues and expenses and other gains and expenses. Especially great losses are present in the balance of financial revenues and expenses. Financial expenses are almost twice as higher as financial revenues in all observed years, except in 2011. This trend shows on extremely high costs of servicing financial liabilities incurred, because of intensive indebtedness. Taxes on income and other liabilities additionally have reduced the net financial result of industrial branches.

Ratio analysis of solvency

Solvency analysis is aimed at the assessment of the long-run financial stability, i.e. long-run investment risks in some enterprise. Consequently, the owners of capital and long-run creditors are the most interested at this kind of analysis. Solvency is defined as the ability of enterprise to make the payments of interest costs and long-run liabilities on time. The most important factors of solvency are the value and structure of property, the size of own capital, and enterprise profitability. Available property of enterprise is the factor of solvency for a lot of reasons. Firstly, it represents the generator of future economic returns and cash flows. Cash flows are used for the payments of financial liabilities to the long-run creditors, and also for dividend payments to the owners. Secondly, the term structure of property determines the level of risk. Fixed assets are more risk than current assets. For the sake of preserving solvency, fixed assets need to be financed with so called risk capital, i.e. owners capital. Enterprise solvency will neither be threatened if fixed assets are financed by long-term liabilities. The size of owners capital is the factor of security (long-term) creditors. Earlier it was considered that enterprise is solvent if lower level of own capital accounts minimum 50% of total capital. From the other side, the prevalent part of , somebody else s capital in total capital is a sign for creditors that their investments can become very risky. 42 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

, Modern market economy changes usual rules. Enterprise s financial balances , , contain less and less equity and more and more somebody else s capital. Creditor s attention is focused on profitability, i.e. the earning power of enterprise. If , , enterprise realizes greater rate of return on total (owner s and creditor s) capital, than the cost of capital engaged is, then enterprise solvency is not threatened. Profitability is becoming more and more the source of primary security for , creditors. It does not mean that equity has lost it s significance. It obtains the role of , secondary security in protecting creditor s interests. (Stevanovic, Malinic & Milicevic, 2011). Ratio indicators of solvency are analyzed in addition. These ratio numbers are often called the ratios of financial leverage. Data are presented in Table 5.

Table 5: Ratio indicators of solvency 2008-2011.

Type of ratio Benchmark 2008 2009 2010 2011 Fixed assets coverage ratio 1 0,44 0,39 0,33 0,43 Debt to equity 1 2,01 2,48 3,01 1,96 NWC / inventories - -1,36 -1,47 -1,6 -1,74 NWC / current assets - -0,51 -0,49 -0,52 -0,55 Source: Author Fixed assets coverage ratio shows to what extent fixed assets, as the riskiest part of total assets, are financed with owners capital. In our case, this ratio is far lower than benchmark value. Industrial branches from a sample do not succeed to cover investments in fixed assets by own capital in observed period. The question is whether low values of these ratios are certain signs that long-run financial stability is worsened? The answer depends on the size of long-run liabilities which also serve as a source for covering fixed assets. Data in Tables 3 and 6 speak that long-run liabilities aren,t enough for covering fixed assets in accordance to benchmark values. Consequently, this ratio shows worsening the solvency of industrial branches from a sample. Debt to equity ratio shows the degree of charging own capital by total liabilities. The lower the value of debt ratio, the higher the solvency and stability of long-term creditors. Data in Table 5 show that the value of this ratio is much above a benchmark value. The greatest negative variances were realized in 2009. and 2010. Ratio numbers net working capital / inventories and net working capital / current assets are often used for the assessment of solvency. Analysis until now shows that industrial branches from a sample are insolvent, i.e. their long-term financial position is highly risky. Solvency and Profitability of Serbian Industry 43

Analysis of solvency can be extended with considerations on net working capital. The reason is that long-run creditors recognize distinctive margin of safety in net working capital, for their investments. Net working capital represents the part of own capital and long-term liabilities that is intended for financing current assets. Net working capital and its relation towards current assets (especially inventories), is important for assessment, planning, and control the long-run financial safety of enterprises.

Table 6: Net working capital 2008-2011.

Position 2008 2009 2010 2011 1 Capital 1.643.902.803 1.636.512.337 1.775.290.452 2.430.194.064 Cumulated 2 losses 768.258.360 853.257.514 1.006.291.250 1.121.684.567 Net capital 3 (2-1) 875.644.443 783.254.823 768.999.202 1.308.509.497 4 Fixed assets 2.008.200.900 2.028.480.703 2.282.255.872 3.023.851.701 Own net working capital 5 (3-4) -1.132.556.457 -1.245.225.880 -1.513.256.670 -1.715.342.204 Long-term provisions and 6 liabilities 531.809.559 615.674.408 749.076.061 843.682.754 Net working capital 7 (5+6) -600.746.898 -629.551.472 -764.180.609 -871.659.450 8 Inventories 441.748.852 428.456.493 478.028.930 499.800.227 Excess (deficiency) 9 NWC (7-8) -1.042.495.750 -1.058.007.965 -1.242.209.539 -1.371.459.677 Source: Agency for business registers of the Republic of Serbia, 2012, calculated by the author Data in Table 6 tell that the long-run financial balance of industrial branches from a sample is seriously deteriorated. Enterprises don,t have long-run capital excess for financing inventories. Deficiency of net working capital is enormous and accounts from 1.042 thousands of billions of dinars (2008), to 1.371 thousands of billions of dinars (2011). It, practically, means that inventories are completely financed from short-term sources. 44 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) Ratio analysis of profitability

Profitability is a final test for the success of enterprise, branch, division, or economy as a whole. Two possible reasons exist. The first reason is that profitability is connected directly to achieving the owners aims; profitability is one of the key factors that encourage, or discourage investors to invest again. The second reason comes from the fact that profitability is inevitable determinant of liquidity, long-run stability, and sustained growth ( Malinic &Milicevic, 2011). Profitability analysis is implementing by several indicators that can be grouped into two groups. The first group consists of the profitability indicators of revenues. The second group consists of profitability indicators of assets and capital. Table 7 contains data for both group of profitability indicators. Table 7:Ratio indicators of profitability 2008-2011.

Indicators 2008 2009 2010 2011 Ratio analysis of revenue profitability Net operating income rate 1,60% 2,20% 4,40% 4,40% Net profit margin ratio -2,20% -4,90% -1,40% 0,70% Gross profit margin ratio 6,20% 2,80% 7,20% 7,20% Ratio analysis of assets and capital profitability Return on Assets (ROA) 4,21% 1,69% 4,49% 4,13% Return on Equity (ROE) -5,52% -12,30% -4,29% 1,49% Source: Author Net operating income rate shows profitability that enterprises achieve in respect to their core business, i.e. dealing with the production and sale of products and services. The net operating income rate of industrial branches from a sample is extremely low in a whole observed period. This rate accounts from 1,6% (2008), to 4,4% (2011). That, practically, means that enterprises have accounted net operating income from 1,6 dinars to 4,4 dinars for every 100 dinars of realized revenues from sale in the market. According to these indicators, enterprises don,t have enough financial strength to carry on significantly higher level of indebtedness. Net profit margin ratio tells more accurately about profitability. This ratio shows which part from sales revenues finally finds out the way towards their owners. The values of ratios are negative in the first three years, while modest positive growth is realized just in the last year of 2011. The fact is that almost all enterprises are forced to finance their property partly from liabilities. Consequently, profit or net income which enterprises realize must be divided between owners and creditors. When profit margin is calculating, it is reasonable to increase net income for interest costs. In such a way it is arrived to another profitability ratio called gross profit margin. In Table 7, gross profit margin is larger than net profit margin and accounts from 6,2% (2008), to 7,2% (2011). Such a trend suits to long-run and short-run creditors. Solvency and Profitability of Serbian Industry 45

Ratios of revenue profitability are needed, but insufficient condition for the profitability assessment of industrial branches from a sample. This is because these , ratios ignore the extent of capital needed to be engaged in creating revenues. That s why analysis is supplemented with the profitability ratios of assets and capital. The most frequently used ratios are return on assets (ROA), and return on equity (ROE). In Table 7, ROA has positive values, but it does not exceed 5% in any year. Calculated values show that industrial branches have accounted returns from 4,2 dinars (2008), to 4,49 dinars (2010) for every 100 dinars invested in different types of property. For a comparison purpose, values of this ratio at the level of the whole Serbian economy accounted: 2,1%(2008), 0,2% (2009), 0,1% (2010) and 0,9% (2011), (Agency for business registers, referent years). Return on equity (ROE) shows the part of return in invested capital which belongs to the owners of enterprises. Generally, industrial branches can,t be satisfied with the fact that profitability of owners capital declines. In Table 7, value of ROE is negative in three out of four years. Just in the last 2011. value of ROE has a minimum positive value accounted for 1,49%. These values, also, can be compared to ROE values at the level of the whole Serbian economy: 2,2%, (2011), -2,9% (2010), -2,9% (2009), and -1,0% (1008), (Agency for business registers, referent years). Rates on return on assets and equity are presented in Figure 2.

Figure 2: Profitability of Assets and Capital 2008-2011.

Source: Author Obviously, negative financial leverage is performing. This circumstance needs deeper analysis in order to better understand the causes of unprofitability. In addition, attention is concentrated on the analysis of result structure. The analysis of result structure involves analysis of operating income and net financial revenues (expenses). The aim is to locate the key areas of unprofitability of this sector. Results are presented in Figure 3: 46 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

Figure 3: Operating income and financial revenues and expenses 2008-2011.

Source: Author In the period from 2008 to 2011. operating revenues were larger than operating expenses, so the sector continually was realizing operating income. The amount of operating income is very small, and that can be seen in an earlier presented profit & loss statement (Table 4).On the other side, financial revenues and expenses balance is characterized by financial expenses much greater than financial revenues. This balance is negative in all observed years. Deficit is greater than operating income in all observed years. The year of 2011. is an exception, because operating income outperformed the amount of financial revenues and expenses balance deficit for the first time. Low level of profitability introduces industrial branches into vicious circle. Their production is capital intensive and depending very much on the volume of investments. Financing rules impose that investments are to be financed with qualitative financial sources. As the profitability of these branches is insufficient, investments are postponed, or financed by expensive external sources. No solution is good. In the first case, result is deepened technically and technologically lagging, drop in productivity and competitiveness. Production, sales and profitability do not have a long-run perspective. In the second case, expensive external sources of financing put pressure on business result and losses are inevitable. An exit from a loss zone demands new financial sources. Because of high long-run risk, external creditors refuse such demands, or offer financial sources under very unfavorable terms. So conclusion from earlier analyses that sustainable growth of real sector of economy is not possible under such conditions is confirmed. (Malinic & Milicevic, 2011). Solvency and Profitability of Serbian Industry 47 Conclusion

Two views on the development perspectives of Serbian industry are presented in this work: the first is external, and the second is internal. External view puts the problems of Serbian industry in the wider context of the causes and consequences of economic growth crisis in transition economies. Orthodox, or liberal, concept of economic development is guilty for condition in Serbian economy. Equal responsibility carry macroeconomic policies too, whose strategic goal is maintaining price stability, instead of output growth. In a poor transition economy such as Serbia, price stability is a missed target with hard consequences. Country has to adopt heterodox model of economic development. Model gives priority to growth output, on a basis of tradable goods. Industrial policies also have priority over general macroeconomic policies.

The strategic goal of industrial policies has to be raising the level of competitiveness of Serbian economy. That goal has to be achieved through reindustrialization. The concept of reindustrialization has solid ethical and economic foundation. The industry of Serbia, its material and human capital, almost destructed during two decades of transition and privatization. The technologically lag of industry can be solved by the concept of technology platforms. Ideas on corporative entrepreneurship can raise human capital efficiency. The experiences of advanced market economies can be instructive for Serbia. Industry in these countries always has been the engine of economic development. Such a status is maintained by continuing battle for raising competitiveness, based on knowledge and innovations. Industrial policies enjoy the largest support of the state and its regulation bodies. Internal view on the development perspectives of Serbian industry is concentrated on the assessment of its financial condition and possibilities. Financial condition is hard because large illiquidity, insolvency, cumulated losses and low profits exist. Possibilities for further development and modernization are highly limited. High-quality financing sources are needed. Serbian industry does not have such sources, or they are inaccessible because of the high perceived investment risk. External view has proved that Serbian industry definitely goes in the wrong direction, in comparison to the world trends. The main channel through which such direction is realized is decline in competitiveness. From the other side, internal view showed hard financial condition and the long-term risky financial position of Serbian industry. Real development perspective of Serbian industry has to be built on the synergy of these two approaches. Synergy can be realized in practice by a special regulation body. The founder of that body would be the Government of the Republic of Serbia. The choice of members would be based on expert criteria, and not on political criteria. Regulation bodies mandate would be to formulate the industrial development strategy of Serbia and to take care on its implementation in the long-run. In the present moment such a task looks like arranging the “puzzle”. Some parts of a puzzle exist, and some do not. Formulating and implementation industrial strategy has to be based on the experiences of good practice in advanced market economies. 48 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) References:

[1] Agency for Business Registers (2012). Saopštenje o poslovanju privrede u Republici Srbiji u 2011. godini, www.apr.gov.rs [2] Beath, J., (2002). „UK Industrial Policy: Old Tunes on New Instruments?”, Oxford Review of Economic Policy, Vol. 18, No.2, pp. 221-239 [3] Djuricin D.,Vuksanovic I., (2012). “Reduction of Systemic Risk in Serbia Through Intelligent Risk Management in State-Owned Enterprises”, Ekonomika preduzeća Vol. 60, br.5-6, pp. 229-247 [4] Malinic D.,Milicevic V., (2012). “Overcoming Financial Structural Disorders as a Prerequisite for Strengthening the Competitiveness of Serbian Economy”, Ekonomika preduzeća, Vol. 60, br.7-8, pp. 317-328 [5] Malinic D., Milicevic V.,(2011). “Perfomance Evaluation of Real Sector in Serbia”, Ekonomika preduzeća, Vol.59, No.7-8, pp. 335-351 [6] Paunovic, B., (2012). “The Role of Corporate Entrepreneurship in Solving the Competitiveness Crisis of Large Companies”, Ekonomika preduzeća, Vol. 60, pp. 343-354 [7] Popovic, N., (2012). “The New Industrialization of Serbian Economy”, Ekonomika preduzeća, Vol. 60, br.1-2, pp. 95-104 [8] Rankovic, J., (2011). „Kako su se promenili rentabilitetni i finansijski položaj u privredi Srbije u 2010. godini”, Ekonomika preduzeća, Vol.59, br.5-6, pp. 262-265 [9] Republic Office of Statistics (2012). Trendovi, www.stat.gov.rs [10] Stevanovic,N., Malinic, D.,Milicevic V.,(2011). Upravljačko računovodstvo, Centar za izdavačku delatnost Ekonomskog fakulteta u Beogradu [11] Sljivic,S., Moreblessings S., Stefanovic, S. (2012). „Entrepreneurship: a Necessity or Opportunity in Transitional Serbia?”, Employment, Education, and Entrepreneurship, Faculty of Business Economics and Entrepreneurship, Belgrade, Vol.3, pp. 17-34 [12] The Government of the Republic of Serbia (2012). Fiskalna strategija za 2013. godinu sa projekcijama za 2014. i 2015. godinu [13] Vujovic, D. (2012). „Serbia: Policies to Enhance Competitiveness”, Ekonomika preduzeća, Vol.60, br.5-6, pp. 261-274

Solvency and Profitability of Serbian Industry 49 APSTRAKT

Posle više decenija ekonomskog propadanja industrije Srbije, svest o značaju ove privredne grane sve više jača u poslednje vreme. Ključno pitanje je koliko su realne perspektive razvoja srpske industrije? Hipoteza je da ta perspektiva zavisi od kvaliteta vizije, ali i od dugoročnih finansijskih perfomansi ove grane privrede. Rad se bavi analizom solventnosti i profitabilnosti tri industrijske grane Srbije u periodu 2008-2011. godine. To su: rudarstvo, prerađivačka industrija i snabdevanje električnom energijom, gasom, parom i klimatizacija. Okvir za analizu predstavljaju zbirni podaci iz bilansa stanja i bilansa uspeha ovih grana. Ocena solventnosti i profitabilnosti se zasniva na racio pokazateljima. U radu se ukazuje na potrebu da se osnuje posebno regulatorno telo na nivou Vlade Republike Srbije, čiji zadatak bi bio da formuliše i kontroliše implementaciju strategije razvoja industrije Srbije u dugoročnom periodu.

KLJUČNE REČI: industrija, perspektive, solventnost, profitabilnost, strategija

Article history:

 Received 2 April 2013  Accepted 15 May 2013

UDC: .146:330.322(497.11) ; 332.122:338.45(497.11) ID: 199123724 Scientific report

An impact of Free Zone on the More Rapid Development of The Presevo Municipality

Uticaj slobodne zone na brži razvoj opštine Preševo

Edita Kastratovic 7 Milan Dragic 8 Vesna Cilerdzic 9

ABSTRACT

This paper is based on the research that was conducted during the development strategy of the municipality of Presevo. Analysis of the existing economic potential of the Southern Serbia has been done, the region totally neglected in terms of investment. Results of the research have been produced together with the proposals of strategic priorities, measures and promotions of the free zone as a solution leading to faster development and economic stabilization. The concept of free zones and industrial parks, a model enabling faster development of underdeveloped regions and a mechanism of balancing the economic growth. This is the concept and the way out of the major economic crisis that the municipality of Presevo is facing.

KEYWORDS: Free zone, development, southern Serbia JEL: R11

7 Corresponding author Edita Kastratovic, e-mail: [email protected], Faculty of Business Economics and Entrepreneurship, Belgrade,Serbia 8 Faculty of Business Economics and Entrepreneurship, Belgrade,Serbia 9 Faculty of Business Economics and Entrepreneurship, Belgrade,Serbia An impact of Free Zone on the More Rapid Development of The Presevo Municipality 51 Introduction

Southern Serbia has been the synonym for poverty for decades. No economic investment has been made in the region, which caused migration of the young and still working population to the more developed towns as well as abroad. Failed privatisation, bankrupt companies, lack of quality personnel, political indifference, these are all factors that contributed to the economic stagnation of the region10. Some attempts in the form of financial injections ended ingloriously due to inadequate planning and improper expenditure of the funds received. The poverty of one region is a huge expenditure for a country, both socially and economically. Socially - in terms of allocating considerable means for the socially vulnerable (which are many in underdeveloped regions), economically - in terms of non- utilization of the resources possessed by the regions. According to contemporary economic theory and practice, no stable or dynamic economic development of a country is possible, nor a quality of life or the standard of living of the population if the islands of poverty and underdevelopment are allowed to retain. At the same time, it means that such a society bases its economic and overall policy on the principle of equal opportunity, while the discrepancy between the level of economic, technological and overall social development of certain regions of a country, presents discrimination itself. That is one of the reasons why one of the central issues of sustainable development strategies is balanced regional development. Also the process of European integration of Serbia is conditioned by the development of the concept and practice of balanced regional development, with the development of the municipalities in southern Serbia, being the first and most serious test, for a range of characteristics. Breaking the vicious circle of poverty in which southern Serbia has been for decades, requires, above all, readiness to face the facts, but also the courage to abandon all restrictions and heritage of the past and start creating a new vision. One of the conditions for the creation, operation and development of SMEs is how the government and the public treat the role, importance and problems of small and medium enterprises. This relationship differed and still differs from country to country, both regarding the space and time. However, it begins to universalize. Southern Serbia has natural, human and all other resources to take the path of stable and dynamic technological, economic and overall social development and to turn from the oasis of poverty into an attractive place to live. The first step in this direction is the creation of favorable social environment, stimulation and release of creative energy of the people in the region. It is necessary to take into account the experience of all the developed countries that have successfully addressed the issues of balanced regional development. Thus, unless the issues of the development of southern Serbia are addressed responsibly and competently, Serbia would remain a prisoner of the poverty of this part of the country.

10 Project leader, Prof Edita Kastratović PhD 52 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) The aim of the study

The aim of this study was to explore, analyze and define the potential of the region of Southern Serbia as well as to present the free zone as a solution for faster development and economic stabilization. The investigation included defining and proposing necessary measures and instruments that would contribute to the improvement of economic, infrastructural and institutional development of Southern Serbia.

Method of work

This research took the case study, as a method that can fully examine all aspects of the potential and the possibilities provided by the municipalities of Presevo concerning economic, infrastructural, institutional development.

The research results

Presevo Free Zone as an opportunity for a more rapid economic development of the municipality and Southern Serbia Based on the diagnosis of the state of affairs and interviews with local shareholders the establishment of a free industrial zone in the Presevo municipality (Kastratovic, 2006) was proposed. All involved agreed concerning the importance of locally-economic strategies thus confirming the theoretical interpretation of the strategy and its implementation in practice, i.e. that the strategy is the rational response of the organization to events in the environment in which it performs its core business and wider social mission (Masic, 2007). The main reason for this is a great chance that the establishment of the Presevo Free Zone would quickly see free flow of ideas, goods, services and people, with no customs or other barriers, with minimal paperwork that would surely lead to the expansion of business and entrepreneurial initiative in this area. Free zone would be established in one of the several attractive locations in the municipality of Presevo. Free Zone would offer excellent opportunity for road transport, and the fact that the free zone would be on the route of the corridor 10, which would make it particularly attractive given the proximity of the border crossing with FYROM. The proposal implies that Presevo Free Zone is a modern joint-stock company of shareholders - private companies, banks, government institutions and companies in mixed ownership. Free zone would imply the existence of production and warehousing space where they can realize specific user applications. There An impact of Free Zone on the More Rapid Development of The Presevo Municipality 53 would be present programs in the IT industry, trade houses, multinational companies, distributors of various commodities. Many advantages of doing business in the Free Zone would be available to them, one of which would be tax benefit, given the fact that under the law on VAT no tax is paid on the entry of goods into a free zone except for goods intended for end users in the zone. No tax would be paid on transport provision or provision of other services to customers of free zones that are directly related to housing and goods entering the zone. Customs benefits come together with tax benefits: 1. Users of the Free zone would pay no customs services in respect of equipment, spare parts, raw materials, or production materials used for the work in the zone. 2. Customs duties arise only if the goods are exported to the domestic market and they would apply only to foreign components contained in the goods. One of the biggest advantages of the Free zone would be that importing and exporting from the zone would be entirely free, meaning that no shipment, import or export licenses or other restrictions on foreign trade would be applicable in the area. Also significantly simplified is the procedure for temporary removal of goods from the zone for the purpose of finalizing, completing, processing or installing, certifying or marketing presentations. Mission of the Presevo Free Zone is to offer its customers the best conditions for doing business in the region, thus indirectly influencing the improvement of the business environment and standards of working and living in the environment, while respecting the highest professional and ecological standards. In order to improve the quality and enrich the range of services offered, Presevo Free zone could offer a number of special services, creating "one stop shop" system where users can fully implement their program in one place with minimum of time and administration - where banks, insurance companies, transport, goods handling services and maintenance, restaurants, etc. Presevo Free Zone would boost the economic development of the municipality and through various mechanisms, additional guarantees and stimulations would attract foreign capital. The Municipality of Presevo is characterized by unsatisfactory level of production growth, continuous growth and high unemployment rate and strongly expressed social moment that slows down more rapid economic development. Privatization has not been implemented yet, the economic environment characterizes high level of economic risk and is also disincentive to foreign investors and partners. It is also multiplied by political risk, which is directly connected with and still heavily influenced by the state economy. In such circumstances, the Presevo Free Zone will represent a concept of improved quality and affirmatively supported by the state and that can significantly contribute to improving economic conditions and the image of the municipality of Presevo. Versatile concept of the Preševo Free Zone is very interesting for the very state as it requires no investment: the state creates micro ambience and conditions therein, and investors donate funds. 54 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

Presevo Free Zone can be an oasis of market economy, while local government, state institutions and other relevant economic factors must do everything as to attract and stimulate foreign investors so that they are given additional guarantees and stimulus, while actively following the effects of operation and influencing the spillover of positive effects on the environment of the zone. When a serious company enters the area, it inevitably brings its traditional suppliers and subcontractors who will engage our raw materials, labour, from the municipality of Presevo and related industries in the area, so that the business expands in concentric circles and develops slowly but surely starts taking root. This is one of the key arguments for free and industrial zones. By creating the Presevo Free Zone, the town would attract more foreign investors, with the market thinking, Presevo can become more interesting and economically stronger. With proper positioning and developing this concept, the situation arises that the zone "pulsates causing the environment to do the same". Companies that enter the zone bring their technology of reflection, so that they will technologically advance the business, which is extremely important. However, more important is the fact that foreign investors bring new "technology thinking" - mental revolution. This will upgrade technological performance, there will be essential education and mental changes in the thinking and behavior of the people running the companies and those working in them. This is a very important moment not only as new jobs will be created, but also the quality of staff education will be improved, directly of those employed in the zone, and indirectly those employed in wider environment and who have to adopt certain standards if they want to work with these companies. The concept of free zones and industrial parks, a model that allows rapid development of underdeveloped areas and mechanism that balances economic development - it is the concept and the way out of major crisis that Presevo is facing. The sense lies in the fact that the local authority determines the degree of incentive and guarantees that it will be given to investors thus put emphasis on the interest of outlets. Through quality regulations and a good marketing strategy the municipality of Presevo can and must be included in this concept. The most important thing for the Presevo Free Zone is the existence of infrastructure, work force, guarantees and incentives, and more importantly, it is the state that promotes it. On the other hand, the strategic importance of the formation of the Presevo Free Zone is linked with the free trade zone, which is under formation formed in the Balkans i.e. southeastern Europe. In this way, our market will be exposed to additional competition, will be open to their products. It is for this reason that it is very important that this project is implemented as soon as possible so as to increase the production and its quality as well as to sell our products successfully in that market. One of the huge benefits that the Presevo Free Zone would have is the fact that the large percentage of the people from this region are temporarily working abroad and they would certainly be quite happy to invest their capital in the creation of free trade zones and their operation, i.e. in the development of the region. Small and medium enterprises have become dominant models in developed An impact of Free Zone on the More Rapid Development of The Presevo Municipality 55 economies, while absorbing 60% of total world employment, according to data from the London Business School in 2007 (Djuric, 2008). The main obstacle to attracting investments in Presevo, has so far been a big problem that the municipality has with the infrastructure and it must be solved as soon as possible. For the creation of the Presevo Free Zone the assistance could be expected from international organizations (CHF, the European Agency for Reconstruction, UNDP and others) that would certainly support such a concept to come to the solution of major economic problems the municipality is facing.

Table 1. Profile of the Presevo Free Zone (FZP) as Long-term Municipal Development Project

Construction of the PRESEVO FREE Project title ZONE The Project relates to the founding of a Short description of the project modern zone. One of the shareholders to be the municipality. Economic development of the entire Overall basic rationale and objectives municipality Presevo Town Hall and future Implementing institutions, project owner shareholders Estimated implementation time frame 5 years 90% Estimated financial package for Municipality 10% investments and Donors shareholders Residents of the town of Presevo, Expected beneficiaries (target groups) businessmen from the municipality and surrounding, investors from surrounding Forming of the Free Zone would provide Expected benefits (expected gain, or employment for Presevo residents and saving, new jobs, type and the level of become attractive to both local and improvement of the quality of life etc.) foreign investors. State of affairs of the project preparation (eg: feasibility study, preliminary or final For the proposed project all the required design, invoice in respect of the quantities, paperwork, studies, documents and other. cost estimate by engineers). Future free zone in the Presevo municipality would have to be more attractive than any other in Serbia so as to attract future foreign investors. The municipality should give up the income from all duties during the construction of the facilities in the area, including all taxes within ten years from the beginning of the use of the constructed facility. The municipality of Presevo should provide an area of 5-10 ha (hectare), with the possibility of expansion. The room should have an optical cable, water network, sewage and modern power station. It is advisable that manufacturing companies work in the zone, then the companies providing warehouses for storing, packaging of goods, uploading and reloading goods for 56 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) international transport. It is necessary for the zone to have a container terminal, shipping, and transport organization and it is necessary that all services in a modern logistics centre on the border with Macedonia to be available. It is desirable that the customs office is within the zone, which would guarantee quick service and minimize keeping of trucks and freight trains. Based on the analysis of the potential and possibilities of Presevo a SWOT analysis has been done, clearly defining and reviewing all the power and the chances on the one, as well as weaknesses and threats on the other hand.

Table 2. SWOT analysis for the Long-term Project Presevo Free Zone

STRENGTHS WEAKNESSES OPPORTUNITIES THREATS Freedom concerning Non-existence of the Free zone in Very attractive initiative by the town planning for the Vladicin Han, location. municipality and other future zone Vranje interested businessmen Announced acceleration of Relative problem Proximity of the works on corridor 10 by Free zones in concerning privately corridor 10 EU and Greece and the Macedonia owned land Government of Serbia Presently non- Proximity of Reduction of tax charges Future free existing airports in Nis, by the Government of zones in infrastructure on Skoplje, Pristina Serbia Kosovo location Reduction of utility and Proximity of other charges compared to railway transport all the municipalities in the region Possibility of rapid infrastructure Law on free zones planning in the future Source: Authors

Concluding Remarks

Conducted research and analysis of the potential of the region of Southern Serbia made possible the formation of a SWOT matrix and defining the advantages and opportunities of the region that are necessary to be used in order to speed up the development and economic stabilization in Southern Serbia. Swot analysis of the Presevo municipality is just an example of possible perception of the potential which should spur the research process and the analysis of other developing municipalities of southern Serbia. An impact of Free Zone on the More Rapid Development of The Presevo Municipality 57

Great opportunity afforded by setting up of the Presevo free zone is the potential of the free flow of ideas, goods, services and people, together with tax and customs exemptions. Foreign investors recognize the benefits of free trade zones. However, they need to be presented with the benefits of investing in the municipalities and towns with unused potential as well as with attractive marketing opportunities. The initial initiative must be taken by the local authorities in cooperation with relevant ministries. Economically underdeveloped municipalities and towns must take initiative to promote their potential in every imaginable business meeting, trade show, meeting with foreign delegations. Presevo Free Zone would offer excellent opportunities to road transport, and the fact that the free zone would be crossed by the Corridor 10, is one of the strongest arguments and basic promotion and presentation of the attractiveness of the municipality. Local authorities must recognize the importance of solving the existing weaknesses defined by Swot analysis. Solving the problem of the private ownership of the land in the direction of the corridor10, non-existence of town planning and infrastructure deficiencies, must be no obstacle to the implementation of the free zone project. Local authorities must, in cooperation with relevant ministries, solve specific problems given the fact that the specific problems result primarily from procedural inefficiency. Political and economic problems presented barrier to a thorough and systematic approach to solving specific problems of all underdeveloped municipalities and regions in Serbia. Government as coordinator, led by the Ministry for Regional Development failed to recognize the need for a parallel procedure to establish free trade zones, which led to the opening of free trade zones in only some towns (municipalities): Subotica, Zrenjanin, Novi Sad, Pirot, Kragujevac.

References

[1] Djuric, Z., (2008): Management of the family business, Belgrade Business School, Belgrade [2] Kastratovic, E. (2006): "Development of locally-economic strategy of the municipality of Presevo," CHF International Serbia, Presevo Municipality [3] Masic, B. (2007): Strategic Management, University of Synergy, Bijeljina

58 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) APSTRAKT

Ovaj rad se zasniva na istraživanju koje je sprovedeno tokom strategije razvoja opštine Preševo. Urađena je analiza postojećeg privrednog potencijala južne Srbije, regiona koji je potpuno zapostavljen u smislu investicija. Došlo se do rezultata istraživanja zajedno sa predlozima strateških prioriteta, mera i promocija slobodne zone kao rešenja koje vodi do bržeg razvoja i ekonomske stabilizacije.Koncept slobodnih zona i industrijskih parkova, model koji omogućava brži razvoj nerazvijenih područja i mehanizam za postizanje ravnoteže privrednog rasta. Ovo је koncept i izlaz iz velike ekonomske krize sa kojom se suočava opština Preševo.

KLJUČNE REČI: slobodna zona, razvoj, južna Srbija

Article history:

 Received 1 April 2013  Accepted 17 May 2013

UDC:368.91:339.13(497.11+497.4/.7)"2008/2011" ; 338.124.2:368 ID: 199123980 Original scientific paper

Effect of Global Economic Crisis on Life Insurance Market‐ Countries of the Former Yugoslavia from 2008.to 2011.

Uticaj svetske ekonomske krize na tržišta životnog osiguranja zemalja bivše Jugoslavije od 2008.‐ 2011. godine

Natasa Vujadin 11 Radomir Vujadin 12 Ivan Piljan 13

ABSTRACT

The paper analyzes the insurance market, with a special emphasis on life insurance, on the territory of the former Yugoslav republics. The life insurance market, and non-life are viewed from several aspects in order to determine the impact of the global economic crisis that emerged in 2008 in the United States, and later spread to other countries in the world and therefore to our region. We looked at the situation in the worst-recession years, and compared it with the situation in the past two years when it was weakened, when the recovery began in most countries of the world. It was found that the situation in Serbia, Slovenia, Macedonia, Bosnia and Herzegovina and Croatia does not differ too much and the crisis spread relatively evenly throughout. The effects were stronger somewhere and somewhere slightly less depending on the level of insurance development. Although paradoxically, the lower the level of development the lower the impact of the economic crisis was, but not absent. KEYWORDS: life insurance, life insurance premiums, insurance companies, gross national product JEL: G22

11Corresponding author Natasa Vujadin,e-mail: [email protected], Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia, 12 Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia 13 Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia 60 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) Review of the Sector of Insurance in the Countries of Former Yugoslavia

Total growth and development, in all the countries of former Yugoslavia, was threatened by the emergence of world economic crisis. The significant economic, political and social progress was slowed down by the global financial crisis. Financial market of the countries in the region was hit by the recession which provoked decrease of index value on all stock markets. But in the broader perspective the negative influence on financial sector has not excessively threatened the stability of these countries because of the strict law, banking and insurance regulations. This is confirmed by the fact that only Moldova has higher indicator of relation of capital and risky assets with respect to Serbia, but Serbia marked the highest indicator of relation between capital and total assets, in the world. Central banks of countries in the region established higher amount of obligatory reserves and thus protected the economic stability especially in Croatia and Serbia. Main impacts of the world economic crisis, which began in 2008, have already been amortized. The situation in the insurance sector in 2011 and 2012 showed signs of recovery in majority of former Yugoslavian countries. Economic and political aspects in the world and the region certainly have not contributed to more intensive recovery. Recession had a negative impact on foreign investments in these countries. Foreign investments have decreased by 20% in Croatia, by 17.5% in Serbia, by 57% in Bosnia and Herzegovina and Macedonia, while the increase of around 8% is present in Montenegro. The mentioned indicators are relevant for the year of 2008. Financial crisis influenced the insurance companies in the world and the region in five ways: by direct influence of sub-prime mortgage loans on the risk through exposure of assets of insurance companies to sub-prime loans, influence on portfolio of insurance companies through special exposure to risk of decrease in prices of certificates of deposit, bonds and other securities of banks that were hit by the financial crisis, the influence of general crash of financial market measured through the fall of stock prices and the growth of interest rates at the capital market, influence of the crisis on the business of risk taking and evaluation of insurance companies. The influence of financial crisis on insurance companies has somewhat been smaller in relation to other financial institutions, considering the specific type of the insurance business. The way of financing of insurers is far more stable in relation to banks. The main financial sources of insurance companies are premiums, which are rarely financed from the loaned assets on the money market. The second reason for lesser impact of the crisis on the sector of insurance companies is a good diversification of investment portfolio. Only the small number of insurance companies asked for the help of the public sector in relation to business banks. The third reason of weaker effect of the crisis on insurance companies is the inability of withdrawal of insurance premiums by the insured person. Effect of Global Economic Crisis on Life Insurance Market Countries of the Former Yugoslavia from 2008. to 2011. 61

The direct influence of the crisis on insurance companies is seen through investment losses, because of the fall of their market value of their investment placement as well as because of not paying the principal amount and interest rate by the issuer of debt instruments. The financial market crisis changed the structure of insurers’ investments. Investments in stock are replaced with higher investments, in percents, in state bonds and other short term placements. The time of investments in general is changed, that is, the investments in instruments with shorter expire date are dominant. The countries in the region and majority of the countries hit by the economic crisis marked the fall of gross domestic product which could be seen through decrease of investments in state instruments made by insurers. As a consequence of global economic crisis, the increased inflation rate appeared, which insurance companies had to face. The inflation growth made insurers reallocate their funds in real assets in order to protect themselves from the risks of inflation. Investing in real-estate is not the option which the insurers turn to gladly, especially because of their decreased liquidity and high volatilization. In the conditions of high inflation , as an alternative partial directing of means in short term state bonds and bonds indexed according to inflation appeared. Relatively low development of financial market, humble supply of financial instruments and a low level of investment activity, combined with insufficient of free money, gives the significantly different structure of placement and less significant role of insurance companies as institutional investors in relation to economically developed world countries . Although they are limited, the effects of global economic crisis on investment activities of insurers in the region can be identified in the domain of coverage of technical reserves determined by the forms of assets, as well as in the domain of structure of investment portfolio of the companies. Coverage of technical reserves determined by the forms of assets was worsened in the moment of the beginning of crisis in all the countries of former Yugoslavia. Even though the notable improvement followed, the problem of finding the adequate forms of assets to invest, and this problem is still present because of insufficiently developed financial market. Wishing to avoid capital losses, increase safety and liquidity of their placements, insurance companies changed the structure of their own investment portfolios, according to the crisis conditions. In all former republics the law strictly regulated investments of insurers. According to the regulations and economic crisis insurers changed the investment structure. Croatian regulations on investments are shown in the table 1. 62 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

Table 1. Croatian regulations on investments

Life insurance Non-life insurance Securities issued by the Croatian Republic, Croatian National Bank, or Croatian at least 50% total no limit bank for restoration and development Debt securities unit of local government or legal entities 35% total 35% total with the headquarters in the 5% individual 5% individual country in which the trade is done at the organized market Bonds and other debt securities which are not traded at the organized market of securities, 5% total and whose issuers are legal 1% individual entities with headquarters in the country Stocks which are traded at the 25% total 25% total organized market 5% individual 5% individual Stocks which are not traded at 5% total the organized market 1% individual Shares and stocks of investment 40% total 40% total funds in the country 5% individual 5% individual Loan insured by the lien on the 35% total 20% total real estate 10% individual 2% individual Loans insured by bank`s guarantee or securities with the 20% total 20% total state/ local government 2% individual 2% individual guarantee Property and other real rights 30% total 30% total on real estate in the country 10% individual 10% individual The amount of the insured sum by the height of redemption value paid in advance 30% total according to the life insurance contract Deposits in banks with the 30% total 30% total headquarters in the country 5% individual 5% individual Means at the business account 3% total 3% total of insurance company Securities of foreign issuers 15% total 15% total Source:www.fpe.unssa.rs.ba/download.php?fajl=Institucionalni%20investitori...

Effect of Global Economic Crisis on Life Insurance Market Countries of the Former Yugoslavia from 2008. to 2011. 63

Because of the financial crisis the insurers in Croatia in 2008 increased the amount of means of mathematical and technical reserve which invest in bonds, even by 68%. The most dominant bonds are the ones from Republic of Croatia (93%) as securities which bring the maximum safety and minimal risk which was the most important for insurance companies considering the expansion of world economic crisis. Investing in stocks of domestic and foreign investment funds drastically decreased, especially when we talk about the investing in stocks of foreign investment funds. Investing in real estate and deposits in business banks insignificantly increased in the critical 2008. If we look at the post-crisis period we will see that the structure of investing has not drastically changed in relation to 2008. We see the increase of investments in mathematical and technical reserves, instruments that have not been so popular during the economic crisis. That is the result of weakening of crisis and mild recovery. However, the insurance companies in Croatia faced investment losses and tendency to minimize them. The fall of market values which was invested in caused the fall of their revenue. Precise evaluation of the crisis can be quantified as a drastic fall of revenue from investments from mathematical reserve form 5.73% to 2.73% and more intensive fall of investments revenue from technical reserve from 6.43% to 1.95% for the period from 2007 to 2008.( Jakovčević, 2009 ) In Slovenia in which the insurance market is the most developed in relation to other former republics, situation is similar to the one in Croatia. Before we start with the investment structure analysis of Slovenian insurers we should mention that in this country there is a strict regulation of investments which we will show in the table 2. Table 2. Regulation on investment of means in Slovenia

Bonds, stocks and other securities traded 5% individual and not traded on the stock market, loans insured by bank`s guarantee or lien on property Bonds and other loan securities which are 1% individual not traded with on the stock market Bonds, stocks and other securities which are 10% total not traded with at the stock market Stocks which are traded and the ones which 30% total are not traded at the organized market, shares in investment companies and funds where more than one half of the investment value is not with guaranteed revenue Stock which are not traded at the organized 5% total market 1% individual 64 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

Shares in investment companies and funds 40% total where more than one half of the investment value is with guaranteed revenue Real estate and other real rights to the real 30% total estate in the country 10% individual Other loans secured by collateral 5% total Deposits in banks with the headquarters in 30% total the country 10% individual Means at the account of the insurance 3% total company Other loan secured by collateral 5% total Source: www.fpe.unssa.rs.ba/download.php?fajl=Institucionalni%20investitori...

Until the end of the year 2007 in Slovenia, financial investments of insurance companies marked high interest rates, but with the 2008 the growth trend changed because of the financial crisis. At the end of 2008 the amount of 3,569.6 million euro of technical reserves was invested at the financial market, which is by 6% more, in relation to the previous year. The means of mathematical reserve were invested by 2.5% more, in 2008 in relation to 2007. Regardless of the crisis more means were invested but the investment structure was different because of that. More investments were made but in the low-risk forms of assets. The insurers invested more means of mathematical reserves in state securities, debt securities and bank deposits. Means of technical reserve were more placed in real estate in 2008 in relation to the previous year, and in bank deposits. Investments of Slovenian insurers had a constant growth in the period from 2009 to 2011, although the financial market in 2011 marks more falls than rises. The means of mathematical reserve were less invested in state securities in relation to 2010, and more in real estate and debt securities. Means of technical reserve were more placed in loans and bank deposits and less in the stocks because of the turbulent market in 2011. In Bosnia and Herzegovina there is a distinct regulation describing how and in which amount the means of technical and mathematical reserve can be invested. It is necessary to mention that the insurance market in Bosnia and Herzegovina is far more underdeveloped in relation to Slovenia and Croatia. This means that the scope and diversity of instruments in which the insurers invest are smaller. In table 3. we will give an overview of means investment regulation in Bosnia and Herzegovina Effect of Global Economic Crisis on Life Insurance Market Countries of the Former Yugoslavia from 2008. to 2011. 65

Table 3. Means investment regulation in Bosnia and Herzegovina

Purpose of investment in : Technical Mathematical Guarantee fund reserves reserve Securities whose issuer is the 50% 50% entity of BandH, county Brčko Central Bank BandH or the state member of EU or their Central bank Bonds and other debt securities 35 but up to 5% 35 but to 5% of 5% of one issuer which are traded with at the of one issuer one issuer organized market in B and H and the EU countries Bonds and other debt securities 5 but up to 1% 1% of one issuer which are not traded with at the of one issuer organized market in B and H and the EU countries, if their issuer is a legal entity with headquarters in BandH, or EU country Shares which are traded with at 30 but up to 5% 25 but up to 5% 10% of one the organized market in B and of one issuer of one issuer issuer H and the EU countries Shares which are not traded 5 but up to 1% 5% of one issuer with at the organized market in of one issuer B and H and the EU countries if their issuer is a legal entity with headquarters in BandH or EU country, and if they are issued as securities Shares of companies with the 5 but up to 1% headquarters in BandH which of one issuer operate with profit Loans secured with lien on a 10 but up to 2% real estate and if the value of one borrower the loan is not larger than 40% of the real estate value estimated by the authorized assessor Loans insured by securities 20% (issued by BandH, bonds and shares which are traded with at the organized markets) Loans insured by bank 20% 20% guarantee, with the headquarters in Band H or EU member country

66 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

Loans in the value of insurance 20% 30% redemption value based on the life insurance contract from the means of mathematical reserve of life insurance Real estate and other rights on 20% 30 but up to 20% real estate 10% in one real estate

Deposits and loans to the banks 30 but up to 30 but up to 20% in one in BandH or EU member 10% 10% bank country in one bank in one bank Means on the accounts of the no limit no limit no limit companies Source: www.fpe.unssa.rs.ba/download.php?fajl=Institucionalni%20investitori... Insurance companies in Bosnia and Herzegovina often do not follow the above mentioned limits. The reason for that is a very underdeveloped financial market of the mentioned country. Insurers in Bosnia and Herzegovina invest very little in securities. Means of technical reserves they invest often in real estate, loans and business banks deposits( Šain & Selimović, 2009.) The crisis in 2008 only confirmed the situation before. There were almost none investments in securities and the investments in the deposits of business banks became dominant. Even after the weakening of global economic crisis and transition into the recovery phase, the insurance market in this former Yugoslav republic has not changed. It is still underdeveloped just like the financial market which effects the investment decisions of insurers. We can freely state that the effect of the economic crisis in BandH was not dramatic because the sector of insurance was underdeveloped then and it still is now. The crisis in 2008 changed the investment structure of insurance companies in the Republic of Macedonia as well. Law on insurance in this former republic also defines the permitted limits for investing of means in technical reserves, which have to be obliged regardless of the worsened economic environment caused by financial crisis. In the table 4 there is an overview of regulations concerning investments in Macedonia. Effect of Global Economic Crisis on Life Insurance Market Countries of the Former Yugoslavia from 2008. to 2011. 67

Table 4. Regulations concerning investments in Macedonia

Investments Amount in % Financial instruments issued by the 20 foreign legal entities Cash 3 Deposits in business banks 60 Securities issued by the Republic of 80 Macedonia, bonds and other debt securities guaranteed by Republic of Macedonia Bonds and other debt securities issued 10 by local government of Republic of Macedonia Bonds and other debt securities traded 35 total with at the organized market 5 individual Bonds and other debt securities not 5 total traded with at the organized market 1 individual Stocks which are traded at the organized 25 total market 5 individual Stocks which are not traded at the 5 total organized market and the shares in 1 individual companies in Republic of Macedonia Shares and stocks of investment funds 20 registered in Republic of Macedonia Source: www.fpe.unssa.rs.ba/download.php?fajl=Institucionalni%20investitori In Macedonia the insurance market is really shallow just like the financial market. So in the years of the crisis the most of investments were made in the state securities and business banks deposits of low risk. If we consider the whole picture, we see that the global economic crisis influenced the change of investment structures of insurance companies in all former Yugoslav republics. Insurers tended to invest the decreased amount of the means of technical reserve in safer instruments in order to avoid potential losses because of the fall of their market value. Because of the crisis the fall of investment revenue dropped and insurance companies had to deal with it. 68 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) General Indicators of the Insurance Sector in the Republics of Former Yugoslavia

We will analyze the general indicators in the insurance sector in former countries of Yugoslavia in the year of crisis - 2008 and year after the crisis – 2011. Table 5. shows the total amount of insurance premiums of former republics for the year 2008 and 2011. which clearly shows that Slovenia and Croatia have the advantage, regardless of the fall in total collected premiums, and that the lowest amount of premiums has Bosnia and Herzegovina and Macedonia. In this table we can see mild increase in amounts of paid insurance premium in 2011 in relation to the year when the crisis was at its peak.

Table 5. Total insurance premium in 2008. and 2011. expressed in millions USD

COUNTRY 2008. 2011. Slovenia 2,067.6 3,008 Croatia 1,340.4 1,711 Serbia 574.8 781 Bosnia and Herzegovina 232.8 323 Macedonia 109.2 14414 Source: www. business.hr. Table 6. presents the data about the height of the life insurance premium per capita in the countries in the region in 2008. and 2011.

Table 6. Height of the life insurance premium per capita in 2008.15 And 2011. In USD

COUNTRY 2008. 2011. Slovenia 333.84 459 Croatia 78.12 104 Serbia 4.56 17 Bosnia and Herzegovina 5.52 13.2 Macedonia 1.16 16.816

14Data were originally expressed in denars. Total premium is 6.808.264.ooo denars. We used the equivalent value on the day of 1.10.2012. 15 Data for 2008. were originally in euros and then converted into dolar`s aproximate value 1eur = 1.20 usd. 16 Data refer to the life insurance premium per capita for 2010. because life insurance data for 2011. are not available. Effect of Global Economic Crisis on Life Insurance Market Countries of the Former Yugoslavia from 2008. to 2011. 69

The highest life insurance premium has Slovenia, while Macedonia is the country with the lowest premiums of this kind of insurance per capita. Regardless of the worsening of economic situation in 2011 Slovenia had the highest life insurance premium ( Sigma, 2012) 942 million USD, then Croatia 455 million USD, Serbia 126 million USD, BH (Agency for insurance supervision in Bosnia and Herzegovina, Annual report for 2011)17 191 million USD ( Agency for insurance supervision of Republic of Macedonia, 2011.godina ) 1810,5 million USD. Table 7. shows the data on the share of life insurance premiums in gross national income for 2008 and 2011 in the former republics.

Table 7. Share of life insurance premiums in gross national income in 2008. and 2011. in %

COUNTRY 2008. 2011. Slovenia 5.8 5.9 Croatia 3.3 2.7 Serbia 2.2 1.7 Bosnia and 2.3 1.92 Herzegovina Macedonia 1.8 1.5 Source: www.business.hr. Slovenia has the biggest share of life insurance premium in GDP, while Macedonia has the lowest. The share of life insurance in GDP is decreasing because the GDP itself shows a negative trend. Life insurance of the countries in the region was hit by the recession so was the entire insurance sector. The image of insurance sector in Republic Croatia is insignificantly different regarding the countries in the region. According to data from 2008, in the mentioned country, 23 insurance companies operate and 2 reinsurance companies. Five insurance companies deal with life insurance, eight does the business of non- life insurance, and ten deals with life and non-life insurance. In 2011 there was only one reinsurance company in the Croatian market and 27 insurance companies, from which six dealt only with life insurance business, ten with non-life insurance, while the remaining ten dealt with both life and non-life insurance. In previous three years in Croatia the premium reduced by 527 million kuna. But it is positive that this negative rate has been dropping in the last two years. In 2011, 26 insurance companies calculated gross premium of 9.145 billion kuna

17 Data were originally expressed in convertible marks. We used the aproximate value of 1km=1.99 eur or 1eur= 1.20 usd 18 We used the value on the day 1.10.2012. Original data regarding the total premium of life insurance is 496.995.ooo denars. 70 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) which is 1.08% lower regarding the last year. (Croatian agency for financial services supervision, annual report, 2011) The sector of life insurance in 2008 in Croatia is faced with the decrease of premiums. In the first four months of the mentioned year the life insurance premium was 780 million kuna, which is 2 million kuna less than in the same period in the year before. Period from 2008 to 2010 was the period in which the calculated life insurance premiums show positive results, but life insurance in 2011 showed fall of 1.07% with the calculated gross premium of 2.431 billion kuna. Besides all of these data life insurance in this country is underdeveloped. In the countries of European Union the share of calculated life insurance premium in total portfolio is over 50%, while in Croatia that share is 25%. The main indicator of development of life insurance of a country is the share of premium in GDP which in Croatia, in 2007 was only 0.9%. Croatia has twice lower share of this kind of insurance in GDP than Slovenia and Hungary have, but it also has a higher rate than Romania and Bulgaria. Forecasts for the success and development of insurance sector are optimistic. Many experts and analytics assess that the accession of Croatia to European Union will contribute to the change of the total economy and financial sector as well. Croatian insurance market has potential and regardless of recession that emerged in 2008 in the world and the region, the mentioned market has a slight advantage in respect to the market of Serbia, Bosnia and Herzegovina, Macedonia and Montenegro. At the insurance market of Serbian Republic in the first half of 2008 only 11 insurance companies had work permit. With the respect to 2007 that number grew by two, which work with non-life insurance. However by 2011, the number of insurance companies stayed the same. Total calculated insurance premium in Serbian Republic in the first half of 2008 was 28,403,601.03 EUR which is higher in respect to 2007 by 2,920,467.53 EUR or 11.46%. Total calculated insurance premium in 11 companies that have their headquarters in Serbian Republic in 2011 was 131.3 KM, which is by 7.12% higher than in 2010. Insurance companies in Serbian Republic still deal with non-life insurance more than with life insurance which is confirmed by the fact that only three companies deal with life and non-life insurance. This is also the indicator of underdeveloped insurance market in this area. The relation between the premiums and GDP is significantly lower with respect to developed markets. However, we should bear in mind, that among the new members of EU, only with the few of them the insurance premium exceeds 3% of GDP (Czech Republic, Hungary and Slovenia). Per capita premium is increased, but is still significantly behind the other countries in transition. Despite the growth over many years, the life insurance premium does not get to the average of countries in transition. For strengthening of one segment of insurance, numerous Effect of Global Economic Crisis on Life Insurance Market Countries of the Former Yugoslavia from 2008. to 2011. 71 systematic and macroeconomic preconditions are necessary (economic and monetary stability, tax incentives, higher life standard, developed insurance culture, high degree of trust in the financial sector, developed market of securities). In the following period the possibility of introducing tax exemptions for life insurance should be developed, in order for this kind of insurance to grow and develop. It is also necessary to apply the long-term strategy of financial education which is very much needed in these areas in order to develop insurance. In Bosnia and Herzegovina 15 insurance companies have work permit. From these only six companies work with non-life insurance while seven work with life and non-life insurance, one company works only with life insurance and one only with reinsurance. If we look at the period from 2009 to 2011, insurance activity in BH still progressed, and that can be seen in the data about GDP, total insurance premium, share of insurance premium in GDP and insurance premium per capita. Big and significant brake to the faster insurance market development is unsatisfactory qualification structure of the employees which causes constant need for education and additional trainings of employees. The crisis left its mark in Serbian Republic as well as in Bosnia and Herzegovina slowing down the growth and development of insurance sector. 2011 and 2012 are the years of stagnation and very modest growth of life and non-life insurance in this area. Slovenia is the only former republic which has a significant development of the insurance sector. Considering that it became the member of European Union, Slovenia advanced in life and non-life insurance. In 2008 it was the 51st country of the world according to the indicators of realized insurance premium. However, this country was affected by the difficult economic situation in 2011 and 2012, which slows down the progress of all types of insurance. Despite the economic crisis, Slovenia had a growth of insurance premium in 2008 of 375 million dollars in relation to 2007. Slovenia had an insurance premium growth in 2007 also by 231 million dollars in relation to 2010. When we talk about life insurance Slovenia shows slight growth in premiums in 2008 compared to 2007, and in 2011 compared to 2010. Compared with the other former republics it has the most developed market of this kind of insurance. The amount of life insurance premiums was enlarged by 111 million USD in 2008. In this year Slovenia took 46th place in the world. The amount of life insurance premiums was enlarged by 72 million in 2011. In this year Slovenia took 49th place in the world according to the life insurance premium height. Regardless of the global crisis the numbers show that Slovenia still had a better place in the year when global recession was at its peak than in the years when it was significantly weaker. Slovenia as a state with the population of two million in 2011 had the GDP of 39.2 billion euro. The real growth of GDP 3.5% average is expected until 2013. 72 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

But the expectations change daily since this country is facing economic, social and political crisis. In the following period the increase in yearly non-life insurance and life insurance premiums is expected. The growth of non-life insurance premiums should follow the growth of GDP, while the growth of life insurance premiums will be followed by changes in population structure. In 2011 in Slovenia, 16 insurance companies had their work permit, a little more than in the previous year. In the insurance market of the former federative republic Macedonia, 15 insurance companies have their work permit, from which only one company has a permit to work with reinsurance, four with life insurance and ten with non-life insurance. The situation in the insurance market of this former Yugoslavian republic is similar to the one in the region. Considering that Macedonia has a smaller territory this number of insurance companies is enough. Foreign capital is present here as well in the certain amount, but we can clearly conclude that the share of non-life insurance is much higher than the life insurance. The insurance sector in Macedonia is still developing. World economic crisis influenced the slowing down of that development, but according to the prognosis for the following period a slight improvement in this economic area is expected.

References

[1]Agency for insurance supervision, Republic of Macedonia, http://www.aso.mk [2]Agency for insurance, Republic of Slovenia, http://www.a-zn.si [3]Agency for insurance supervision, Bosnia and Herzegovina,http://www.nados.ba [4]Agency for insurance, Serbian Republic,http://www.azars.ba [5]Agency for financial services supervision, Republic of Croatia,http://www.hanfa.hr [6]Business internet portal, http://www.business.hr [7]Croatian agency for financial services supervision(2011), Annual report [8]Magazine Svijet osiguranja,http:// www.svijetosiguranja.eu [9]Magazine Sigma,http://www.swissre [10]www.fpe.unssa.rs.ba/download.php?fajl=Institucionalni%20investitori Effect of Global Economic Crisis on Life Insurance Market Countries of the Former Yugoslavia from 2008. to 2011. 73 APSTRAKT

Predmet rada je analiza tržišta osiguranja, sa posebnim akcentom na životno osiguranje, na prostoru bivših jugoslovenskih republika. Tržišta životnog osiguranja, ali i neživotnog posmatrana sa više aspekata kako bi se utvrdio uticaj svetske ekonomske krize koja se javila 2008. godine u Sjedinjenim Američkim Državama, a kasnije se proširila na ostale zemlje sveta pa samim tim i na naš region. Posmatrali smo situaciju u godinama najžešće recesije i poredili sa situacijom u protekle dve godine kada je ista slabila i kada je započet oporavak u većini zemalja sveta. Utvrđeno je da se prilike u Srbiji, Sloveniji, Makedoniji, Bosni i Hercegovini i Hrvatskoj ne razlikuju previše i da se kriza svuda relativno podjednako širila. Efekti su negde bili jači, a negde nešto slabiji u zavisnosti od stepena razvoja osiguranja.Iako zvuči paradoksalno, što je niži stupanj razvoja osiguranja to je udar ekonomske krize bio blaži, ali nije izostao.

KLJUČNE REČI: osiguranje života, premija osiguranja života, osiguravajuća društva, društveni bruto proizvod

Article history:

 Received 21 March 2013  Accepted 7 May 2013

UDC: 005.32 ; 005.336.3 ID: 199124492 Scientific review

Organizational Behavior‐Creative Tool for Creating Value

Organizaciono ponašanje‐kreativno sredstvo za stvaranje vrednosti

Tamara Stojanovic 19 Aleksandar Djokic 20 Snjezana Djokic 21

ABSTRACT

An organization, as a social system, consists of individuals who have their own expectations from it. Since individuals have to be organized in work teams, i.e. groups, this means that organizations depend on interaction and coordination among individuals to accomplish their goals. The field of organizational behavior is about understanding people and managing them to work effectively. Aligning individual behaviour with organizational goals is a critical concern of management. Both economists and psychologists have pointed out that human behavior cannot often be explained by standard models based on rational, well- informed and optimizing subjects. Managing organizational behavior should not rely on manipulating people nor through controls or through incentives. It means creating the system of values – organizational culture - that enables all the participants in the organization to take part in the creative process of doing business, acknowledge their significance and point out the value of their efforts. Only such organizational behavior can create a long-term value. KEYWORDS:organization,behaviour,management, individual, organizational culture, value JEL: G23

19 Corresponding author Tamara Stojanovic,e-mail: [email protected], Business studies University Banja Luka, BiH 20 College Dositej, Trn, BiH, [email protected] 21 College Dositej, Trn, BiH,[email protected] Organizational Behavior‐Creative Tool for Creating Value 75 Introduction

An organization, as a social system, consists of people who have their own expectations from it. Also the organization's purpose is to provide: personal satisfaction to its employees and managers, social structure, efficiency, flexibility and creation of identity. Since people, as individuals, have to be organized in work teams, i.e. groups, this means that organizations depend on interaction and coordination among people to accomplish their goals. The field of organizational behavior is about understanding people and managing them to work effectively. The art of getting things accomplished in organizations is called management. Its executive, a manager, cannot make decisions by himself nor can implement them alone. His job is to find right people, organize them in work teams and direct them in searching for right solutions. Thus, management is concerned with organizational behaviour on all three levels: individual, group and organizational. Aligning individual behaviour with organizational goals is a critical concern of management. Both economists and psychologists have pointed out that human behavior cannot often be explained by standard models based on rational, well- informed and optimizing subjects. Humans are not mechanical devices but creative beings who respond creatively both to the opportunities the environment presents and constraints that prevent them from doing what they wish. The challenge for organizational behaviour science and practice is to establish rules of the game that acknowledge and direct human energy in ways that increase rather than reduce the effective use of scarce human resources.

Understanding organizations

If we want to understand organizational behavior the first prerequisite is to understand the concept of organization itself. An organization is more than a formal arrangement of functions, more than an organization chart, more than a vision statement, more than a set of accounts. John Middleton (2002) states that an organization consists of people and so it is also a social system. Today, organizations are literally omnipresent in our lives which make them very difficult to separate from and analyse objectively. Not just that they create goods and services that we use every day, but also, more than any other institution, business organizations affect the quality of our environment, where and how we live. According to Robert A.G. Monks and Nell Minow (2008), their power, partially, stems from the variety of purposes they fulfill or should fulfill such as: Personal satisfaction. We could say that organizations give people opportunity to satisfy their basic drives: search for fulfillment, success, security, 76 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) creativity and competitive spirit. Every participant in the organization gives his/her contribution to the business process and each of contributions has its value. Together they create the structure, i.e. organization which is bigger and more valuable than its constituents. Social structure. A man is a social being and thus he creates social structures which enable him to strengthen cooperation with others and, through the work specialization, to make his life easier. That is why organizations provide permanent and flexible social structures. Efficiency. The organization is also the product of human intention to create 'perfect' structure/system that would provide maximum benefits/profits/gains with minimum costs. Striving for efficiency created business organizations (corporations) which development and growth depends on efficiency dynamo. As long as the organization is able to lower its costs and be efficient, it will survive. Omnipresence and flexibility. Internal and external factors force the organization to move to another markets, change its structure and way of doing business in order to exist and provide its owners return on invested capital. Organizational life is in constant movement, in constant change. Being able to change itself and adapt to the change is the prerequisite for the organization's survival and success. Creating identity. The purpose of the organization is also to build an artificial entity that is immortal since its existence does not depend on its owners and other stakeholders who are mortal as all human beings are. On the other hand, the organization 'helps' people to create their own identity through its goods and services, marketing campaign, influence on laws and regulations, promotion of special values, culture and way of living. In essence, people expect from the organization to provide them a decent salary, goods and services to satisfy their needs, wants and preferences; structure and system that would enable them to demonstrate their creativity and brilliance and when all of this is accomplished, they actually want to share it with others. Also, people want their jobs and environment to be safe and secured. They expect constant growth and progress. Finally, all these things they want for themselves, they also want for their descendants. Thus, the primary and uppermost goal of the organization is to create a long- term value. In order to achieve this goal the organization has to reevaluate its current system of values (corporate culture, i.e. organizational behaviour) and introduce the system that reaches the goal. Stojanovic concludes (2010) that only true values, based on the value of human being who is the very constituent of each system, have power to create long-term and sustainable values. Organizational Behavior‐Creative Tool for Creating Value 77 Definition of Organizational Behavior

The field of organizational behavior draws from the behavioral science disciplines of psychology, social psychology, and cultural anthropology. According to Pugh (1971), organizational behavior is concerned with the study of the structure, functioning and performance of organizations and the behavior of groups and individuals within them. John Ivancevich and Michael Matteson, in their book Organizational Behavior and Management (1998), offer a broader definition. They say that organizational behavior is about the study of human behavior, attitudes and performance within an organizational setting; drawing on theory, methods, and principles from such disciplines as psychology, sociology, and cultural anthropology to learn about individual perception, values, learning capabilities, and actions while working with groups and within the total organization; analyzing the external environment’s effect on the organization and its human resources, missions, objectives and strategies. In an effort to reduce the complexity and breadth of organizational behavior, Wood (1997) makes a useful distinction between what he calls macro organizational behavior and micro organizational behavior. Macro organizational behavior a preoccupation of those with interests in formal organizations and structural questions whereas micro organizational behavior is concerned with informal organizations and individual and small group questions. Thus, macro organizational behavior is concerned with “the organization” in organizational behavior and micro organizational behavior is concerned with the “behavior” in organizational behavior. Based on Wood's definition of organizational behaviour, Bozidar Stavric and Aleksandar Djokic argues that it can be seen as the way the organization adapts to the changes stemmed from external environment and deals with interpersonal relations within its structure. Thus, organizational behaviour includes management actions directed towards: adapting the organizational behaviour to its environment and establishing interpersonal relations within its structure. If we understand organizations as social inventions for accomplishing common goals through group effort, their essential characteristic would be the coordinated presence of people, not necessarily things. Gary Johns and Alan M. Saks in their book Organizational Behavior: Understanding and Managing Life at Work (2010) express the view that the field of organizational behavior is about understanding people and managing them to work effectively. Individuals are assembled into organizations for a reason. The field of organizational behavior is concerned with how organizations can survive and adapt to change. Certain behaviors are necessary for survival and adaptation. People have to:  be motivated to join and remain in the organization;  carry out their basic work reliably, in terms of productivity, quality and service; 78 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

 be willing to continuously learn and upgrade their knowledge and skills; and  be flexible and innovative (Katz, 1964). Since people, as individuals, have to be organized in work teams, i.e. groups, this means that the organization depends on interaction and coordination among people to accomplish their goals. Groups can be formal (defined by organizational structure and scope of work) or informal (meaning that communication and morale can have a strong impact on goal achievement). Thus, according to Johns and Saks (2010), the field of organizational behaviour is concerned with how to get people to practise effective teamwork. What happens in organizations often has a profound impact on people and vice versa. It is clear that the impact of organizational behavior is not limited to the organization itself. The consumers of an organization’s goods and services are also affected by receiving quality or non-quality service. Thus, organizational behavior is important to all stakeholders; and understanding it can make us more effective managers, employees or consumers. Finally, behavior within the organization has to be viewed in a wider context considering the outside world’s effect on the organization and its human resources, missions, objectives and strategies.

Organizational Behavior in Management Context

Theoretical Background

As everything is subject to constant change so is the organizational behavior. All changes that have happened in management theory and practice - mass production, the rise of organization man22, management by objective, the technological explosion of the 1960s, pc era, the decline of manufacturing, business process re-engineering, outsourcing, globalization, the fall of organization man amid a dramatic fall in job tenure... all have impacted on organizational thinking and individual behavior over the years. Classical management viewpoint tended to advocate a very high degree of specialization of labour and a very high degree of coordination. Frederick Taylor (1856–1915), the father of Scientific Management, was also a contributor to the classical school, although he was mainly concerned with job design and the structure of work on the shop floor. Weber (1974) made the term bureaucracy famous by advocating it as a means of rationally managing complex organizations.

22 a man who subordinates individualism to conformity with the standards and requirements of an organization Organizational Behavior‐Creative Tool for Creating Value 79

The human relations movement, represented by authors such as Chris Argyris (1957), Rensis Likert (1961), Alvin W. Gouldner (1954) and Philip Selznick (1949), called attention to certain dysfunctional aspects of classical management and bureaucracy and advocated more people-oriented styles of management that tend to meet the social and psychological needs of employees. The apparent tension between the classical approach and the human relations approach has been resolved in two ways. First, modern scholars and managers recognize the contributions of both approaches: the critical role of control and coordination in getting organizations to achieve their goals (advocated by classical management theoreticians) and the dangers of certain forms of control and coordination and addressing the need for flexibility and adaptability (stressed by human relationists). Second, modern scholars have taught that management approaches need to be tailored to fit the situation. Thus, Johns and Saks (2010) point out that contingency approach to management recognizes that there is no one best way to manage; rather, an appropriate style depends on the demands of the situation. Just as there is no one best way to run and organize a business, so there is no one best perspective from which a total understanding of organizations can be gained. Organizational behavior draws its strength from its richness and variety of perspectives. The trick of it, according to Middleton (2002), is to detect which particular approach to a given organizational issue might best suit some particular company with its unique culture and at a specific moment in its corporate history.

Idiosyncrasies of Management

Key words usually used to define management are: making decisions, conduct, plan, control, organize, govern, accomplish, command, manipulate... In different cultures management is seen, learned and implemented differently since it is a process based on values. Ichak Adizes (1994) believes that management is not just a science or art but also the reflection of social and political values. It is a political process burdened with value criteria. If it is to be analysed through the function it has, this function should be viewed in its essence - free of value criteria, social, political or cultural implications. In this context, management is a unique and identical process no matter if it is applied in managing organizations or any other entity. The only constant in the organizational life is a change. Changes require adaptation which is very often impeded by resistance and other problems. Management's task is to solve present problems and be ready to face future problems. Thus, if there were no changes and problems, there would be no need for management. Management, in its essence, means solving problems through making decisions and their implementation. Both of these processes should be efficient if management is to fulfill its purpose. However, none of them is one-man job. A 80 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) manager cannot make decisions by himself nor can implement them alone. His job is to find right people, organize them in work teams and direct them in searching for right solutions. Following the above mentioned, management is concerned with organizational behaviour on all three levels: individual, group and organizational. Management is most usually defined as the art of getting things accomplished in organizations. As stated by Daniel A. Wren (1987) managers acquire, allocate and utilize physical and human resources to accomplish goals. This definition does not include a prescription about how to get things accomplished. If behaviour can be predicted and explained, it can often be controlled or managed. If prediction and explanation constitute analysis, then management constitutes action. Unfortunately, we see all too many cases in which managers do no analyses, trying quickly to fix problems. The result is often a disaster. The point is not to overanalyze a problem. Rather, as Johns and Saks (2010) conclude, it is to approach a problem with a systematic understanding of behavioral science.

Understanding human behavior

Both economists and psychologists have pointed out that human behaviour is often not in line with standard models based on rational, well-informed and optimizing subjects. There are numerous deviations from rationality, or biases, which have been identified. In his survey on behavioral economics, DellaVigna (2009), identifies biases stemming from non-standard preferences, biases due to non-standard beliefs and biases caused by non-standard decision making. People are, for instance, susceptible to the framing of decisions, use suboptimal methods of learning, are overly confident, and have difficulty in formulating time-consistent preferences. From small groups to entire societies, organizations are composed of individuals. Michael C. Jensen and William H. Meckling (1994) argue that if we are to have a science of such organizations, it will have to be founded on building blocks that capture as simply as possible the most important traits of humans. According to professor Jensen (Harvard Business School), understanding human behavior is fundamental to understanding how organizations function. Much disagreement among managers, scientists, policy makers and citizens stems from substantial differences in the way the human nature is understood. The growing body of social science research on human behavior has a common message: individuals are resourceful, evaluative maximizers. Humans are creative beings who respond creatively both to the opportunities the environment presents and constraints that prevent them from doing what they wish. They do not care only about money, but also about other things such as respect, honor, power, love and the welfare of others. Thus Jensen concludes that the challenge for our society, and for all organizations in it, is to establish rules of the game that tap and direct human energy in ways that increase rather than reduce the effective use of our scarce resources. Organizational Behavior‐Creative Tool for Creating Value 81 Manging Human Behavior

Aligning individual behaviour with organizational goals is a critical concern of management. Jakob de Haan and David-Jan Jansen in their Working paper identity several studies providing empirical evidence that individual behaviour can often deviate from organizational goals which can lead to suboptimal performance, inefficiency and organizational dysfunction (e.g. Guth & MacMillan, 1986; Hope & Thomas, 2008; Walkling & Long, 1984). Management uses plenty of tools to make people do what they have to do in order to reach the goals of the organization, but all of them can be classified in two basic groups: controls and motivational incentives. Control theorists (e.g., Carver & Scheier, 1981, 1982; Klein, 1989; Lord & Hanges, 1987; Powers, 1973) applied the basic model of a mechanical control system to humans. To reflect the complexity of human control systems, they extended many aspects of the original cybernetic model while trying to preserve the conceptual simplicity inherent in its cybernetic principles. However, the use of control theory in the field of organizational behavior has been repeatedly criticized by many authors such as Locke (1991), Locke & Latham (1990), Wood & Locke (1990), Sandelands et al. (1991). According to Haan and Jansen (2011) the conclusion of many critics has been that control theory is inappropriate as a theoretical tool for the analysis of organizational behavior. Martin R. Fellenz in his article Control theory in organizational behavior: Review, critique and prospects points out the argument that action may precede goal-setting in organizations. The assumption underlying control theory as well as other goals approaches (see Pervin, 1989) is that all purposeful behavior follows a 'goalbehavior' sequence. However, Weick (1979) pointed out that organized collective action, as well as individual behavior in organizations, often precedes goal definition. Thus, specific formal and informal aspects of the organization such as evaluation and reward systems, decision rules, the dominant logic or rationality (see Prahalad & Bettis, 1986), organizational interpretation modes (Daft & Weick, 1984), norms, values, and culture and the social context, among others, can have profound effects on goal-setting, changing and retrospective goal inferences. In other words, goal-setting and change is not just an individual process in which people develop goals and sub goals in a hierarchical order according to means-ends relationships. It is also, as Fellenz (1997) point out, a social process in which individuals develop goals in order to make their (in) actions rationally accountable to themselves and to others. Incentives can serve as means of aligning goals and motivating an individual’s best possible performance. However, research presented by Bebchuk & Fried (2005), Burns & Kedia (2006), Sanders & Hambrick, (2007) indicates that incentives can also reinforce or even establish a misalignment of goals. Corporate scandals such as at Enron, as well as the recent economic crisis, suggest that the misalignment of goals as 82 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) a consequence of incentives can even lead to the collapse of established firms. Hence, finding an effective incentive framework that motivates individual behavior in line with organizational goals is crucial for organizational efficiency and effectiveness. When considering financial incentive, the reliance on such incentives is based on the underlying assumption of expectancy theory (Vroom, 1964) and more specifically that individual behavior is mostly motivated by expected money rewards. However, Philipp Meyer-Doyle and Marshall W. Meyer (2010) identified several studies (e.g. Sanders & Hambrick, 2007; Zhang et al., 2008) concluding that financial incentives can lead to myopic behavior and ultimately precipitate organizational failure. Further, individual behavior is not only motivated by expected financial payoffs but it is largely driven by socially embedded factors such as organization and group embeddedness, social rewards, perceived fairness based on how the organization has endowed and treated its individuals, social relations and resulting expectations etc. Thus, Meyer-Doyle and Marshall (2010) concludes that financial incentives alone appear to be motivating individual behavior too myopically and are not taking into account many fundamental motivational factors of individual behavior, especially socially embedded factors. Obviously, organizational behavior that is to create long-term value should not rely on the management that is manipulating people nor through controls or incentives. It means creating the system of values that enables all the participants in the organization to take part in the creative process of doing business, acknowledge their significance and point out the value of their efforts. This leads us to the concept of organizational culture, which is defined by Charles A. O’Reilly and Jennifer A. Chatman (1996) (see also Sørensen, 2002), as a system of shared values (that define what is important) and norms that define appropriate attitudes and behaviors for organizational members (how to feel and behave). The usefulness of understanding corporate culture is suggested by the body of work that links culture to performance. For instance, in a recent survey, Sackmann (2011) identifies 55 papers published since 2000 that study culture and performance. As Haan and Jansen notice, most of these papers find support for a direct link between corporate culture and firm performance. Ekkehart Schlicht (2002) argues that the implementation of such an organizational culture may initially be motivated by the search for profit. But once it is successfully implemented, people will start to believe in these values – even those who initially made them up on purpose. To create organizational culture that support performance, management is not enough; what is needed is real leadership. According to Michael W. Grojean, Christian J. Resick, Marcus W. Dickson and D. Brent Smith (2004), leaders are responsible for ethical standards and moral values that provide guidance for the behavior of employees. Michael E. Brown and Linda K. Treviño (2006) suggest that important situational factors include the presence of an ethical role model, an ethical context, and moral intensity of issues faced. The authors also suggest that personal characteristics like neuroticism and Machiavellianism can damage ethical behavior. In contrast, agreeableness, conscientiousness and moral reasoning enhance ethical leadership. Mark J. Benson and Robert Hogan (2008) note that ‘bad’ leadership can result in short-term performance successes, but will ultimately Organizational Behavior‐Creative Tool for Creating Value 83 result in problems and dysfunctional performance. According to Malcolm Higgs (2009), this can be explained by the impact of leaders on the morale and motivation of followers and the organizational culture and climate.

Organizational Behavior and Organization’s Effectiveness

Organizational behavior can have a powerful influence on the attitudes and behaviors of individuals in organizations. But the real question is if it also has an impact on an organization’s effectiveness. Johns and Saks (2010) revealed that the study of the best companies to work for in Canada showed that these are also the most successful companies in terms of shareholder return and sales growth. Thirty- one of the 50 best companies to work for in Canada in 2003, whose shares trade publicly outperformed the S&P/TSX Composite Index by 14.4 percent in annual total shareholder return and by 5 percent in average annual sales growth over a period of five years. The share prices of the best employers of 2004 increased by an average of 10.2 percent a year over the past 10 years compared to 6.2 percent for the S&P/TSX Composite Index. In addition, a recent study in the United States, presented by Ingrid S. Fulmer, Barry Gerhart and Kimberly S. Scott (2003), found that the 100 best companies to work for in America have more positive force attitudes and superior financial performance compared to other companies. These results are consistent with the increasing evidence that management practices and organizational behavior not only influence employee attitudes and behavior but also have an effect on an organization’s effectiveness. A recent issue of Fast Company magazine reported how the Gallup Organization undertook an exercise to process 30 years’ worth of data on worker attitudes to try and answer one simple but crucial question: ‘‘What does a strong and vibrant workplace look like?’’ (see Polly LaBarre, 2001). From their analysis, project leader Marcus Buckingham and his team distilled 12 core issues (called the ‘‘Q12’’) that act as an effective barometer of the strength of any work unit. According to Marcus Buckingham, these are the 12 factors that determine whether people are engaged, not engaged or actively disengaged at work. Next, the team set about analyzing how the answers given to the Q12 linked to concrete business effectiveness measures. They found that the most ‘‘engaged’’ workplaces were 50% more likely to have lower turnover, 56% more likely to have higher-than average customer loyalty, 38% more likely to have above-average productivity and 27% more likely to report higher profitability. Buckingham’s team made another startling discovery: there was more variation in scores within companies than between companies. In other words, Buckingham found some of the most engaged groups and some of the least-engaged groups working within the same company. On top of that, CEOs typically were not aware who in their company was engaged effectively and who wasn’t. 84 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

In his book, Competitive Advantage Through People, Jeffrey Pfeffer (1994) argues that organizations can no longer achieve a competitive advantage through the traditional sources of success, such as technology, regulated markets, access to financial resources and economies of scale. Today, the main factor that differentiates organizations is the workforce and the most successful organizations are those that effectively manage their employees. Pfeffer’s work helps to point out that organizational behavior is not just interesting and important but that it also makes a big difference for the effectiveness and competitiveness of organizations. Clearly, human capital matters (as the company’s most precious asset) and the management of it is thus one of the most important factors for an organization’s competitiveness and survival.

Conclusion

Organizational behavior has a number of commonly agreed-on goals. Chief among these are effectively predicting, explaining and managing behavior that occurs in organizations. Through systematic study, the field of organizational behavior provides a scientific foundation that helps improve predictions of organizational events. Organizational behavior is especially interested in determining why people are more or less motivated, satisfied or prone to resign. Explaining events is more complicated than predicting them. Certain behavior could have many different causes, each of which would require a specific solution. Furthermore, explanation is also complicated by the fact that the underlying causes of some event or behavior can change over time. The ability to understand behavior is a necessary prerequisite for effectively managing it. Humans are basic elements of every organization – they create processes, structures, systems, goods and services, they make decisions and implement them. The deepest motivational factors of each human being are significance, creativity and purpose. Whatever they want to achieve for themselves, they want the same for their descendants. Thus primary and uppermost goal of the organization is to create long-term values for all of its constituents and stakeholders. In order to achieve this goal the organization has to reevaluate its current system of values (organizational culture, i.e. organizational behaviour) and introduce the system that reaches the goal of creating a long-term value. Only true values, based on the value of human being who is the very constituent of each system, have the power to create long- term and sustainable values. Managing organizational behavior should not rely on manipulating people nor through controls or through incentives. It means creating the system of values – organizational culture - that enables all the participants in the organization to take part in the creative process of doing business, acknowledge their significance and point out the value of their efforts. To create such organizational culture management is not enough; what is needed is real leadership that provides guidance for the behavior of employees. Organizational Behavior‐Creative Tool for Creating Value 85 References

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[17] Jensen, M. C. & Meckling, W. H. (1994) „Nature of Man“. Journal of Applied Corporate Finance. V. 7, 2: pp. 4 - 19. [18] Johns, G. & Saks A.M. 6th ed. (2010) Organizational Behaviour: Understanding and Managing Life at Work, Pearson Education. [19] Katz, D. (1964) “The motivational basis of organizational behavior”. Behavioral Science No 9, pp. 131–146. [20] Klein, H.J. (1991) “Control theory and understanding motivated behavior: A different conclusion”. Motivation and Emotion, 15: pp. 29-44. [21] LaBarre, P. (2001) ‘‘Marcus Buckingham thinks your boss has an attitude problem, ‘Fast Company, August, http://www.fastcompany.com/43419/marcus-buckingham-thinks-your-boss- has-attitude-problem. [22] Likert, R. ed. (1961) New patterns of management. New York: McGraw-Hill. [23] Locke, E.A. (1991) “Goal theory vs. control theory: Contrasting approaches to understanding work motivation”. Motivation and Emotion, 15: 9-28. [24] Locke, E.A. & Latham, G.P. (1990) A theory of goal setting and task performance. Englewood Cliffs, NJ: Prentice Hall. [25] Lord, R.G. & Hanges, P.J. (1987) “A control system model of organizational motivation: Theoretical development and applied implications”. Behavioral Science, 32: pp. 161-178. [26] Meyer-Doyle, P. & Marshall W. M. (2010). Combining Financial and Organizational Incentives to Better Align Individual Behaviour with Organizational Goals. Social Science Research Network. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1690229 [27] Middleton, John. (2002) Organizational Behavior. Oxford: Capstone Publishing (a Wiley company). [28] O'Reilly, C.A. & Chatman, J.A. (1996), “Culture as social control: corporations, culture and commitment”. Quated in: Staw, B.M. & L.L. Cummings (eds.), Research in organizational behavior. Greenwich (CT): JAI Press. [29] Pervin, L.A. (1989) “Goal concepts: Themes, issues, and questions”. Quated in L.A. Pervin (Ed.). Goal concepts in personality and social psychology: pp. 473-479. Hillsdale, NJ: Erlbaum. [30] Pfeffer, J. (1994) Competitive advantage through people: Unleashing the power of the work force. Harvard Business School Press: Boston. [31] Powers, W.T. (1973) Behavior: The control of perception. Chicago, IL: Aldine. [32] Prahalad, C. & Bettis, R. (1986) “The dominant logic: A new linkage between diversity and performance”. Strategic Management Journal, 7: pp. 485-501. [33] Pugh, D. ed. (1971) Organization Theory: Selected Readings. Harmondsworth: Penguin. Organizational Behavior‐Creative Tool for Creating Value 87

[34] Robert A.G. Monks and Nell Minow. ed. (2008) Corporate Governance. Chichester: John Wiley&Sons. [35] Sackmann. S.A. (2011), Culture and performance, Quated in: Haan, J. & David D.J. 2011. „Corporate Culture and Behavior: a Survey“. DNB Working Paper No. 334-11. [36] Sandelands, L., Glynn, M.A., & Larson, J.R. Jr. (1991) “Control theory and social behavior in the work place”. Human Relations, 44: 1107-1129. [37] Sanders, G.W.M.& Hambrick, D.C. (2007). “Swinging for the fences: The effects of CEO stock options on company risk taking and performance”. Academy of Management Journal, 50: pp. 1055-1078. [38] Schlicht, E. (2002) “Social Evolution, Corporate Culture and Exploatation”. Discussion Paper No. 651. Social Science Research Network. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=371620 [39] Selznick, P. ed. (1949) TVA and the grass roots: A study in the sociology of formal organizations. Berkeley: University of California Press. [40] Sørensen, J.B. (2002). “The strength of corporate culture and the reliability of firm performance”. Administrative Science Quarterly, 47(1): pp. 70–91. [41] Stavrić, B. & Đokić, A. (2003) Preduzetni menadžment. Banja Luka: SSC. str. 297-308. [42] Stojanovic, T. (2010) Doktorska disertacija ne temu: Uloga interne revizije u jacanju korporativnog upravljanja i upravljanja rizicima. Unpublished. [43] Taylor, F. W. ed. (1967) The principles of scientific management. New York: Norton. [44] Vroom, V.H. (1964). Work and motivation. New York, NY: Wiley. [45] Weber, M. ed. (1974) The theory of social and economic organization. Quated in Johns, G. & Saks A.M. 6th ed. 2010. [46] Wood, R.E., & Locke, E.A. (1990) “Goal setting and strategy effects on complex tasks”. Research in Organizational Behavior, 12, pp. 73-109. [47] Wood, J. (1997) in Dickson, T. & Bickerstaffe, G. (eds.) Mastering Management: The Definitive Guide to the Foundations and Frontiers of Finance. London: FT/Pitman Publishing. [48] Wren, D. 3rd ed. (1987) The evolution of management thought. New York: Wiley. [49] Zhang, X., Bartol, K., Smith, K.G., Pfarrer, M.D. & Khanin, D.M. (2008). “CEOs on the edge: Earnings manipulation and stock-based incentive misalignment”. Academy of Management Journal, 51: pp. 241-258. 88 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) APSTRAKT

Organizacija, kao društveni sistem, se sastoji od pojedinaca koji imaju svoja očekivanja od te organizacije. Pošto pojedinci moraju biti organizovani u radne timove - grupe, organizacije zavise od interakcije I koordinacije medju pojedincima da bi se postigli ciljevi. Oblast organizacionog ponašanja podrazumeva razumevanje ljudi i njihovo organizovanje u cilju efikasnog rada. Izjednačavanje ponašanja pojedinaca sa organizacionim ciljevima je glavna briga menadžmenta. Ekonomisti I psiholozi ističu da ponašanje ljudi često ne može biti objašnjeno standardnim modelima koji se temelje na racionalnim, dobro informisanim i optimizovanim objektima. Upravljanje organizacionim ponašanjem ne bi trebalo da se oslanja na manipulaciju ljudima, ni na kontrolu i podstrek. Već to znači da treba napraviti system vrednosti – organizacionu kulturu – koji omogućava svim učesnicima u organizaciji da učestvuju u kreativnim procesima poslovanja, koji ističe njihov značaj i vrednost njihovih napora. Samo ovakvo organizaciono ponašanje može da stvori dugoročnu vrednost.

KLJUČNE REČI: organizacija, ponašanje, menadžment, pojedinac, organizaciona kultura, vrednost

Article history:

 Received 2 April 2013  Accepted 10 May 2013

UDC: 005.72 ; 005.34 ID: 199124748 Professional paper

Effect of Firm Organizational Structure and Management Style on Business Success: An evidence of Nike Inc.

Uticaj organizacione strukture organizacije i stila rukovođenja na poslovni uspeh: Primer Nike Inc.

Rebecca Milos23

ABSTRACT

Organizational structure is the hierarchical arrangement of levels of authority, lines of communication, and responsibilities of an organization. Classifications of organizations often indicates formal, informal, or hybrid organizational structure that is dependent on the degree of centralization, decentralization, or the combination of the two within an organization. The most commonly employed organizational structures in modern companies are often utilized out of a need for practical management and include: functional organizational structure, product based organizational structure, regional or geographical based organizational structure, market or customer oriented organizational structure, and matrix organizational structure. The advantages of a matrix organizational structure, as utilized by Nike Inc. are addressed within this paper. Although is it commonly speculated that there is one right organizational structure for each business, it is more likely that hybrids of a variety of organizational structures are more adept at meeting the needs of modern companies. Additionally, the extent to which organizational structures function and work within the business is largely determined by the management style, manager’s and employee’s aptitude in their positions, and the degree to which constant learning is espoused and practiced.

KEYWORDS: organizational structure, management style , business success, Nike JEL: D22

23 CalCampus, NH,United States 90 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) Introduction

Organizational structure is the hierarchical arrangement of levels of authority, lines of communications, and responsibilities of an organization. The organizational structure of a business delineates how the roles, power, and responsibilities are assigned, controlled, and coordinated as well as how information flows between the levels of management (businessdictionary.com, n.d.). The organizational structure of a business is determined by a variety of factors including: ownership, purpose or goal of the organization, size of the organization, the organization’s contribution to society, prime beneficiary, membership, industrial affiliation, nature of authority, market orientation, management principles, and practice of the organization (Radovic-Markovic and Omolaja, 2011). Determining the type of ownership, purpose or goal, size of the organization and so on is necessary for an organization to establish its identity and illustrate its identity to the public. However, a more common way of classifying organizations takes into account whether the organization is formal, informal, or hybrid. Formal organizations are typically concerned with a centralization of authority and the relationship between managers and subordinates (Schatz, n.d.). In other words, formal organizational structures are usually structured around the idea of centralization. Centrally organized businesses often have one ultimate decision making authority who communicates the vision and direction for the company and asserts strict control over departments and divisions (Vitez, n.d.). Formal, centralized organization structure is often depicted through vertical organizational charts that indicate authority starts at the top and cascades down in specific lines of authority. Informal, or spontaneous growth organizations, as the names imply, have less structure and are often created within social groups or projects. Informal organizations often espouse principles of decentralized organizational structure. Decentralized organizational structure relies on a team environment in which several people may have the autonomy to make business decisions (Vitez, n.d.). Informal, or spontaneous growth organizations, are less likely to be depicted in an organizational chart as functions, responsibilities, and authority constantly change in order to meet the needs of the business. Lastly, hybrid organization structures are those that are born out of a a synthesis of principles from both formal and informal organizational structures and tailored to meet the needs of the business and employees. Formal, informal, and hybrid organizational structures are important ways of classifying organizations and distinguishing differences and similarities between them. Formal, informal, and hybrid organization structures communicate lines of authority and structure within the company but do not in themselves specify management style. Effect of Firm Organizational Structure and Management Style on Business Success: An evidence of Nike Inc. 91 Theoretical overview

The choice of criteria to use in determining organizational structure is often dependent on the choice of management (Radovic-Markovic & Omolaja, 2011). The most commonly employed organizational structures in modern companies are often utilized out of a need for practical management and include: functional organizational structure, product based organizational structure, regional or geographical based organizational structure, market or customer oriented organizational structure, and matrix organizational structure. Functional organizational structure contains specialized subdivisions that report to an authority figure for that functional department and are often utilized in small companies, companies with one product, or companies where changes occur slowly (Griffin, n.d.). Product based organizational structures create departments for each product line within the company and are justified when there are multiple products to maintain. Regional or geographical based organizational structures are created when a businesses market includes a large geographical area. In this form of organizational structure there are local branches of the company throughout the area that may be in charge of their own marketing and sales but still report to the headquarters of the company. This organizational structure is appropriate for companies whose market is national, international, or in other ways geographically expansive. Market or customer based organizational structure is a highly specialized organizational structure in which only the marketing department is decentralized in order to train and maintain sales forces specific to each customer base (Radovic-Markovic & Omolaja, 2011). Matrix organizational structure, or project organization, is often used for management of large projects or product development processes and utilizes both vertical and horizontal management for information flow. Vertical authority lies with departmental heads and horizontal authority lies with project and process coordinators (Radovic-Markovic & Omolaja, 2011). Nike, a house-hold name brand retailer in shoes and athletic gear, is a real world example of a business that utilizes a matrix organizational structure. Matrix organizational structures can actually be considered a hybrid of functional organizational structure and product based organizational structure. In a matrix organizational structure, employees report to department managers and are also pooled together to form project or product teams. As a result, each person reports to a department manager as well as a project or product manager. In a matrix structure, product managers have control and say over product-related matters, while department managers have authority over matters related to company policy (Jones International University, n.d.). Nike Incorporated is an excellent example of a company that employs the matrix organizational structure. Nike Inc., owns affiliated brands Converse, Inc., Hurley International, LLC and NIKE Golf. In order to successfully manage its brands and affiliate brands Nike employs a “collaborative, matrix organization, where team members often report into two areas, such as a geography and a global function (Nike.com, n.d.) In other 92 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) words, Nike utilizes geographical organization, product organization, vertical management, and horizontal management throughout its brands and emphasizes teamwork in order to meet company and brand goals. “In the Nike brand, teams work across footwear, apparel and equipment product engines; core consumer categories - action sports, basketball, football (soccer), men's training, running, sportswear, and women's training; and in six geographies - North America, Western Europe, Eastern/Central Europe, Greater China, Japan, and Emerging Markets. NIKE, Inc. affiliate brands operate in a similarly collaborative way, as well as critical corporate functions (Nike.com, n.d.).” Role differentiation is based on locale, brand, and and consumer categories. Further role differentiation may be involved within locale, brands, and customer categories although this is only speculation and cannot be confirmed by information provided by Nike. Having established that Nike utilizes a matrix organizational structure with role differentiation being based on locale, brand, and consumer categories, it is also necessary to discuss the advantages and disadvantages of the matrix organizational structure and their implications for Nike. The matrix organizational structure is often considered an advantageous organizational structure for dynamic businesses. The matrix structure is highly advantageous because it fosters resource coordination, specialization, breadth of skill, communication, and flexibility. Resource coordination allows departmental managers to focus on their areas of expertise and allows project coordinators to do the same, specialization capitalizes on a specific skill set of an employee, breadth of skill encourages employee growth through teamwork, communication promotes inter-department and intra-project communication and relationships, and flexibility endorses versatility in the sharing of human resources (Guzman, n.d.). Using this model, Nike is able to coordinate vertical management through the use of departments or functional heads such as marketing, sales, production, etc, and is also able to coordinate horizontal management through the use of project coordinators or managers. This set-up allows Nike to maximize the skill set of the department and project managers, fosters learning and promotes relationship building within departments and between departments, and allows for quick response to customer demands. The way that Nike utilizes the matrix organizational system is particularly important in areas of learning. By maximizing the skill set of the both the department and project managers as well as promoting employee growth through collaboration, Nike enhances the employee satisfaction and employee skill sets which benefit both the employees and Nike. Although the advantages of the matrix organizational structure appear ideal, there are disadvantages associated with this organizational structure as well. The matrix organizational structure has some potentially disastrous drawbacks inherent in its makeup. The matrix organizational structure has four main disadvantages that include psychological stress, conflict, cost, and inefficiency. Psychological stress is associated with the matrix organizational structure because projects and teams may constantly fluctuate leading to a sense of instability (Nordmeyer, n.d.). Although there is stress in instability, the amount of stress Effect of Firm Organizational Structure and Management Style on Business Success: An evidence of Nike Inc. 93 perceived may depend on the employee in question. Conflict is associated with matrix organizational structures because there is more than one manager, the departmental and the project. This division of authority may promote loyalties to one or the other, conflict between managers, and departments, and confusion for employees. Cost issues are associated with matrix organizational structures because employees are working within two sub categories: department and project. This set-up may lead to less time being dedicated to each category and the need for more overtime to complete tasks. Inefficiency is associated with the matrix organizational structure because there may be conflicting policies between the managers. In order to minimize the disadvantageous effects of matrix organizational structure on its business endeavors it is imperative for Nike, and all corporations who utilize matrix organizational structure, to encourage relationship building and teamwork exercises which serve to increase trust and communication between people. These exercises will help to dispel or minimize any stress, conflict, and inefficiency inherently present in the matrix organizational structure.

Conclusion

Which organizational structure a business chooses is a function of many factors. These factors are often determined by the size of the organization, the location, the number of products, the variety in the customer base, preference of management style, and the practicality of adopting a particular organizational structure. Formal, informal, hybrid, functional, product-based, geographical, customer-oriented, and matrix organizational structures offer a wide array of advantages and disadvantages. However, there is no perfect organizational structure, and for this reason it is common to see facets of a variety of organizational structures (i.e. hybrid organizational structures) adopted by a large majority of companies. Additionally, decentralized and centralized organization are often presented as opposites that are mutually exclusive, when in fact businesses may benefit from incorporating principles of both. Consequently it can be postulated that finding the right organizational structure for a particular business is a matter of finding the right combination, or hybridization, of the variety of organizational structures previously delineated. The extent to which the organizational structures function and work within the business is largely determined by the management style, manager’s and employee’s aptitude in their positions, and the degree to which constant learning is espoused and practiced. 94 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) References

[1]Businessdictionary.com. (N.D.) Organizational Structure: Definition. Businessdictionary.com. Available at: http://www.businessdictionary. com/definition/organizational-structure. html [Accessed: 28 Feb 2013]. [2]Griffin, D. (N.D.). Functional Organizational Structure Advantages. Chron. Available at: http://smallbusiness.chron.com/functional-organizational- structure-advantages-3721.html [Accessed 2 March 2013]. [3]Guzman, O. (N.D.). The Advantages of Matrix Organizational Structure. Chron. Available at: http://smallbusiness.chron.com/advantages-matrix-organizational- structure-286.html [Accessed 2 March 2013]. [4]Jones International University. (N.D.). Organizational Structure and Change. Available at: http:// courses.jonesinternational.edu/private/ jiu/media/assets/978-1-4533-0090-9_Carpenter/978-1-4533-0090-9.carpenter. chapter.07.pdf [Accessed 2 March 2013]. [5]Nike.com. (N.D.). Nike, Inc. Management. Available at: http://nike.q4web.com/Investors/Corporate-Governance/NIKE-Inc- Management/ default.aspx [Accessed 2 March 2013]. [6]Nordmeyer, B. (N.D.) Disadvantages of Organizations with the Matrix Approach. Chron. Available at http://smallbusiness.chron.com/disadvantages- organizations-matrix-approach-22115.html [Accessed 2 March 2013]. [7]Radovic-Markovic, M., and Omolaja, M.A., (2011) Management Dynamics: In the New Economy. Saarbrucken: VDM Verlag. [8]Schatz, T. (N.D.) Basic Types of Organizational Structure: Formal and Informal. Chron. Available at: http://smallbusiness.chron.com/basic-types- organizational-structure-formal-informal-982.html [Accessed 28 Feb 2013]. [9]Vietz, O. (N.D.). Centralized vs. Decentralized Organizational Structure. Chron. Available at:http://smallbusiness.chron.com/centralized-vs-decentralized- organizational-structure-2785.html [Accessed 28 Feb 2013]. Effect of Firm Organizational Structure and Management Style on Business Success: An evidence of Nike Inc. 95 APSTRAKT

Organizaciona struktura je hijerarhijsko uređenje nivoa autoriteta, načina komunikacije, i odgovornosti neke organizacije. Klasifikacije organizacija često ukazuju na formalnu, neformalnu, ili hibridnu organizacionu strukturu koja zavisi od stepena centralizacije, decentralizacije, ili kombinacije prethodno navedenog u okviru jedne organizacije. Najčešće korišćene organizacione strukture u savremenim preduzećima se često koriste iz potrebe za praktičnim upravljanjem i uključuju: funkcionalnu organizacionu strukturu, organizacionu strukturu zasnovanu na proizvodu, regionalno ili geografski zasnovanu organizacionu strukturu, organizacionu strukturu orijentisanu na tržište ili kupca i matričnu organizacionu strukturu. U okviru rada navedene su prednosti matrične organizacione structure, koju koristi Nike Inc. Iako se često spekuliše da postoji samo jedna odgovarajuća organizaciona struktura za svako poslovanje, više je verovatno da su hibridi različitih organizacionih struktura veštiji u zadovoljavanju potreba savremenih preduzeća. Pored toga, u kojoj meri organizacione strukture funkcionišu i rade u okviru poslovanja je u velikoj meri određeno stilom rukovođenja, sposobnostima menadžera i zaposlenih, kao I stepena u kojem se zagovara i praktikuje konastantno učenje .

KLJUČNE REČI: organizaciona struktura, stil rukovođenja, poslovni uspeh, Nike

Article history:

 Received 10 March 2013  Accepted 3 May 2013

UDC: 334.724.2(55) ; 005.216.1 ID: 199125004 Original scientific paper

Performance Measures for Social Entrepreneur Institutions: Case of Iranian National Commission for UNESCO

Merenje učinka društvenih preduzetničkih institucija: Slučaj iranske kompanije za UNESCO

Behrad Seyyed Zare24

ABSTRACT

Social entrepreneurship is drawing the attention of lots of officials and scholars all around the Globe. Yet, still it is crystal clear that they do not agree about what social entrepreneurship is. Therefore, measuring some concept which is not clearly defined is a hard task, and may be impossible. In this study, the author takes advantage of the performance measurement tool designed by Razavi et al. (2013) for the Iranian National Commission for UNESCO. The main purpose of this study is to find that whether these measures are applicable for such measurements or not and also to prioritize these measure. Findings show that these measures positively affect the social entrepreneurship performance in the case.

KEYWORDS: performance measures, social entrepreneur institutions, case study, Iranian National Commission for UNESCO

JEL: L 26

24 Corresponding author Behrad Seyyed Zare,e-mail: [email protected], Faculty of Entrepreneurship, University of Tehran, 16th St. North Karegar Ave., Tehran, Iran Performance Measures for Social Entrepreneur Institutions: Case of Iranian National Commission for UNESCO. 97 Introduction

To many scholars, like Peredo and McLean (2006), social entrepreneurship is a bilateral entity, which brings social and entrepreneurship concepts together. Dees (1998) considers social entrepreneurship as a sort of entrepreneurship, while according to Austin et al. (2006), there are two kinds of entrepreneurs: social entrepreneurs and commercial entrepreneurs. This categorization reveals that the most important subject is to determine whether the created value is social or commercial; but the entrepreneurial side is common in both of these definitions. Certo and Miller (2008) argue that social entrepreneurship is a sub-discipline within the field of entrepreneurship. In other studies, Thompson (2002) refers to social entrepreneurs in the non-profit sector, and Spear (2006) calls it entrepreneurship in a social context for non-commercial organizations (Salamzadeh et al. 2013). According to the mentioned above literature and some other evidence (see e.g. Daryani et al., 2011; Salamzadeh et al., 2011a, b), there is some degree of vagueness in the literature of social entrepreneurship, and there is a need to elaborate the concept. On the other hand, measuring this concept is of paramount importance. Mair and Marti (2006) go beyond this problem and argue that: The real problem might not be the measurement per se, but how the measures may be used to quantify the performance and impact of social entrepreneurship. Many consider it very difficult, if not impossible, to quantify socio-economic, environmental and social effects. Then, there is a gap in the literature which is referred in this study. The main idea of this research is: (i) to test the performance measurement tool designed by Razavi et al. (2013) for the Iranian National Commission for UNESCO, and (ii) to prioritize these measures. To do so, the author firstly reviews the literature and the theoretical framework. Then, the methodology is discussed and the paper concludes.

Social Entrepreneurship Measurement: A Review

The increasing awareness in recent decades of the potential contribution of social entrepreneurship to the economy and society is hardly surprising in view of the growing number of third-sector organizations, namely, the segment of the economy that is made up of neither public nor private sectors (Sharir and Lerner, 2006). Trexler (2008) believes that measurement of the growth and impact of social enterprise will be impossible without a shared understanding of precisely what we’re supposed to measuring—an ironic situation for a field that exhorts nonprofits to use quantifiable metrics. The real problem might not be the measurement per se, but how the measures may be used to quantify the performance and impact of social entrepreneurship. 98 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

Many consider it very difficult, if not impossible, to quantify socio-economic, environmental and social effects (Mair and Marti, 2006). Recent empirical work has also explored the strategic context of impact measurement regimes within social entrepreneurship with particular reference to how such data is used in organizational accountability and innovation (Nicholls, 2006). Some scholars coded for use of formal propositions or hypotheses, research method, research setting, sample size, and the measurement of the social entrepreneurship construct. Finally they concluded that there is considerable variance in the measurement of social entrepreneurship (Short et al., 2009). To some scholars, directly related to their differences in missions, commercial and social entrepreneurship differ dramatically in terms of performance measurement (Certo and Miller, 2008). On the other hand, with its continued emergence in both academic and practitioner communities, the diversity of organizations categorized as social entrepreneurship continues to expand. The increasing diversity represents a challenge to the field as it attempts to build a scientific body of knowledge (Smith and Stevens, 2010). As Short et al. (2009) discuss, there is significant variance in the measurement of social entrepreneurship. Measures range from qualitative assessments (such as nature of innovation, fit of opportunity with community’s objectives, and implementing strategies) to more easily quantifiable targets (such as total contributions and size of donation). Moreover, Mair and Marti (2006) argue that it is necessary to make major efforts in this direction and to develop useful and meaningful measures that capture the impact of social entrepreneurship and reflect the objectives pursued. Yet, assessing social performance and the impact of social entrepreneurship is one of the greatest challenges for practitioners and researchers. However, such measures relate a narrow view of social entrepreneurship, and underplay the significance of social and qualitative outputs (Haugh, 2005). Grimes (2010) challenges earlier works on performance measurement and social entrepreneurship, arguing that the new emphasis on performance measurement is not merely a means for holding social entrepreneurship organizations accountable within the context of a funding relationship. However, Ahmed and Hoffmann (2008) argue that indeed the measurement of social entrepreneurship brings many new conceptual and practical difficulties to the table, chief amongst these being data availability, which is much scarcer than data relating to businesses. The OECD definition’s focus is deliberately to target business related entrepreneurship, and, so, explicitly ignores social entrepreneurship. That is not to undermine the importance of social entrepreneurship. Merely to say that the definition sets out to capture a particular aspect of entrepreneurship related specifically to businesses, since the interests of the OECD and the bodies that have been participating and supporting the OECD in this work are in this domain (Ahmed and Hoffmann, 2008). In this research, the author takes advantage of the Performance Measures for Social Entrepreneur Institutions: Case of Iranian National Commission for UNESCO. 99 measurement model proposed by Razavi et al. (2013) to test four hypotheses and also to prioritize the measures for measuring social entrepreneurship in the Iranian National Commission for UNESCO.

Theoretical framework

The Iranian National Commission for UNESCO was established in 1948 subsequent to Iran's accession to UNESCO, by the order of the National Consultative Assembly, the then Parliament of Iran. To depict its objectives, terms of reference and main operating bodies, the constitution of the Iranian National Commission for UNESCO was drafted in 13 articles and later adopted in the meeting of the Cabinet in 1949, by the proposal of the then Minister of Culture. The Constitution of the Iranian National Commission for UNESCO was revised after the Islamic Revolution to compose 17 articles and 4 notes. This Constitution was submitted to the Cabinet for adoption in 1987 upon approval by the Supreme Council of the Iranian National Commission for UNESCO25. The theoretical framework of this research is based on the model developed for measuring the performance of IRANIAN NATIONAL COMMISSION FOR UNESCO (Razavi et al., 2013). Based on this research, the performance of IRANIAN NATIONAL COMMISSION FOR UNESCO is defined through four measures-each of which has some elements (Tables number 1 to 4). As it is shown in the following tables, there are four main measures:  Financial Performance Measures,  Growth and Learning Measures,  Operational Measures, and  Mission Measures.

Table 1. Financial Performance Measures for Iranian national commission for UNESCO

Measure Elements Public supports Government supports Financial Earned income from publications performance Advertisement licensing measures Bank/financial institutions supports Sponsorships

25 http://www.irunesco.org/en/index.php?option=com_content&view=article&id= 931&Itemid=90 100 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

Table 2. Growth and Learning Measures for Iranian national commission for UNESCO Measure Elements Participation in international and regional meetings Participation in specialized seminars Use of national commission publications Growth and Participation in collaboration with specialized commissions Learning Measures in UNESCO Establishing specialized committees Personnel education Publications Source:Author

Table 3. Operational Measures for Iranian national commission for UNESCO

Measure Elements Advertisement in industries Expert/academics use Registration of achievements Internationalization of ideas in intellectual and cultural areas Information flow Conventions Capacity building Establishment of databases Providing consultancy and operational services to industries Innovation of national plans Documentation of achievements Establishment of UNESCO chair Operational Membership in international committees of UNESCO chairs Measures Planning a SMART strategy Multilateral diplomatic interaction with international organizations Number of members in international UNESCO chairs Active contribution in macro-policies of UNESCO UNESCO international prizes Relations with other institutions Running UNESCO Chairs Academic conventions with universities Number of site visits Synergizing the national capacities in the areas with social/scientific importance Team making Source:Author Performance Measures for Social Entrepreneur Institutions: Case of Iranian National Commission for UNESCO. 101

Table 4. Mission Measures for Iranian national commission for UNESCO

Measure Elements Increasing the span of UNESCO activities UNESCO mission as the leverage of UN in areas of education, research and society Prioritizing based on national conditions Decreasing unemployment Mission Measures Decreasing social failures Supports from peace Eliminating illiteracy Cultural bases plan Ethics and social change management Improving health Source:Author

Methodology

As mentioned earlier, this paper aims to prioritize the performance measures developed for Iranian national commission for UNESCO as a social entrepreneur institution. The research population of the study includes all the knowledgeable individuals who were aware of the activities of Iranian national commission for UNESCO and those who have ongoing relations with this institution. A survey was carried out in 2012 and the respondents were selected based on their expertise and knowledge in the field. A stratified random sampling method was tailored. To collect the data, Razavi et al. (2013) questionnaires was used in which the reliability coefficient was calculated based on the alpha Cronbach (0.85) (Table 5). Questionnaires were sent to the all respondents to avoid any damaged or unusable questionnaire problems. Finally, 132 individuals returned the questionnaires. For data analysis, descriptive and inferential statistical techniques and the software of SPSS version 20 were used in a significance level of p<0.05. Both academics and officials engaged in this process to improve the validity of the findings. Also, a questionnaire was designed and confirmed by a couple of experts (face/expert validity). In other words, content and expert validity tests were undertaken during the development and revision of the instruments. Afterwards, the Friedman test was used to rank the measures based on expert ideas, and standard descriptive statistics were performed to analyze all responses. 102 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

Table 5. Validity of the measures

Measure Cronbach’s alpha Items Financial Performance Measures 0.76 6 Growth and Learning Measures 0.86 7 Operational Measures 0.81 24 Mission Measures 0.82 10 Total 0.85 47 Source:Authors

Findings

Table 6 shows the main characteristics of the respondents. As it is shown, the respondents are categorized by their gender, age, educational level, and tenure.

Table 6. Main Characteristics of the Sample (N = 132)

Characteristics Frequency Percent Gender Male 110 83% Female 22 17% Age Less than 35 years 32 24% 35-45 years 70 53% More than 45 years 30 23% Educational Level Bachelor’s degree 32 24% Master’s degree 80 61% PhD degree 20 15% Tenure Less than 5 years 60 45% 5-10 years 45 34% More than 11 years 27 21% Source:Authors Financial Performance Measures Mair and Marti (2006) believe that it is necessary to ensure the sustainability of the initiative and financial self-sufficiency for social enterprises. However, some believe that social entrepreneurs have appropriate procedures within the organization to systematically assess the financial viability (Weerawardena and Mort, 2006). Some scholars hope to raise awareness of the ongoing need to go beyond traditional financial performance measures when studying social entrepreneurship institutions (Cohen et al., Performance Measures for Social Entrepreneur Institutions: Case of Iranian National Commission for UNESCO. 103

2008). Moreover, Kerr (2008) believes that there is a growing body of knowledge that allows measurement of the social impact and financial success of social entrepreneurship (Razavi et al., 2013). As it is shown in tables 7 and 8, Performance Measures positively affect the performance of Iranian national commission for UNESCO. H1: Financial Performance Measures positively affect the performance of Iranian national commission for UNESCO.

Table 7.One-Sample Statistics for Financial Performance Measures

N Mean Std. Deviation Std. Error Mean Financial Performance Measures 132 5. 5015 1. 33342 . 07200

Table 8.One-Sample Test for Financial Performance Measures

Test Value = 5 95% Confidence Interval

of the Difference Sig. (2- Mean T df Lower Upper tailed) Difference Financial Performance -20. 814 131 . 000 -1. 49854 -1. 6402 -1. 3569 Measures Source:Authors Growth and Learning Measures Some scholars believe that in a more sustainable direction, new learning measures are needed (Bendt et al., 2013). Short et al. (2009) argue that the level of social entrepreneurship in an organization will be positively related to distinctive market-focused learning capabilities. In sum, growth and learning measures are another type of measures for social enterprises. However some conventional studies say that growth measures included employment growth (absolute, organic, and relative) sales growth (absolute, organic, relative) (Sherman, 2005), this study focuses on seven measures which show the growth of the case (Razavi et al., 2013). As it is shown in tables 9 and 10, Growth and Learning Measures positively affect the performance of Iranian national commission for UNESCO. H2: Growth and Learning Measures positively affect the performance of Iranian national commission for UNESCO.

Table 9.One-Sample Statistics for Growth and Learning Measures

N Mean Std. Deviation Std. Error Mean Growth and Learning Measures 132 10. 06622 6. 27604 . 33887 104 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

Table 10.One-Sample Test for Growth and Learning Measures

Test Value = 5 95% Confidence Interval

of the Difference Sig. (2- Mean T Df Lower Upper tailed) Difference Growth and 21. 131 . 845 . 06622 . 6003 . 7328 Learning Measures 195 Source:Authors Operational Measures Operational measures are among the most important measures for social entrepreneur enterprises. Conventional measures concentrate on some other aspects. For instance, Lane and Casile (2011) believe that some familiar operational measures, such as cash flow and operating income, will be appropriate for many social ventures. However, scholars have been demanding for more operational measures that are more appropriate (Becker, 2012) (Razavi et al., 2013). Based on the findings, Operational Measures positively affect the performance of Iranian national commission for UNESCO. H3: Operational Measures positively affect the performance of Iranian national commission for UNESCO.

Table 11.One-Sample Statistics for Operational Measures

N Mean Std. Deviation Std. Error Mean Operational Measures 132 7. 5922 2. 44015 . 13577

Table 12.One-Sample Test for Operational Measures

Test Value = 5 95% Confidence Interval

of the Difference Sig. (2- Mean T Df Lower Upper tailed) Difference Operational 19. 092 131 . 000 2. 59216 2. 3250 2. 8593 Measures Source:Authors Performance Measures for Social Entrepreneur Institutions: Case of Iranian National Commission for UNESCO. 105

Mission Measures Mission measures are those related to the mission of the social entrepreneur organization- in this case Iranian national commission for UNESCO. As Peredo and McLean (2006) discuss: “Social entrepreneurship can be defined as the development of innovative, mission-supporting, earned income, job creating or licensing, ventures undertaken by individual social entrepreneurs, nonprofit organizations, or nonprofits in association with for profits”. Adopting a mission to create and sustain social value is another interpretation of the social entrepreneurship mission (Boschee and McClurg, 2003). Since, social entrepreneurship is mission-related, internal values and motivations largely drive the venture (Certo and Miller, 2008). But the point is to precisely define the required measures to elaborate such mission- which was done by identifying the above mentioned elements (Razavi et al., 2013). As it is shown in tables below, Mission Measures positively affect the performance of Iranian national commission for UNESCO. H2: Mission Measures positively affect the performance of Iranian national commission for UNESCO.

Table 13.One-Sample Statistics for Growth and Learning Measures

N Mean Std. Deviation Std. Error Mean Mission Measures 132 9. 05652 4. 27635 . 35287

Table 14.One-Sample Test for Growth and Learning Measures

Test Value = 5 95% Confidence Interval of the Difference Sig. (2- Mean T Df Lower Upper tailed) Difference Mission 20. 103 131 . 833 . 06252 . 6113 . 7335 Measures Source:Authors The test statistic for the t-test on one population mean is derived under the assumption that the sample was randomly chosen from a normal population and that the population standard deviation is unknown and must be estimated from the sample. As it is evident from the Tables above, all the factors are significantly influencing the performance of Iranian national commission for UNESCO. Moreover, for the purpose of prioritizing the key success factors, Friedman’s test was used. Based on the findings of this test, Table 15 shows the priority of each factor. 106 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

Table 15. Priority of Performance Measures for Iranian national commission for UNESCO

Key Success Factors Mean rank Priority/Rank Mission Measures 15.76 1 Operational Measures 15.75 2 Financial Performance 15.55 3 Measures Growth and Learning Measures 15.12 4 Source:Authors

Conclusions

Social entrepreneurship is one of the main topics in scholarly discussions of entrepreneurship. Although some scholars consider this concept as an addition to conventional/commercial entrepreneurship, some go far beyond this and study it in a more detailed and unique way. Yet, its definitions and measures are mostly dependant on how it is mentioned and on who is defining it. In the present study the author took advantage of the measurement tool designed by Razavi et al. (2013). Moreover the author tested if these measures were effective of the social entrepreneurship performance of the case. Also, the measures were prioritized based on the Friedman’s test. Based on the findings, mission measures were the most important measures and growth and learning measures are the last but not the least important ones. Future researchers are invited to test the model for other similar institutions and also to design a unique tool for their cases.

Performance Measures for Social Entrepreneur Institutions: Case of Iranian National Commission for UNESCO. 107 References

[1]Ahmad, N., and Hoffmann, A. (2008). A framework for addressing and measuring entrepreneurship. OECD Statistics Working Paper, pp. 3-36. [2]Austin, J., Stevenson, H. and Wei-Skillern, J. (2006). Social and commercial entrepreneurship: same, different or both?, Entrepreneurship Theory and Practice, 30(1), 1–22. [3]Becker, M. (2012). Social Entrepreneurship in the Hotel Industry: An Application of the Balanced Scorecard to Social Entrepreneurship in Hotels. Published Thesis. International University of Applied Sciences Bad Honnef-Bonn. [4]Bendt, P., Barthel, S., & Colding, J. (2013). Civic greening and environmental learning in public-access community gardens in Berlin. Landscape and Urban Planning. In press [5]Boschee, J., & McClurg, J. (2003). Toward a better understanding of social entrepreneurship: Some important distinctions. Retrieved October, 9, 2008. [6]Certo, S. T., & Miller, T. (2008). Social entrepreneurship: Key issues and concepts. Business horizons, 51(4), 267-271. [7]Certo, S. T., & Miller, T. (2008). Social entrepreneurship: Key issues and concepts. Business horizons, 51(4), 267-271. [8]Cohen, B., Smith, B., & Mitchell, R. (2008). Toward a sustainable conceptualization of dependent variables in entrepreneurship research. Business Strategy and the Environment, 17(2), 107-119 [9]Daryani, M., Salamzadeh, Y., Salamzadeh, A., & Sharafi, F. (2011). An Analysis of the Current Gaps in Social Entrepreneurship in Iran: Shackled Feet. In 1st International Conference on Management, Innovation and Entrepreneurship, Shiraz, Iran [10]Dees, J.G. (1998). The meaning of social entrepreneurship’ [online] http://cdi.mecon.gov.ar/biblio/docelec/dp4012.pdf (accessed 29 August 2010). [11]Grimes, M. (2010). Strategic sensemaking within funding relationships: The effects of performance measurement on organizational identity in the social sector. Entrepreneurship Theory and Practice, 34(4), 763-783. [12]Haugh, H. (2005). A research agenda for social entrepreneurship. Social enterprise journal, 1(1), 1-12. [13]Kerr, J. (2008). Sustainability Meets Profitability: The Convenient Truth of How the Business Judgment Rule Protects a Board's Decision to Engage in Social Entrepreneurship. [14]Lane, M. D., & Casile, M. (2011). Angels on the head of a pin: The SAC framework for performance measurement in social entrepreneurship ventures. Social Enterprise Journal, 7(3), 238-258 [15]Mair, J., & Marti, I. (2006). Social entrepreneurship research: A source of explanation, prediction, and delight. Journal of world business, 41(1), 36-44. 108 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

[16]Nicholls, A. (Ed.). (2006). Social Entrepreneurship: New Models of Sustainable Social Change: New Models of Sustainable Social Change. OUP Oxford. [17]Peredo, A. M., & McLean, M. (2006). Social entrepreneurship: A critical review of the concept. Journal of world business, 41(1), 56-65 [18]Razavi, S.M, Kazemi, R.M., Zare, B. (2013). Identification of Performance Measures for Social Entrepreneur Institutions: Case of the Iranian national commission for UNESCO. Australian Journal of Basic and Applied Sciences. Forthcoming. [19]Salamzadeh, A., & Salamzadeh, Y. (2011a). What is Social Entrepreneurship? In the 1st International Conference on Business, Strategy and Management, Kolkata, India. [20]Salamzadeh, A., Azimi, M.A. and Kirby, D.A. (2013) ‘Social entrepreneurship education in higher education: insights from a developing country’, International Journal of Entrepreneurship and Small Business. Forthcoming. [21]Salamzadeh, A., Salamzadeh, Y., & Nejati, M. (2011b). Social Entrepreneurship: Analyzing Literature and Proposing a Comprehensive Model. In Proceedings of the 9th Asian Academy of Management International Conference (pp. 520-525). [22]Sharir, M., & Lerner, M. (2006). Gauging the success of social ventures initiated by individual social entrepreneurs. Journal of world business, 41(1), 6-20. [23]Sherman, D. A. (2005). SOCIAL ENTREPRENEURSIP: SCALING SOCIAL IMPACT. Conceptual paper of the Executive Doctor of Management Program, Cleveland: Case Western Reserve University, http://weatherhead. case. edu/edm/archive/files/concept/SHERMAN--1st% 20Year% 20Conceptl% 20paper--4-26-05. pdf (Zugriff: 01.11. 2007). [24]Short, J. C., Moss, T. W., & Lumpkin, G. T. (2009). Research in social entrepreneurship: Past contributions and future opportunities. Strategic entrepreneurship journal, 3(2), 161-194. [25]Smith, B. R., & Stevens, C. E. (2010). Different types of social entrepreneurship: The role of geography and embeddedness on the measurement and scaling of social value. Entrepreneurship and Regional Development, 22(6), 575-598. [26]Spear, R. (2006). Social entrepreneurship: a different model?, International Journal of Social Economics, 33(5–6), 399–410. [27]Thompson, J.L. (2002). The world of the social entrepreneur, The International Journal of Public Sector Management, 15(5), 412–431. [28]Trexler, J. (2008). Social Entrepreneurship as Algorithm: Is Social Enterprise Sustainable?. E: CO Issue, 10(3), 65-85. [29]Weerawardena, J., & Mort, G. S. (2006). Investigating social entrepreneurship: A multidimensional model. Journal of world business, 41(1), 21-35. Performance Measures for Social Entrepreneur Institutions: Case of Iranian National Commission for UNESCO. 109 APSTRAKT

Društveno preduzetništvo privlači pažnju mnogih zvaničnika i akademskih ljudi širom sveta. Ali, kristalno je jesno da se oni ne slažu kada je u pitanju definicija društvenog preduzetništva. Stoga, meriti neki koncept koji nije jasno definisan, je vrlo težak zadatak, a možda I nemoguć. U ovom radu, autor je koristio sistem za merenje učinka koji je napravio Razavi et al. (2013) za Iransku Nacionalnu Komisiju za UNESCO. Glavni cilj ovog rada jeste da otkrije da li je ovaj sistem merenja primenjiv u ovakvoj vrsti merenja ili ne, I takodje da prioritizuje ovaj sistem. Rezultati pokazuju da ova merenja pozitivno utiču na učinak društvenog preduzetništva u ovom slučaju.

KLJUČNE REČI: merenje učinka, institucije društvenog preduzetništva, studija slučaja, iranska nacionalna komisija za UNESCO

Article history:

 Received 4 April 2013  Accepted 16 May 2013

UDC: 005.336.3:614.2(55) ; 007:004]:614.2 ; 614.253.8(55) ID: 199125260 Original scientific paper

Establishing Hospital Information Systems and Creating Patient Loyalty through Improvements in Services: Evidence from Iranian Hospitals

Uspostavljanje bolničkih informacionih sistema i stvaranje lojalnosti pacijenata putem poboljšanja usluga: informacije iranskih bolnica

Masoomeh Yousefirad26 Mohammad Ali Sarlak27 Tahereh Feizi28

ABSTRACT

Nowadays, traditional systems are not considered as efficient solutions in hospitals, as the need for hospital information systems is highlighted. Therefore, according to the paramount importance of hospital information systems, in this research, authors will try to investigate the impact of using such systems on improving services in hospitals of Iran, and more specifically in Tehran. The present study is a survey and is applied in nature. To gather the required data, a questionnaire was designed and distributed between 206 respondents from 10 hospitals in Tehran. Afterwards, the gathered data was analyzed using SPSS and LISREL. Findings show that patient satisfaction positively affects their loyalty. Moreover, some other hypotheses were tested to reach the final model. Personnel behavior affects customer satisfaction. Younger and more educated patients show less degree of satisfaction than older and less educated patients. Moreover, men were more satisfied than women. KEYWORDS: hospital information systems, service quality, information technology, loyalty,satisfaction JEL: I 11

26 Corresponding author Masoomeh Yousefirad,e-mail: [email protected], , Payam Noor University, Tehran, Iran 27 Payam Noor University, Tehran, Iran 28 Payam Noor University, Tehran, Iran Establishing HIS and Creating Patient Loyalty through Improvements in Services: Evidence from Iranian Hospitals 111 Introduction

Most hospitals keep and update their paper-based medical records after introducing an electronic medical record or a hospital information system (HIS) (Lærum et al., 2004). A Hospital Information System for managing clinical path information constituted of a plurality of medical service information each indicating a schedule regarding a medical service for a patient (Nagaeda et al., 2004). However, most hospitals keep and update their paper-based medical records after introducing an electronic medical record or a hospital information system (Lærum et al., 2004). Fully computerized hospital information systems are spreading in hospitals all around the world. Most HIS consist of server computers, terminals, a database, and a LAN. The introduction of HIS has enabled quick communication between doctors and staff and the immediate interaction between beneficiaries (Hanada et al., 2010). Hospitals use such systems to improve efficiency, develop new initiatives, increase patient satisfaction, etc. Among the other advantages of using such information systems are the large samples, which increase the statistical precision (Fonager et al., 1996), assess the effects of adverse drug events (Raschke et al., 1998), improvement of clinical communication, improvement of medical record keeping and decision-making, and educational benefits (Van Der Meijden et al., 2003), increased adherence to guideline-based care, enhanced surveillance and monitoring, and decreased medication errors (Wu et al., 2006), and the like. HIS also enhances the hospital's quality assurance reporting and ability to keep track of provider performance and patient satisfaction (Anderson, 1997). The organization of aHIS is a project which demands special attention and care (Bakker, 1984). Based on some research, inappropriate information quality of the system and incompatibility with user needs which leads to decreased satisfaction of users towards the system (Anderson and Aydin, 1997; Kimiyafar et al., 2008).Another study investigates the influence of IT- supported systems and HIS on patient satisfaction, and concludes that it positively affects their satisfaction. In other words, by introduction of IT-supported HIS patient satisfaction can be improved. HIS already evaluated as very good before introduction of HIS could be improved only slightly, whereas badly evaluated HIS exhibited a large optimization potential (Schuld et al., 2008). As Rahimi and Vimarlund (2007) argue, although IT- based applications in healthcare have existed for more than three decades, methods to evaluate outputs and outcomes of the use of IT-based systems in medical informatics is still a challenge for decision makers, as well as to those who want to measure the effects of ICT in healthcare settings. They conclude that using HIS could improve the outcomes of health care institutions, among which is patient satisfaction. In the present study, however, we only focus on some main issues, such as influence of technological and human factors on patients' satisfaction and loyalty in the studied hospitals. In order to do so, we firstly review the theoretical framework and the literature. Then, methodological issues are elaborated. Afterwards, we discuss the findings and paper concludes with some suggestions for future research. 112 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) Theoretical Framework

In this section we discuss different aspects of the research framework we use to reach our goals. In order to do so, we review each part in a different part. Hospital Information Systems (HISs) Indeed, any health care institution, e.g. hospitals, clinics, etc. takes advantage of IT, to some extent. Organizations need more return on their investments; therefore, they accept any new ideas to make substantial changes in their businesses. IT solutions are among those profitable ideas to be added to such organizations. Patient care information systems include hospital information systems, computerized or electronic medical record systems, or nursing documentation systems. Information systems with a practical utility for patient care or diagnostic procedures are relatively easily accepted, sometimes even without any scientific evidence of their value (Van Der Meijden et al., 2003). HIS have often been promoted as an efficient means to deliver high quality care through rapid information retrieval and efficient data management. However, CIS have experienced high levels of user resistance (Palm et al., 2006). Objectives of HIS include:  To Improve Patient Care In light of the referral system that has patients moving from district to regional and central hospitals in the provinces, it became imperative that information belonging to patients previously treated at hospitals in the provinces be available at any other hospital where the patient might be admitted (Lee, 2005).The improvement in the health care professionals’ access to patient related information during the treatment process meant improved medical records handling and shorter turnaround time for the release of diagnostic information such as laboratory and special investigation results. The improvement of patient administration procedures resulting in shorter waiting times and a general better level of service to patients (Classenet al., 1992; Van Eaton et al., 2004).  To improve the delivery of services across the departments/ and between hospitals This included the re-engineering and standardization of patient administration and related procedures throughout hospitals in the province. The improvement of the information necessary for performance evaluations and health care audits (Mbananga et al., 2002).  To improve the efficiency of hospital management The HIS should facilitate decentralized financial management at hospital level; improve revenue collection; and improve management decision-making through the availability of integrated management information. Envisioned was also the cost savings Establishing HIS and Creating Patient Loyalty through Improvements in Services: Evidence from Iranian Hospitals 113 mechanism of identifying primary cost-drivers at hospital level and the scientific monitoring of the mechanisms introduced to lower costs (Littlejohns et al., 2003). In some areas of the US regional electronic networks link all healthcare players in the area. Appleby reflects that such moves in current and future healthcare are making traditional ownership models irrelevant where "we’re going to increasingly compete on how information is applied, not who owns it" (Ballard, 1999). The research identified a lack of understanding of IT options and potential benefits in this industry. It also determined that there was little or no awareness of the competitive advantage that could be achieved through IT. The role of IT within the network was found to be constrained at the level of providing a supporting infrastructure for users rather than one of being pivotal for organizational strategic advantage (Orr et al., 2001). Diedling and Welfeld (1995) identified the IT department as the architect of the hospital strategic information plan which must be the blueprint for organizing patient care, research, financial, and administrative data (Orr et al., 2001). Shahin and Jamshidian (2006) in a research entitled "Information Technology in Service Organizations", found that different type of service operations require different levels of IT. Authors have also emphasized that IT plays an important role in the service industry, especially in financial and healthcare sectors and it will continue to increase its importance as managers further appreciate the benefits that can be gained, as IT is treated as a strategic issue and as the complexities of a large network, demand increased capabilities in information management (Mooghali, 2012). Winter et al. (2003) designed a study to utilize the resources of hospital information system to assess the effects of it on hospital length of stay and cost of hospitalization. In sum, hospital information system is considered as a prerequisite for the efficient delivery of high quality health care in hospitals. However, a large number of legal and practical constraints influence on the design and introduction of such systems (Lærum et al., 2004). Some recent research shows the potentials of implementing HIS systems in developing countries despite the challenges. To facilitate effective and efficient data collection for policy making, evaluation, disease management and quality care delivery, collaboration and involvement between developing countries and the developed world is required. Moreover, HISs and other clinical decision support tools are currently used in both primary and secondary healthcare facilities in most developed nation, and some developing countries (Williams and Boren, 2008). However, as Sood et al. (2008) argue, there are sharp differences between barriers to adaptation and implementation in developing countries to that of developed countries. To some scholars, rather than focusing on technological innovation in healthcare institutions as an end itself, developing countries should adopt a holistic approach to cultivate a more mature information culture in healthcare. However, healthcare sector, the adoption of ICT is perceived as the main driving force in the unfolding healthcare reforms in many developed and developing countries (Zheng, 2005). 114 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

In sum, future HIS development should view provider-provider and provider- patient communication as a core function, and incorporate features such as seamless support and tracking of communication, automatic gathering and presentation of data from multiple sources, data collection in atomic units by the most qualified provider, and integrated management, resource utilization, and tracking. The steps towards HIS that support these features might be smaller than generally suspected, once the appropriate changes in the reference point have been made (Giuse and Kuhn, 2003; Heeks, 2006).Health information systems have to be developed and explored that enhance opportunities for global access to health services and medical knowledge (Haux, 2006). Patient Satisfaction and Loyalty Healthcare consumers are demanding excellence in care and services from care providers, and payers are following in their expectations. Demonstration of quality outcomes and consumer satisfaction with services are now a priority and the primary competitive edge in healthcare. Hospitals and healthcare systems that invest in programs to determine how patients evaluate their experiences will have valuable information to make transformational changes in care delivery and services (Urden, 2002).Many hospitals are considering enhanced approaches to patient satisfaction measurement and guest relations-or service management. Some are building in-house satisfaction management systems. Others are evaluating the growing number of systems commercially available for purchase (Fisk et al., 1990). Platonova et al. (2008) found that patient trust, satisfaction, and loyalty are strong and significant predictors of patients' intentions to stay with the doctor and to recommend the services to others. Satisfaction ratings have business implications for healthcare providers and may be useful as a management tool for private and public purchasers. Based on the findings of another research, there is a statistically significant link between satisfaction and loyalty. Although satisfaction's effect overall is relatively small, contentment with certain hospitalization experience may be important. The link between satisfaction and loyalty is weaker for high-satisfaction hospitals, consistent with other studies in the literature (Kessler and Mylod, 2011). In sum, patient satisfaction is a multi-dimensional healthcare construct affected by many variables. Healthcare quality affects patient satisfaction, which in turn influences positive patient behaviors such as loyalty. Patient satisfaction and healthcare service quality, though difficult to measure, can be operationalized using a multi-disciplinary approach that combines patient inputs as well as expert judgment (Naidu, 2009). Health Care Quality in Hospitals The degree of patient satisfaction can be used as a means of assessing the quality of health care and the personnel. It reflects the ability of the provider to meet the patients’ needs. Satisfied patients are more likely than the unsatisfied ones to continue using the health care services, maintaining their relationships with specific health care providers and complying with the care regimens (Aldebasi and Establishing HIS and Creating Patient Loyalty through Improvements in Services: Evidence from Iranian Hospitals 115

Ahmed, 2011; Sreenivas and Babu, 2012).The quality of service—both technical and functional—is a key ingredient in the success of service organizations. Several techniques for measuring technical quality have been proposed and are currently in use in healthcare organizations. Information relating to this is not generally available to the public, and remains within the purview of health-care professionals and administrators (Bopp, 1990; Sreenivas and Babu, 2012). Functional quality, in contrast, relates to the manner of delivery of health-care services. Numerous studies have shown that provision of high-quality services is directly related to increase in profits, market share, and cost savings (Devlin and Dong,1994; Sreenivas and Babu, 2012).

Methods

A survey collected data through a questionnaire drawn up around the research questions, after studying the literature and finding different dimensions of the model. After designing the questionnaire, validity and reliability of the questionnaire were determined. To do so, the face validity was ensured through ideas of experts. For a long time Cronbach's alpha was one of the major assets of classical test theory, a well-established statistic that could be found in virtually every paper reporting an evaluation of a measure. In this paper, we used it to show the reliability of our questionnaire (see Table 1).

Table 1: Reliability Test (Cronbach's Alpha)

No. of questions Cronbach's alpha Total 43 .96 Quality 14 .90 Quantity 8 .84 Cost Management 5 .72 Personnel Behavior 9 .92 Patient Satisfaction 4 .70 Patient Loyalty 3 .94 Source:Authors The paper focuses of two main concepts of HIS and patients' satisfaction. Also, as mentioned earlier, in order to gather the required data, a questionnaire was designed and distributed between 206 respondents from 10 hospitals in Tehran. Cochran's formula was used to determine the sample size of this study. Finally, 206 questionnaires were gathered and analyzed (return rate=93.63%). In order to gather the required data, two questionnaires were used: 1. A questionnaire to gather the data for assessment of the existing status of IT in hospital: 116 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

This questionnaire includes two segments: (i) assessing the quantitative status and application domain for such systems in hospitals, and (ii) assessing the qualitative status of HIS- based on ISO 9126. 2. A questionnaire to gather the information regarding patients: This questionnaire includes two segments: (i) demographic information of respondents, and (ii) questions regarding different dimensions of patient satisfaction. It should be noted that these dimensions are self elaborated and are also based on the existing literature. The number of questions for each dimension is mentioned in Table 1. Afterwards, the gathered data was analyzed using SPSS and LISREL.

Findings

 Descriptive Findings Among 206 respondents, 45.1 percent had high school degree, 9.2 had a preliminary university degree, and the rest were postgraduates. 56 percent of them were female, and 44 percent were male. 45.1 percent were between 26 to 35 years old, while 9.7 percent were between 46 to 55 years. 51 percent did not have any inpatient experiences, while 10.7 percent had just one experience of such visits. Findings show that maximum satisfaction of quality of healthcare services were due to the probability of doctors’ error in diagnosing the illness, and prescriptions, which was considered low (34.5%), and then because of ease of access to services (34.5%). In contrast, the lowest satisfaction was due to rendering services at the global level (14.2%).The highest rate of satisfaction was due to access to doctors (33.5%), and the highest dissatisfaction was because of ease of access to managers (19.3%). In sum, 27.7 percent of the respondents were mostly satisfied. Also, 24.8 percent preferred their own hospitals, against other ones.  Inferential Findings Figure 1 shows the research model. As it is shown in the model, and also in Table 2, there are statistically significant positive relations between independent variables- i.e. quality, quantity, cost management, personnel behavior- and dependant variable- i.e. satisfaction. Establishing HIS and Creating Patient Loyalty through Improvements in Services: Evidence from Iranian Hospitals 117

Figure 1: research model

Quality

Quantity

Loyalty HIS Satisfaction Cost Management

Behavior Source:Authors

Table 2: Regression results

Estimate Beta Standard error T value Sig Quality .17 .05 .021 8.15 P<0.01 Quantity .076 .12 .036 2.11 P<0.05 Cost Management .19 .20 .039 4.84 P<0.05 Personnel Behavior .084 .2 .022 3.86 P<0.05 Patient Satisfaction .074 .9 .034 2.18 P<0.05 Source:Authors As it is shown in the model, other independent variables do not have any significant relationship with satisfaction. However, some of mediating variables do have a significant relationship. Then, we could infer that these variables indirectly affect satisfaction. These variables are shown in Table 3.

Table 3: Regression results- significant mediating variables

Standard Estimate Beta T value sig error Type of visit and quality -3.71 -.23 1.17 -3.18 P<0.05 Type of visit and personnel 4.31 0.19 1.57 2.75 P<0.05 behavior Source:Authors 118 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

These figures show that outpatients are satisfied with quality of services, and inpatients are more satisfied with personnel behavior. Moreover, the initial model of path analysis with t values reveals that demographic variables do not have any significant relationship with other research variables. Therefore, we should delete them from our model (p>.05, and t<2). These values are shown in Table 4. Table 4: Regression results- insignificant relations

Estimate Beta Standard error T value Sig Level of Education -.14 -.04 .14 -1.01 p>0.05 Age .069 .02 .036 0.46 p>0.05 Insurance status -.22 -.02 .35 -.64 p>0.05 Source:Authors In the final model, the significant relations are remained, and insignificant ones are deleted. All of the figures are presented in Tables number 5 to 9.

Table 5: Regression results- final model

Standard T Estimate Beta sig error value IS and quality .79 .2 .21 3.76 P<0.05 Marital status and cost -1.9 -.17 .75 -2.55 P<0.05 Outpatient experience and cost -.72 -.21 .24 -3.04 P<0.05 management Inpatient experience and .55 .14 .15 3.64 P<0.05 satisfaction Residency and satisfaction 1.40 .14 .39 3.56 P<0.05 Quality and quantity .35 .65 .029 12.07 P<0.01 Quality and personnel behavior .61 .48 .083 7.40 P<0.01 Quality and satisfaction .17 .52 .02 8.53 P<0.01 Quality and loyalty .09 .26 .024 3.59 P<0.05 Quantity and personnel .34 .23 .12 2.73 P<0.05 behavior Quantity and satisfaction .07 .12 .034 2.15 P<0.05 Cost management and .41 .19 .16 2.95 P<0.05 personnel behavior Cost management and .18 .2 .037 4.94 P<0.05 satisfaction Cost management and quantity .58 .21 .15 3.90 P<0.05 Personnel behavior and .08 .19 .022 3.83 P<0.05 satisfaction Satisfaction and loyalty .54 .55 .072 7.56 P<0.01 Source:Authors Establishing HIS and Creating Patient Loyalty through Improvements in Services: Evidence from Iranian Hospitals 119

Table 6: Regression results- final model

Estimate Beta Standard T value sig error IS and quality .06 .02 .03 2.40 P<0.05 Marital status and quality -1.71 -.06 .75 -2.28 P<0.05 Outpatient experience and cost .65 -.07 .25 -2.61 P<0.05 management Inpatient experience and .3 .14 .08 3.59 P<0.05 satisfaction Marital status and quantity -.59 -.04 .27 -2.23 P<0.05 Outpatient experience and -.22 -.04 .09 -2.54 P<0.05 quantity HIS and personnel behavior .01 .03 .05 2.18 P<0.05 Marital status and personnel -.98 -.04 .47 -2.07 P<0.05 behavior Outpatient experience and -.37 -.05 .16 -2.31 P<0.05 personnel behavior HIS and satisfaction .18 .13 .05 3.58 P<0.05 Marital status and satisfaction .77 -.08 .32 -2.41 P<0.05 Outpatient experience and .29 -.09 .16 -2.80 P<0.05 satisfaction HIS and loyalty .17 .13 .05 3.54 P<0.05 Marital status and loyalty -.56 -.06 .24 -2.37 P<0.05 Outpatient experience and -.21 -.07 .08 -2.74 P<0.05 loyalty Inpatient experience and loyalty .3 .08 .09 3.28 P<0.05 Residency and loyalty .76 .07 .24 3.22 P<0.05 Source:Authors

Table 7: Regression results- final model

Standard Estimate Beta T value sig error HIS and quality .85 .21 .23 3.74 P<0.05 Marital status and quality -1.71 -.06 .75 -2.28 P<0.05 Outpatient experience and quality -.65 -.07 .25 -2.61 P<0.05 HIS and quantity .3 .14 .08 3.59 P<0.05 Marital status and quantity -.59 -.04 .27 -2.23 P<0.05 Outpatient experience and -.22 -.04 .09 -2.54 P<0.05 quantity Marital status and cost -1.9 -.17 .75 -2.55 P<0.05 Outpatient experience and cost .72 -.21 .24 -3.04 P<0.05 IS and personnel behavior .1 .03 .05 2.18 P<0.05 Marital status and personnel -.98 -.04 .47 -2.07 P<0.05 behavior Outpatient experience and -.37 -.05 .16 -2.31 P<0.05 personnel behavior 120 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

IS and satisfaction .18 .13 .05 3.58 P<0.05 Marital status and satisfaction -.77 -.08 .32 -2.41 P<0.05 Outpatient experience and -.029 -.09 .1 -2.8 P<0.05 satisfaction Inpatient experience and .55 .14 .15 3.64 P<0.05 satisfaction Residency and satisfaction 1.4 .14 .39 3.56 P<0.05 HIS and loyalty .17 .13 .05 3.54 P<0.05 Marital status and loyalty -.56 -.06 .24 -2.37 P<0.05 Outpatient experience and -.21 -.07 .08 -2.74 P<0.05 loyalty Inpatient experience and .3 .08 .09 3.28 P<0.05 loyalty Residency and loyalty .76 .07 .24 3.22 P<0.05 Source:Authors

Table 8: Regression results- final model

Standard Estimate Beta error T value sig Quantity and quality .22 .12 .08 2.98 P<0.05 Cost management and quality .32 .12 .10 3.20 P<0.05 Personal behavior and quality .05 .04 .02 3.11 P<0.05 Quality and quantity .03 .05 .01 3.14 P<0.05 Cost management and .31 .21 .07 4.61 P<0.05 quantity Personal behavior and .23 .34 .04 6.24 P<0.01 quantity Quality and personnel .13 .16 .05 2.72 P<0.05 behavior Cost management and .11 .05 .04 2.52 P<0.05 behavior Quality and satisfaction .05 .15 .01 3.54 P<0.05 Quantity and quality .07 .12 .03 2.77 P<0.05 Cost management and .22 .24 .05 4.87 P<0.05 satisfaction Personal behavior and .14 .32 .02 6.76 P<0.01 satisfaction Quality and loyalty .13 .39 .02 6.94 P<0.01 Quantity and loyalty .10 .16 .03 3.5 P<0.05 Cost management and loyalty .30 .32 .05 6.34 P<0.01 Personnel behavior and .18 .41 .02 7.83 P<0.01 loyalty Source:Authors Establishing HIS and Creating Patient Loyalty through Improvements in Services: Evidence from Iranian Hospitals 121

Table 9: Regression results- final model

Standard Estimate Beta T value sig error Quantity and quality .22 .12 .08 2.96 P<0.05 Cost management and quality .90 .33 .18 5.06 P<0.01 Personal behavior and quality .66 .52 .09 7.54 P<0.01 Quality and quantity .37 .70 .03 12.02 P<0.01 Cost management and quantity .31 .21 .07 4.61 P<0.05 Personal behavior and quantity .23 .34 .04 6.24 P<0.01 Quality and personnel behavior .13 .16 .05 2.72 P<0.05 Quantity and personnel .37 .25 .14 2.58 P<0.05 behavior Cost management and .52 .24 .14 3.56 P<0.05 personnel behavior Quality and satisfaction .23 .67 .02 12 P<0.01 Quantity and satisfaction .15 .24 .04 3.48 P<0.05 Cost management and .40 .44 .06 7.24 P<0.01 satisfaction Personal behavior and .22 .51 .03 8.57 P<0.01 satisfaction Quality and loyalty .21 .65 .02 10.64 P<0.01 Quantity and loyalty .10 .16 .03 3.50 P<0.05 Cost management and loyalty .30 .32 .05 6.34 P<0.01 Personal behavior and loyalty .18 .41 .02 7.83 P<0.01 Satisfaction and loyalty .54 .55 .07 7.56 P<0.01

Source:Authors According to the tables we could conclude that:  Based on the views of patients, improving the quality of services will lead in increasing the quantity.  Improving the quality of services is highly influential in increasing satisfaction.  Quality of services is one of the main criteria in customer loyalty.  Quality of services, personnel behavior, and cost management are more important than the quantity of services, in order to satisfy customer needs.  Loyal patients pay more attention to quality of services, personnel behavior, satisfaction, and cost management, than the quantity of services. 122 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) Conclusion

Based on the model, personnel behavior affects customer satisfaction. This might be due to the importance of behavior, skills, and creating loyalty for patients, which guarantees quality services. As mentioned earlier, satisfied patients are more likely than the unsatisfied ones to continue using the health care services, maintaining their relationships with specific health care providers (Aldebasi and Ahmed, 2011; Sreenivas and Babu, 2012). According to our findings, there was no significant relationship between age, educational level, and satisfaction. However, it should be noted that this might be because of our definition of the sample, in which respondents had high school degree, at least. As Kane et al. (1997) mention, demographic information does not matter. However, some researchers consider them important in patient satisfaction (see Danielsen et al., 2010; Evanset al., 2011; Boscardin and Gonzales, 2013). Based on our findings, men are more satisfied than women. Some studies confirm this finding (e.g. Comstock et al., 1982; Hall and Roter, 1995), while some reject (e.g. Larsen et al., 1979). This might be due to higher expectations of women. This finding is in line with findings of Haas et al. (2001). Moreover, married people were less satisfied with cost management issues. Cost of services directly affects satisfaction. These issues are supported by some authors (e.g. Pink et al. 2003). To many authors, outpatients are more satisfied than inpatients (Sitzia and Wood, 1997; Wolber et al., 2010). Similarly in our study, outpatients were more satisfied with the quantity of services, than inpatients. Personnel behavior was better appreciated by inpatients (Glasgow et al., 2010). This could be due to their contact with health care personnel instead of administrative staff (Shie et al., 2011). Research show that those who frequently go to hospital are less satisfied with cost management. This is the case in our study as well (Pink et al. 2003). Based on findings, those who have more experience of being in hospitals are more satisfied. This might be because of their adaptation with environment and realities of hospitals (Osborn et al., 2010). Local people are less satisfied than those who travel to receive health care services. It might be because of their perceived quality of services, which is less in their region, which is approved in previous research (Oljira and Gebre-Selassie, 2004; Wood, 2012). Quality of services will lead in higher degree of satisfaction, and this might lead in customer’s loyalty. This is also approved in other research done by authors in this domain (e.g. Chaniotakis and Lymperopoulos, 2009; Heuer, 2011). Future researchers are invited to elaborate the findings of this research by conducting it in other contexts. It should be noted that due to the limitations of our research, we followed a parsimonious approach and paid attention to the most important factors. Therefore, authors might add some other factors and dimensions to the model in order to investigate the findings. Moreover, using other modeling methods might be useful. Establishing HIS and Creating Patient Loyalty through Improvements in Services: Evidence from Iranian Hospitals 123 References

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Danas, tradicionalni sistemi se ne smatraju efikasnim rešenjima u bolnicama, jer je sve istaknutija potreba za bolničkim informacionim sistemima. Stoga, autori će, zbog velike važnosti bolničkih informacionih sistema, u ovom istraživanju pokušati da istraže uticaj korišenja takvih sistema na poboljšanje usluga u bolnicama u Iranu, preciznije u Teheranu. Ovaj rad je ispitivanje i primenjen je u praksi. Da bismo prikupili neophodne podatke, sastavili smo upitnik koji je popunilo 206 ispitanika iz 10 različitih bolnica u Teheranu. Zatim, sakupljeni podaci su analizirani korišćenjem SPSS I LISREL. Rezultati pokazuju da zadovoljstvo pacijenata pozitivno utiče na njihovu lojalnost. U radu, još neke hipoteze su testirane da bi se dobio konačan model. Ponašanje zaposlenih utiče na zadovoljstvo klijenata. Mladji i obrazovaniji pacijenti pokazuju manji nivo zadovoljstva od starijih I manje obrazovanih. Zatim, muškarci su više zadovoljni nego žene.

KLJUČNE REČI: bolnički informacioni sistem, kvalitet usluga, informacione tehnologije, lojalnost, zadovoljstvo

Article history:

 Received 17 March 2013  Accepted 20 April 2013

UDC: 005.51:502/504 ; 551.583(497.11) ID: 199125516 Scientific review

Managing the Impact of Climate Changes in Serbia‐ case study

Upravljanje uticajem klimatskih promena u Srbiji‐ studija slučaja

Marko Protic29

ABSTRACT

Climate change already has an impact on biodiversity, and is projected to become a progressively more significant threat in the coming decades. Loss of Arctic sea ice threatens biodiversity across an entire biome and beyond. The related pressure of ocean acidification, resulting from higher concentrations of carbon dioxide in the atmosphere, is also already being observed. Ecosystems are already showing negative impacts under current levels of climate change … which is modest compared to future projected changes…. In addition to warming temperatures, more frequent extreme weather events and changing patterns of rainfall and drought can be expected to have significant impacts on biodiversity. This paper provides several examples of relatively low-cost actions for managing impacts of climate change in Serbia.

KEYWORDS : climate, managing, adaptation, actions, planning

JEL: K51

29 Corresponding author Marko Protic,e-mail: [email protected], PD Elektrosrbija doo, Power Distribution Čačak, Serbia Managing the Impact of Climate Changes in Serbia‐case study 129 Introduction

The impacts of changing climate are already evident in Serbia and globally. Scientific understanding of climate change indicates that Serbia will experience significant shifts in weather patterns over the period of a single generation, a trend that will likely continue for several centuries. Communities of all sizes will face many new risks and opportunities. Managing the impacts of a changing climate will require developing local strategies. The anticipated impacts of climate change include drought, reduced quality of surface waters, a higher incidence of vector-borne diseases, more frequent heat waves resulting in reduced air quality and high human discomfort in urban centers, and an increase in storm surge flooding in rivers regions. For many municipalities, the change in the frequency and severity of extremes in weather – such as intense precipitation, heavy winds or ice storms, as well as seasonal variations in the water supply – are a major concern. The greatest warming is expected to occur in the Vranje, Nis, Leskovac, Pirot, Prokuplje, and southern Serbia. Anticipating the effects of climate change and taking actions before major impacts occur is an effective strategy to manage climate risk and reduce a community’s overall vulnerability. Adaptation involves making changes in decisions, activities and thinking in response to observed or expected changes in climate. Governments, individuals, industry and community groups can all take adaptive actions to reduce potential harm and to take advantage of new opportunities. Possible adaptation actions are tremendously wide ranging and may involve using new technologies, adjusting planning and investment practices, and revising regulations. Adaptation measures can also help achieve other municipal sustainability goals and should not be considered only as stand-alone actions to address climate change ( Baumol, 1972) The Earth’s climate is changing. Some of this change is due to natural variations that have been taking place for millions of years, but increasingly, human activities that release heat-trapping gases into the atmosphere are warming the planet by contributing to the “greenhouse effect.”( Baumol & Wallace,1971). The Intergovernmental Panel on Climate Change concludes that the best estimate for global average surface air warming over the current century ranges from 1.8°C to 4.0°C . This rate of temperature change is without precedent in at least the last 10 000 years (Swedish Journal of Economics, 1971) Consequently, historical climate no longer provides an accurate gauge for future climate conditions. 130 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) What is climate change adaptation?

Even after introducing significant measures to reduce greenhouse gas (GHG) emissions, some additional degree of climate change is unavoidable and will have significant economic, social and environmental impacts on Serbian communities. To reduce the negative impacts of this change and to take advantage of new opportunities presented, Serbians will need to adapt Bertiau F. C. S. J., de Graeve E.S. J., Treanor P. J. S. J., Vatican Observatory Publications, 1, 4, 1973, 159.) Environmental protection is considered mandatory responsibility of mankind. People need to have clean air, water and soil in order to survive. Companies that have a stake in environmental benefit for themselves and for the whole society (Borg, 1996 ). The modern lifestyle makes us completely dependent on energy. The growing use of fossil fuels - such as oil, coal and gas - have a dramatic impact on the total emissions of greenhouse gases into the air (California Energy Commission. Nonresidential Compliance Manual. 2005.)

Figure 1. Emissions from power plants

Fossil fuel-fired power plants and oil industry and petroleum products are the biggest polluters of the environment. Environmental pollution may occur in virtually all sectors of the electric power industry in coal production, transmission and distribution of electricity, then the oil and gas sector, from exploration, exploitation, and especially in processing and transportation of oil and its derivatives (Cinzano et.all, 2001). The emission of flue gases generated in the operation of energy facilities, the environment are the most dangerous sulfur dioxide (SO2), carbon monoxide (CO), carbon dioxide (CO2), nitrogen oxides (NOx) and dust particles. All these elements appear in the process of coal-fired power plants. Impermissible high emissions of particulate matter (over 50,000 tons / yr.) Managing the Impact of Climate Changes in Serbia‐case study 131

Table1. Data Kolubara and Kostolac the quality of lignite

Mine Type Composition in percent Lower Quantity Quantity Quantity power Combustible SO2 NO2 CO2 in Moisture Ash in kJ / materials In % in % gr. kg * 42 220 9,600 piece 48 10 0,4 0,3 Kolubara 39 220 9,300 * 49 12 0,4 0,3

small *piece 43 14,5 42,5 0,7 0,3 220 9,700 Kostolac *small 36 34 30 0,6 0,4 230 6,800 Source: Author Carbon monoxide (CO) is a highly toxic gas, colorless, odor and taste. The gas produced during the incomplete combustion of fossil fuels. Concentration of 1% CO in air is deadly. Carbon monoxide is toxic at high concentrations, and indirectly contributes to global warming. Emissions originate mainly from traffic. In Europe emits around 125 M tons, or 11% of total global emissions of this gas (Cinzano et all.,2000). It is estimated that emissions of sulfur dioxide (SO2) in Europe amounts to 39 M tons per year. SO2 emissions compounds dramatically higher in winter than in summer, due to the combustion of fossil fuels. Winter smog occurs the most frequently in the central, southern and southeastern Europe. Therefore, the authorities in the countries of the region launched a campaign to reduce the use of vehicles in central city areas. The concentration of SO2 in the atmosphere of the Western European cities is noticeably lower than in the 1970th year. The decline of SO2 concentration in the atmosphere is the result of reduction of use of fossil fuels in heating homes (Coase, 1960). Issued acidic substances such as SO2 and nitrogen dioxide (NO2) in the atmosphere can hold up to several days, during which time pass over a distance of several thousand kilometers, which is transformed into sulfuric and nitric acid. Primary pollutants SO2 and NO2 and their reaction products after their deposition and changes fall on the earth's surface and ground water (acid rain) which cause acidification of the environment( Scott et.all, 2001 ). Unofficial information reveals that in 2006 year, the emissions from the energy sector were 52.97 Mt CO2, and that is 2/3 of SO2 occurred since 1990. The consequences of power generation. Still no official data on the emissions of greenhouse gardens, and communications related to the UN Framework Convention on Climate Change is the only in preparation (Department of Energy, Annual Energy Review, 2005). Preliminary analysis leads to estimates that the reduction potential carbon in Serbia as part of 20 - 25 Mt CO2 per year. Importance are the environmental problems caused by the Serbian energy sector. Installations for the production of electricity from coal generate enormous amounts of ash, which is currently stored in landfills, causing tremendous pollution of air, water and land.It is estimated that Serbia has about 1,800 ha covered with ashes, which is located at about 170 million tons of ash. Air pollution with SO2, 132 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

NOx and SO2 emissions originating from the energy sector not properly and systematically measured. Serbia is one of the largest and biggest polluter in the Western Balkans (Department of Energy, Electric Power Annual, 2006.). Climate change adaptation refers to actions that reduce the negative impact of climate change, while taking advantage of potential new opportunities. It involves adjusting policies and actions because of observed or expected changes in climate. Adaptation can be reactive, occurring in response to climate impacts, or anticipatory, occurring before impacts of climate change are observed (Department of Transportation, Bureau of Transportation Statistics, 2001.). In most circumstances, anticipatory adaptations will result in lower long-term costs and be more effective than reactive adaptations. Adaptation (responding to climate impacts) and mitigation (reducing GHG emissions) are necessary complements in addressing climate change (Environmental Protection Agency, Office of Transportation and Air Quality,2006.). The fourth assessment report of the Intergovernmental Panel on Climate Change states that while neither adaptation nor mitigation actions alone can prevent significant climate change impacts, taken together they can significantly reduce risks. Mitigation is necessary to reduce the rate and magnitude of climate change, while adaptation is essential to reduce the damages from climate change that cannot be avoided (Elvidge, C.D., Baugh, K.E., Kihn, E.A., Kroehl, H.W, Davis, E.R, 1997, Mapping of city lights using DMSP Operational Linescan System data. Photogrammetric Engineering and Remote Sensing, v. 63, p. 727- 734.). Single policies and measures can be designed to help tackle both mitigation and adaptation. For example, as the climate changes, a projected higher frequency and intensity of rain storms may increase storm water runoff and the potential for localized flooding in urban areas. Planting street trees is an initiative that municipalities can implement to both reduce storm water runoff (adaptation) and increase carbon storage (mitigation). In other cases, there may be conflicts between adaptation and mitigation goals that can only be addressed in a broader context of community priorities and risk tolerance. For example, increased use of air conditioning can be considered an adaptive measure because it reduces human health problems during heat waves, which are projected to become more frequent in future. However, air conditioning is energy intensive and, depending on the source of the electricity, is likely to increase carbon dioxide emissions (Elvidge et all.,2001). Therefore, in deciding which adaptation action is most appropriate for a particular situation, attention must be paid to its implications for adaptation and mitigation, as well as its cost, efficacy and acceptance by the public. Managing the Impact of Climate Changes in Serbia‐case study 133 Why Serbian municipalities need to adapt

Gradual shifts in average conditions (temperature, precipitation ...itc.) will be accompanied by changes in climate variability and the frequency of extreme weather and climate events. The impacts of changing climate are already evident in every region of the country, especially in southern Serbia where impacts are associated with warming that is taking place at faster rates than those throughout the country as a whole. Anticipated impacts across Serbia include increased frequency and severity of extreme weather events (e.g. heat waves, floods, coastal storm surges and droughts), more smog episodes and disease outbreaks, thawing of permafrost, loss of northern sea ice, and rising sea levels. These impacts will affect municipalities large and small, urban and rural, and have both positive and negative implications on infrastructure (e.g. transportation, water supply, and sewage), social and economic systems (e.g. human health, competitiveness, recreation) and natural environ-ments (e.g. biodiversity loss, habitat degradation, invasive species).

Climate change impacts in Serbia

Projected rapid changes in the climate system will increasingly pose significant challenges in Serbia. Some primary biophysical impacts of concern include  permafrost thawing, with the associated effects on southern infrastructure,  warming and prolonged drought, making forests more susceptible to fires and insect infestations,  increased drying of the continental interior, reduced snow packs and shrinking glaciers, leading to water shortages for agriculture, hydroelectric facilities, shipping, municipal water supplies and other uses,  increasing frequency of heat waves and smog episodes, causing morbidity and mortality, notably in large cities where heat island effects amplify these events,  increasing severity and frequency of some extreme weather events and associated natural hazards such as floods, impacting economic activities, infrastructure and health  increasing coastal exposures to storm surges due to increases in the number and intensity of storms, combined with higher sea levels, leading to erosion and infrastructure damage,  damage to habitat for vulnerable species, impacting the local economy and traditional ways of life in some communities... 134 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

Impacts of recent extreme weather events highlight the vulnerability of Serbian communities and critical infrastructure to climate change. The costs resulting from extreme weather events in Serbia over the past 15 years have been greater than for all previous years combined. Hundreds of millions rsd in property damage and disruptions in the production and flow of goods and services have been associated with flooding, wind, hail and ice storms, and wild fires in all regions in Serbia. Increases in the frequency and intensity of extreme weather, as is projected to occur with continued climate change, will also affect the cost and availability of insurance and impact governments where they serve as insurers of last resort. Local governments have a unique and critical role to play in managing the risks of a changing climate. While all levels of government have important adaptation responsibilities, the local nature of many climate impacts means that municipalities are often on the front line to ensure effective management of risks, protect community safety and promote economic sustainability. Municipalities are well positioned to implement adaptive measures, particularly through processes such as land use planning, community energy planning and mechanisms like zoning or permit regulations. For many communities, changes in climate variability, as reflected in less predictable weather events, may represent a greater challenge for planning than will changes in average climatic conditions. The actions taken today by towns and cities to enhance community resilience to climate change will greatly influence their ability to meet future sustainability goals, as well as to pay for the human and economic costs of climate-related impacts. The case studies in this paper provide several examples of relatively low- cost actions, particularly through planning processes, being taken by communities today that are designed to reduce costs of future impacts.

Planning for climate change impacts in Serbia-case study

No single approach to climate change adaptation is appropriate for all communities. Each municipality has to contend with unique geography and specific climate-change issues. Legal systems, laws, institutions and cultural traditions differ by region. The resources that a community can dedicate to adaptation planning also vary substantially. Large metropolitan areas may have many planners and policy-makers dedicating at least some of their time directly to adaptation-related issues, whereas a remote hamlet likely will not have any planners. Approaches should build on the communities’ land use and capital infrastructure plans and be adjusted to the realities of the local situation. Managing the Impact of Climate Changes in Serbia‐case study 135

The adaptation actions presently taken by communities across Serbia are diverse. Most climate change adaptation actions are embedded in a municipality’s existing plans and strategies. In some communities, municipal staff and community partners have developed plans, policies, regulations or programs specifically for climate-change adaptation. These plans may target one adaptation issue/measure or be wide-ranging by tackling numerous climate issues, cross-cutting various departments and even external organizations. Such planning can target private citizens, including home and business owners, or be focused on a municipality’s internal operations and infrastructure. Assessing vulnerability is an integral part of most adaptation planning processes. Vulnerability to climate change is the degree to which a system is susceptible to, and unable to cope with, adverse effects of climate change, including climate variability and extremes. Understanding a municipality’s climate vulnerability provides a basis for establishing priorities. Analysis starts with an assessment of a municipality’s vulnerability to the current climate, informed by knowledge of how climate events have impacted the community in the past, the actions that were taken in response to those impacts and how successful those actions. The next phase of analysis examines how climate risks are likely to change in future, these risks are informed by projections of future climate as well as social and economic conditions. Stakeholder input is critical at all stages of a vulnerability assessment. Adaptation can be seen simply as a way to manage the risks presented by a changing climate. Climate-related risks can be treated similarly to other risks (i.e. financial, political, demographic and engineering) municipalities face. Many municipal decision-makers are familiar with risk management, which is a practical and credible approach to selecting the best course of action in uncertain situations. Risk management helps decision-makers determine, understand, analyze and communicate about risks. Vulnerability assessments are a common element of risk management approaches. They help identify and classify potential risks to municipal policies, programs, infrastructure and other assets. The process for selecting a community’s adaptation plans and measures may be formal or ad hoc. The advantages of a formal approach are its ability to provide clear and structured rationales and to accommodate the uncertainties that are inherent in projections of future climate, social and economic conditions. For every climate impact, there is a range of possible responses that vary in time, complexity and cost. Many of these options fit into the following broad categories:  “no-regrets”: actions that provide benefits regardless of impacts incurred from climate change,  Profit/opportunity: actions that take advantage of a changing climate to yield net benefits, 136 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

 “win-win”: actions that reduce vulnerability to climate change while also contributing to other economic, social or environmental goals (including reduction of greenhouse gas emissions),  Low-regret: measures that have relatively low costs and yield high benefits,  avoiding unsustainable investments: measures that limit or prevent new investment in areas already at high climate risk and where climate change is likely to exacerbate the impacts,  averting catastrophic risk: policies or actions taken to avoid unacceptably high losses as a result of climate events... Climate change scenarios are one tool that can help raise awareness of climate change risks and, in some cases, help plan to address specific impacts. They present the differences between historic climate conditions and plausible future climate conditions. The scenarios complement projections of socioeconomic changes that many communities routinely use as part of long-term planning processes. Adaptation is closely linked with sustainable development. Policies, plans and investments that span more than two decades may not be sustainable if the changing climate is not factored into their development. Understanding the links between climate change actions and sustainability goals helps municipalities make their adaptation actions more effective by strategically allocating resources to achieve multiple outcomes (Epple, 1987). Municipal decision-makers also need to be aware of the possible conflicts that can arise when choosing adaptation measures. For example, a sea wall may protect coastal properties from extreme storm damage, but it can also have an adverse affect on the health of the costal ecosystem (e.g. disturbing sensitive fish- and bird-breeding grounds) and have negative impacts on erosion or sedimentation elsewhere on the coast. Discussion is an important means of resolving conflict and arriving at community consensus. Many Serbian communities that have successfully implemented adaptation plans and measures have held public consultations to openly discuss costs, benefits, strengths and weaknesses of various options, and to give the public an important say in deciding the best way to proceed. Awareness of the potential impacts of climate change on communities and of the value of taking early action to reduce negative impacts is critical. Because adaptation often involves proactive investment to prevent future damage, awareness is needed among the public and decision-makers. Moving from awareness to action frequently requires strong leadership. Foresight, determination and patience are needed to instigate municipal adaptation work and see it through to implementation stages. In many cases, it takes one or more champions (inside or outside the local government) to keep adaptation initiatives alive in the face of the many competing priorities that municipalities face. Managing the Impact of Climate Changes in Serbia‐case study 137

Communities that have shown initiative and success in climate change mitigation programs and measures may be able to efficiently leverage this leadership to accelerate adaptation efforts. Also, interdisciplinary partnerships and collaboration can be useful when addressing the complex challenges of climate change. When planning for climate change, particularly in the vulnerability assessment stage, policy-makers and planners will need to draw on external specialists. These partnerships with climate change specialists are particularly important because municipalities will have to clearly explain complex issues to a public faced with many competing priorities.

Conclusion

Adaptation involves a wide range of actors: individuals, community groups, civil society, the private sector and all orders of government. A proactive adaptation approach – which involves consideration of climate change impacts in planning processes – reduces short- and long-term risks and avoids the significantly higher costs associated with reactive measures. Collective approaches can help achieve multiple policy goals for various orders of government. The implementation of adaptation measures is essential for municipal governments to protect the well-being of citizens and to manage public resources effectively. Successful adaptation actions require planning and appropriately resourced strategies. Mainstreaming adaptation into existing and new municipal plans, policies and regulations – including capital, infrastructure, land use and emergency response plans – may be the most efficient means of reducing vulnerability to climate change while also contributing to other sustainable development goals. Nevertheless, some communities facing acute impacts may choose to develop detailed climate change adaptation plans to address local priorities. Information resources are available to help municipalities, whether they are just starting to think about adaptation, conducting a vulnerability assessment or preparing to plan and implement discreet adaptation measures. General information is readily accessible, and regionally specific resources are constantly evolving.

138 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) References

[1]Baumol, William J.(1972) “On Taxation and the Control of Externalities”, American Economic Review 62: 307-322. [2]Baumol, William J., and Wallace E. Oates. (1971)“The Use of Standards and Prices for Protection of the Environment”,Swedish Journal of Economics73: 42- 54. [3]Bertiau F. C. S. J., de Graeve E.S. J., Treanor P. J. S. J.,(1973) Vatican Observatory Publications, 1, 4 159. [4]Borg, V.,(1996) “Death of the Night.” Geographical Magazine, 68, 56. [5]California Energy Commission (2005) Nonresidential Compliance Manual [6]Cinzano, P., F. Falchi and C.D.Elvidge. (2001). “The First World Atlas of the Artificial Night Sky Brightness.” Monthly Notices of the Royal Astronomical Society, 328, 689-707. [7]Cinzano, P., W. F. Falchi, C.D. Elvidge and K. E. Baugh* (2000) “The artificial Night Sky Brightness Mapped from DMSP Satellite Operational Linescan System Measurements.” Monthly Notices of the Royal Astronomical Society, 318, 641-657. [8]Coase, Ronald. “The Problem of Social Cost”, Journal of Law and Economics 3:1, 1960, 1-44. [9]Davis S,, Mirick D., Stevens R.(2001) “Night Shift Work, Light at Night, and Risk of Breast Cancer”, Journal of the National Cancer Institute93:20, 1557-1562. [10]Department of Energy (2005) EnergyInformation Administration. Annual Energy Review, Washington, D.C.: GPO [11]Department of Energy (2006) EnergyInformation Administration. Electric Power Annual, Washington, D.C.: GPO [12]Department of Transportation (2001)Bureau of Transportation Statistics. National Household Travel Survey, Washington, D.C.: GPO [13]Environmental Protection Agency(2006) Office of Transportation and Air Quality. Light-Duty Automotive Technology and fuel Economy Trends: 1975 through 2006, Washington, D.C.: GPO [14]Elvidge, C.D., Baugh, K.E., Kihn, E.A., Kroehl, H.W, Davis, E.R, (1997), Mapping of city lights using DMSP Operational Linescan System data.Photogrammetric Engineering and Remote Sensing, v. 63, p. 727-734. [15]Elvidge, C.D., Imhoff,M.L., Baugh, K.E., Hobson, V.R., Nelson, I.,Safran, J., Dietz, J.B., Tuttle, B.T., (2001), Nighttimelights of the world: 1994-95. ISPRS Journal of Photogrammetry and Remote Sensing, v. 56, 81-99. [16]Epple, D. (1987). “Hedonic Prices and Implicit Markets: Estimating Demand and Supply Functions for Differentiated Products.” Journal of Political Economy, 95: 59-80. Managing the Impact of Climate Changes in Serbia‐case study 139 APSTRAKT

Klimatske promene već imaju uticaj na biodiverzitet, i predviđa se da one postanu sve značajnija pretnja u narednim decenijama. Opadanje arktičkog morskog leda ugrožava biodiverzitet svih bioma i šire. U vezi sa tim, primećen je i porast kiselosti okeana, što je posledica veće koncentracije ugljen-dioksida u atmosferi. Ekosistemi već pokazuju negativne uticaje zbog sadašnjeg nivoa klimatskih promena, što je skromno u odnosu na buduće očekivane promene. Osim porasta temperature, može se očekivati da će češća pojava ekstremnih vremenskih prilika i promene obrazaca padavina imati značajan uticaj na biodiverzitet. U radu je navedeno nekoliko primera aktivnosti koje relativno malo koštaju, a tiču se upravljanja uticajem klimatskih promena u Srbiji.

KLJUČNE REČI: klima, upravljanje, adaptacija, aktivnosti, planiranje

Article history:

 Received 17 March 2013  Accepted 15 May 2013

UDC: 061.251:328.182 ID: 199126284 Scientific review

Political Influence and Activity of the Masonic Organizations

Politički uticaj i delatnost masonskih organizacija

Katarina Majstorovic30 Milos Stanojevic31

ABSTRACT

We live in the globalization era. Many mechanisms of public life are helping the goal of unification and loss of individuality in many spheres. It seems that the topic of masonry, as a powerful and influential factor of social life and change, doesn`t have an appropriate theoretical attention. The aim of this paper is to remind and highlight the complexity of correlation between Freemasonry and politics. We comprehend the nature of masonry as secret society and point to the features of its social engagement. The emphasis was primarily on the nature of the phenomenon that we discussed and possible practical consequences of that nature.

KEYWORDS: masonry, secret societies, politics, conspiracy, freedom

JEL: L31

Main features of secret societies

"What makes a man is not a true value that is owned or believed to have but an effort to make her closer. Because it is not possession, but searching for the truth, that strengthens the forces of our constant effort towards perfection. If God in his right hand held all the truth, and in left longing for the truth, and had he told me to

30 Corresponding author Katarina Majstorovic,e-mail: [email protected], Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia 31 Faculty of Business Economics and Entrepreneurship, Belgrade, Serbia Political Influence and Activity of the Masonic Organizations choose, I would choose the left hand and said: 'Give, Father, because the truth is just for you!" (Lessing) It is very difficult to make the final or at least satisfactory operational definition of a secret society. Not because it is a concept that is used to define other concepts (along the lines of philosophy we would say "category"). One of the reasons is that there are countless references which the authors deal with the phenomenon of secret societies, and omit the knockdown term determination. Secret societies are seen mainly as part of our social reality, ancient in origin, modern in its action. This is the context that is the starting point for a description of the social environment, in which the secret societies are just one factor, among others, that help us to understand and hence we end in a world that is our home. Primary sociological definition of secret societies calls for the notion of social groups. Regardless of the size of the group, its main feature is that all members have a sense of common identity and constant interaction. However, our intellectual honesty is not satisfied with this. What feature of a secret society could be its differentia specifica? We must be aware of difficulties in trying to define secret society, partly because the resulting issues might be important to us: what is fundamentally different for a Freemason and a Christian? Why most writers, who thought of masonry as a represent of conspiracy theory, are driven by religious motives, and are acting as apologists? Why a common Christian notion of a secret society is linked to his "obscurantism”, although a Mason claims that it is just an unpretentious myth, devoid of attempts to clarify the very human mission of a secret society? Also, the answers to these questions would greatly help us to determine the portion of truth in the often stated finding that secret societies rule the world from the shadow, and that individual effort is simply an imaginary, subjective excess that is already pre-foiled and devoid of any sense. Is this a story that comes to us from the paranoid mankind civilization, or is it historically authentic story? Is paranoid mind able to define as sciences need, suggesting that dark side of secret society role should be its differentia specifica, and thus it should uniquely determine the secret society in contrary to other social groups?

Secret and anxiety in secret societies

Psychologically, secret is very important, because it affirms the value of privacy. People who are hardly trying to undermine others privacy, would also claim to respect it, in principle. Who would let someone violently harm his privacy? From another point of view, it can be said that privacy goes hand in hand with a special commitment that enables someone to be aware of the secrets of our life. Because of the special relations he would have some kind of right to share our secrets. Such discretion is protected by several provisions of laws, regulations and sanctions of different kind. If not otherwise, it is thus promoted as a value. Also, to disclose a secret is a conclusive reason to negatively evaluate one's character. 142 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

We could say that human nature is quite clearly defined towards secrecy, in ethical sense. "A person of trust" is a desirable friend. We should try to become that kind of person, because friendship is an ideal to which human nature tends. Mysterious ambience typical of a secret society described fluently George Simmel, a German sociologist, especially in "The Sociology of Secrecy and of Secret Societies." Secret societies make room for secrecy as sociological dimension par excellence. This secrecy allows the visible and invisible world come to life. Psychologically, a part of life forever remains unknown, regardless of the nature of relationships with others. It remains only for us and prolong our lives, because of a specific dynamic of what is silence, and what doesn`t come into existence for others. Time and space will determine what can be kept in a secret society away from the view of an outsider: "In the tribal community almost the whole life of the individual is open to the views of his brethren. Men, women and children live in a very close relationship, and the entire life cycle, from birth to death, takes place in the 'public intimacy' of tribe. However, some groups stimulate and maintain confidentiality as a condition of existence of the whole community. Tribal medicine men, shamans and priests jealously keep their mysteries secret since it is considered that they give vitality to the tribe so the tribe would simply died out without them and disappeared from the earth. Magic charisma is the prerogative of the priests, and secret initiation ceremonies are performed by the group. In large modern societies, which emphasize closeness and privacy of personal life, individuals learn how to hide their emotions from others, as well as religious and political beliefs. At the same time they expect that the problems of the society as a whole will be revealed" (Mekenzi,1990). It is natural that confidence in the new spiritual and political leaders favors transparency. At the beginning people do have boundless confidence in the new charisma. This transparency has transformed secrecy as an imminent feature. Public knowledge of world heritage is slowly conquering the secrets of nature. But there is one very important element that rules the world and doesn`t come from that human emancipation. It is based on charisma and more powerful on its great ignorance but also great sense of security that provides. Having that kind of power, people feel strong enough and do not care about ignorance. They become less fragile. Thinking of the individual Simmel (1906) claims that children feel their own importance on the basis of confidentiality relations, because they are constantly tempted to give away the secret. Resisting the temptation often means to be different than the others and that is a good way to get oneself as an individual. In large groups perhaps the most notably pressure is to come to get your own individuality. In other words, socialization has its strong mechanisms working out on group level, but personalization is something you must fight for alone. Simmel (1906) notes that individual comes to know himself through secrecy. The other dimension of individual related to secrecy is a psychological topic, considering some tendencies in persons` behavior. Psychologists often speak of a Political Influence and Activity of the Masonic Organizations

"conspiratorial type of behavior", where secrecy in childhood works as a mechanism of protection against external events that were experienced as traumatic, and later takes its place as a reaction without that initial events. It is interesting that etymology of the term conspiracy takes us to Latin verb conspirare, whose basic meaning is to breathe together, to act and to think in harmony. Dictionaries usually amount to a twofold interpretation for conspiracy: it is comprehended as joint planning in secret (in the sense of evil or illegal acts) or as activity of planning conspiracies (Marz, 2005). This concept brings us a big problem: organized secrecy, secrecy as an integral and constitutive principle seems to ignore personal secrecy, privacy, or the identity of the group. And this is a complex topic and beyond the ambition of this work. But it is very useful to notice that this kind of secret brings the interpretation of secret societies we usually prescribe to conspiracy theories. There is some hidden idea, plan to destroy ones for the sake of others, a desire for self-assertion. Is the destruction only side-effect of the desire for personal dominance, and that history can forgive and let this desires move the actions whose consequences are global? What is the ideological base of the human society which permits such desires? Another dimension of secrecy that is interesting to us is the secrecy of the secret knowledge that is the source of power. It is debatable how much this secrecy is creative. It would be nice to design a project and work hard to make this project succeed, especially if it would ultimately bring the benefit to mankind. We can imagine that we lead a "double life", if our secrecy is to be sacrifice, as a condition to succeed in finding a cure for the terrible disease from which millions died. But if the secrecy is what is needed for success in a mass destruction of those who we declare to be something different than us, then the destruction of the planet is a real threat. And that is why it is important that we turn to the creative side of human nature. Members of secret societies seek to gain knowledge of the great mysteries, to “posses” the biggest mystery. Sometimes they claim that the knowledge that has been seen as the foundation of our entire civilization is in fact a quasi science and convincing fallacy. So, the basis of our Christian civilization lies upon some wrong attitudes, which our weak and imperfect nature needed, in order to get rid of primordial fear. Fear is strong and that is a reason for us to adopt a "sand castle" of our weakness as a real home. The disclosure of such a weakness is an excellent instrument for a new slavery, and that is a mechanism present within a secret society and its insisting on the right to know the truth. This mechanism is founded in human nature, and so has a wide impact in many social practices. For example, a large number of multi-level companies focus on a mystery-related business by developing a product that is sold and is simply defined as a "product". They do not disclose what it is, and a profit is the result of some constitutive rules and relations between promoters. The product is redundant, but that is not what common-sense and law would allow. And that is why the product must persist in his not authentic, taboo form. Additionally, promoters are related in a special way, because they are few who know something that is not publicly available. That is the secret. 144 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

Now, we should say something about anxiety. The true nature of secrecy leads to fear, anguish and anxiety because we feel that the unknown exists. Sociologists and psychologists often refer to it as to a source of religious feelings. We do not have the answers, and we want to tie ourselves to something powerful enough to silence our fear, because we are helpless and we do not know. So we try to live so that we can propitiate a higher power. The price of so gained peace is putting aside questioning and investigating. As Prometheus, we have faith and hope, because we were denied the opportunity to have knowledge. Quite similar, there is a mechanism to explain the operation of secret societies, but without unique aims. Secret societies are often about power, authority, association, the same attitudes, feeling of belonging and acting together. In order to have some of it we will realize that we must accept not to ask, not to seek endlessly, and we must perhaps accept a humiliation (which is often an integral part of the act of initiation).

Secret societies and politics

"Of all the ways in which people are leading the most appropriate is to use a hidden secret" ( Robinson, 1995). In the discussion about the notion of secret societies above, we pointed to frequent claims of secret societies as a driver of a conspiracy against Christianity or some state religion, or a conspiracy on a global political level. This could only describe common impression about secret societies. The relationship between secret societies and policy is complex, because of many dimensions that define both phenomena. The political dimension of man has been announced as the central determinant of anthropology. According to Aristotle, the man is comprehended as basically political being, that he is and should be through polis. He is a member of society, deeply engaged in politics, which means that common interest of the polis must be placed well ahead of his own. Furthermore, that kind of dedication forms the ultimate and the highest human value and can come to life only from the background of common interest. Our behavior must follow principle of moderation, not because we are humble but because we have an ontological limitation in respect to perfection. In fact, God is the only one who has wisdom, who is self-sufficient and has the peace. We do not have any of it. Our maximum is fronesis - practical wisdom, skills to be wise in decision-making and persistent. Our measure is a measure of the nature we have. One manifestation of virtue is behavior that recommends us as good friends. Politics is the sphere of public life. The aim of public life is proclaiming values and so striving to improve the quality of life. The struggle for political power is the struggle for state government. In that struggle, our arguments get new dimension because of public moment. Freedom is a precondition to the public, and public demands responsibility for what we say. Certainly, the burden of that responsibility is hard enough to get us away from the popular image of the politician as “easy money” profiteers. The public account is concerned to get far-reaching benefits and Political Influence and Activity of the Masonic Organizations must defeat hypocrisy and hidden personal interests. Prior to an abuse of the public word is the real use of it, that should benefit all or most. Secrecy in politics stems from the fact that the struggle for the goal, immanent to one option, often accounts a worse position or creating a worse position for the alternatives. As we saw, secrecy is rooted in human nature, and many goals of our nature come to life through political articulation. It can be said that the political dimension of the secret societies, their real or commonly understood engagement, clearly leaves taboo away. The mystical element is overcome, in the sake of practical and purpose. We do not have detailed knowledge about the world and need to create a global picture of the society. Designing objectives, trying to create general welfare, is helping that global picture. Thus, the history becomes battleground for competing interests through a variety of programs, resources and forces. The stakes are related, they serve to the distribution of power and authority. What is it that makes the secret societies closely related to the political stage in authentic or paranoid interpretations of history? All secret societies claim to possess secret knowledge, and that knowledge is exclusively in their hands. That knowledge is the only supreme truth, so members are threatening serious consequences if they disclose secrets. They claim to have long history and often use their visible power to keep wider community in fear and a certain degree of awe. Finally, secret societies often have a charismatic leader or a leading figure who claims to be the reincarnation of the messiah ( Harding. 2006) How far is this description from the description of the elements of political life, engaged in the fight for the electorate? The fact is that a political party differs from the societal community such as secret society. But also, a connection between the secret society and politics can`t be reduced to a raving paranoia caused by the envious and fearful. It seems that the primitive secret societies were related to many roles that are only partially held in the modern secret societies. Solidarity of members was a necessary condition for founding of secret society, but in contemporary societies this requirement is more a function of a politically articulated aim of improving the organization and its efficiency. Inability of a personal impact is transformed into ability to participate, and thus a feeling of belonging is gained. Secrecy has undergone transformation that accompanies modern features: “Secrecy is the freedom that zealots dream of: no watchman to check the door, no accountant to check the books, no judge to check the law. The secret government has no constitution. The rules it follows are the rules it makes up” ( Moyers,1987). Behind the apparent desire for anarchy lies fool control. In the vision of a secret society politically engaged people are not like atoms in Brownian motion, but more like the population of Bentham’s Panopticum. There is no real freedom, just well designed and centralized control. It is not obvious where that control comes from, and that fact makes it more powerful. It is clear that we have come very close to the logic of globalization, this way. 146 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

We still have to name an example of politically motivated secret societies. Irish nationalist secret societies were founded in America, 1858. The most famous among them was Fenian Brotherhood, also known as the Irish Republican Brotherhood (IRB), with revolutionary character and clear political aim. Members identify themselves this way: "I ... do solemnly swear in the presence of Almighty God, that I will do everything, even if he has to lay his own life, that Ireland becomes independent republic and to unconditionally obey their superiors in all things not contrary to the laws of God, and that I will keep every secret of this secret society that has been entrusted to me" (Mekenzi 1990: 159). However, IRB received confirmation of Irish independence in the blood, 1916. In a single week they took the post and strategically important objects and issued a declaration that the Irish are entitled to organize their own in their own country without the presence of a foreign power. That was not the end. Ireland was the place where soon after the World War II broke out guerrilla movement. The country was divided, Ulster belonged to Britain and Ireland split into two independent states. One of the most famous nationalistic societies along anarchists and Bolsheviks in Russia was The Carbonara society. They were heavily influenced by Freemasonry, and their origin takes us to the beginning of 19 century. In that period, between 1802 and 1810 French officers in Italy founded the first lodge. They were the enemies of bonapartism. Carbonari swore this way: "I swear that I will help my brothers and their families, as much as possible. I agree that, if I swear falsely, my body will burn, will be nip into pieces and that the brothers around the world will curse me"(Mekenzi 1990: 165). There were no political elements in this initial commitment. Examples concerning our recent history are known, and are about personalities. Many see Clinton as a young saxophonist, recounting his intrigue with the ladies, most do not know about his relationship with the most notorious modern secret societies: the Trilateral Commission, Council on Foreign Relations and the Bilderberg group. The Trilateral Commission publishes the names of its members, and its inner workings secret. Council on Foreign Relations publishes the role of its members, but they take an oath of secrecy about operations and goals. Bilderberg Group keeps everything a secret. President Bush was a member of the Trilateral Commission and the Council. Many of the techniques of modern secret societies with political goals date back to the French Revolution. Among unintended consequences of the Revolution was the rise of nationalism problem in the world, whose various forms define political scene today. Secret societies have a big role in helping minority forces to fight for their place. Sometimes it happens that minorities have no chance against the majority. They try hard to obtain independence through secession, like Kurds in Iraq and Sikhs in India, where secret societies led struggle for national emancipation. As long as the nationalism is actual global problem, secret societies with political goals will be important factor of social change. Political Influence and Activity of the Masonic Organizations Masonic organizations

We do not have the ambition to research the origin, organization, history and ideology of Freemasonry. We are interested in its political, public engagement. To link this engagement to the engagement of secret society, we will claim that Freemasonry connects modern and ancient secret societies. Here are some main facts about masonry we need. The origin of the word "mason" is related to the French language, from which it is transferred to the English roots. The basic premise is that the phrase free mason originates from free stones. Free masons were English guilds who gathered construction workers who were working on the free, separated stone. These are the artists who have had more creativity and artistic ability. As Freemasonry was transformed to speculative freemasonry and associated lodge with the Masons. The lodge was a meeting place and main form of Freemasonry organization. The best-known Masonic symbol is the letter G within the square and compasses. Masonic identification with geometry comes from the middle ages, when geometry was often considered to be occult and holy. The deepest sense of geometry in masonry is an allusion to self-knowledge without limitation. The source of this interpretation is Pythagorean brotherhood. Mathematicians are researchers whether they are dealing with nature, numbers, or anything else. The secret of the universe is hidden in numbers and geometrical forms. According to Descartes, geometry is synonymous with perfect knowledge, precise and clear cognition. Geometry is the key to universe. Geometry and architecture knowledge was the condition for being a member of the lodge. G symbol is interpreted as a stylized ancient symbol of royal power and attached to the base of the pyramid at the bottom, which represents the temporal power, and relies on an inverted pyramid (divine authority). It is a symbol similar to the famous Star of David. Some authors believe that the Masonic symbolism in G comes from Gnosticism that the early church outlawed. The most important document of freemason history is The New Book of Constitutions, written by James Anderson in 1717. This work is an enormous effort and contains information about the basic values, canons, which were dominant, description of freemasonry, duties, and regulations. Freemasonry has all the characteristics of a secret society. Represents a system of moral values to which it referred, accompanied by a certain symbolism that originates from the old masters. Tools no longer serve shaping stone, but the shape and perfidious man's morality. The Masonic initiation ceremony is archaic. For membership the candidate must find two guarantors and petition. Usually a guarantor is the mason who knows the applicant (in everyday life). Biography told in detail, supplemented by reason of the entry and photo is material for consideration. The number of elected persons is limited: in 33 degree lodge system, there can be 90 masons that have 31st degree, most 54 that have 32nd degree and only 9 that have 33rd degree. Usually used secret words for recognition among masons were “friendship, love, truth”. 148 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) Mission, learning and influence of Freemasonry

What is the most important part of Masonic mission? The Grand Master of the Grand Lodge of France, Henri Tort-Nougues in his philosophical comprehension about Freemasonry made the following comment: "Faith and hope of Freemasonry are based on a simple and basic idea; it is an idea that conscience, reason and freedom exist in every human being and because of them man is the spiritual being who deserves not only our respect, but also friendship, full measure of our friendship, because to the extent that man seeks the truth and love as we do, as far as he seeks the same star, we belong to the same species, the same union. Our job is to transform that union into community and to make universal brotherhood of that community" (Anri Tor-Nuges 2004: 170). Masonry is transformed but still a very powerful social force. Great ideals of the French bourgeois revolution-liberty, equality, fraternity have their embodiment in masonry. Equality means equality in dedication, ideals and knowledge that goes beyond operational reasoning. Common to all Masonic organizations is their learning on religious grounds, given the ideal of tolerance, but not atheism, and so codified learning of Anderson. In addition to religious tolerance, motivation for Masonic organization activity is freedom to explore the truth. The main aim is to transform raw human nature into the spirit and the intellect. The mean for this is a critical examination and free debate. So the Masonic mission is humane and serves the benefit of the whole society, which has as a goal of improvement. Skills and knowledge that such an undertaking requires need border potentials of man and go beyond common sense. That explains exceeding to secrecy, guarded by rituals. There are many organizations that have been created in the wake of Masonic teaching, choosing particular element of Freemasonry as a goal, all in accordance with needs of actual moment (the fight for workers' rights, the fight against alcoholism ...). The best known examples are: Council of Sons (Independent Order B`nai Birth); the Jewish order; Odd Fellows, established in England since 1879; Rotary International founded in Chicago, with more explicit practical orientation to mutual support among members in order to improve personal interests. The best known among Masons historical greats were: England: King George IV, VI, VII, Edward VIII, Newton, Admiral Nelson, Walter Scott, Rudyard Kipling, William Sart, Robert Burns, Thomas Elliott, Alfred Brehm, Winston Churchill, Alexander Fleming, Oscar Wilde, Arthur Sullivan USA: Benjamin Franklin, Thomas Jefferson, John Adams, Roger Sherman, Robert Livingston, among first 56 signatories of the Declaration of Independence 51 were Masons; presidents: George Washington, James Monroe, Andrew Jackson, James Polk, James Buchanan, James A. Garfield, William McKinley, Theodore Roosevelt, William H. Taft, Warren G. Harding, Franklin D. Roosevelt, Harry S. Truman, Gerald Ford, Eisenhower, Mark Arthur, Nelson Rockefeller, Lewis Rothschild Political Influence and Activity of the Masonic Organizations

France: Montesquieu, Saint-Simon, Condorset, Helvetius, Diderot, Mirabeau, Robespierre, Danton, Lafayette, La Fontaine, Napoleon, Victor Hugo, Lamartine, Louis Blanche, Clemenceau, Marshal Foch, Francois Mitterrand , Giscard d'Estaing, Cecile de Mil Italy: Giosue Carducci, Count of Cavour, Giuseppe Garibaldi, Giussepe Mazzini, Francesco Crispi, Giovanni Giolitti, Ernesto Nathan, Licio Gielli Russia: Paul I, Tsar Alexander I, Prince Vasili Kuragin, Mihail Speranski, Alexander Von Benckendorff, Alexander Ypsilantis, Aleksei Razumovsky, Aleksandr Gribojedov, Nikita, Sergei and Matvjej Muravjov, Pjotr Čadajev, Michael Lunin, Kondratilj Riljejev, Aleksandr Pushkin, Ivan Turgeniev, Mihail Kutuzov, Leo Tolstoy, Aleksandr Kerensky, Aron Simonovič, Otto Strandman, Jacob Rubinstein, Maxim Gorky, Leon Trotsky

Masonic organizations and politics

"Once there were two men, one very wise and other very stupid. The stupid one decides to perform a trick to make fool of the wise, and persuade him that he is not so wise. Chump put peanuts in the shell in his hand and, covering him, he said: 'If you are so wise, you should tell me whether that peanut shell in my hand is crushed or whole.' He knew that if the wise man says that shell was crushed, he would open his hand to prove that wise man is actually stupid. If the wise man said that the shell was intact, he would have crushed it and opened his hand to show again that the wise was mistaken. The wise man thought for a moment and then said: The answer is in your hands” (Eperson 2005: 361). Who is wise and who is stupid when it comes to politics? Is there any transparent decision making, or elections are finished before the election process started and our behavior is quasi-free? Certainly that Freemasonry looks very much like center of enormous power, from which the answers could come. Masonic mission is to search for the most valuable in the world. At the individual level, this means striving to encourage each person to be pride of its humanity. Far-reaching, Masonry wants to reach the ideal: perfect man in the world that is happier and wiser. The main question is what are the means for reaching that goal?

Masonry moral

What is it that Mason can and can`t do? What are the changes in behavior of the man caused by the fact that he belongs to the organization whose goals are clearly defined? The answer to the last question depends on the level of generality 150 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) of these goals. The answer to the first question I will try to find in the book of Albert Pike, The moral principles and dogma, written exclusively for Masons. The author argues that the one who is not a mason can read but can`t understand it because the book serves only as a guide which is hiding secrets, written using a secret language. Pike recommended situational ethics. It means that moral principles do not have absolute usage, but are modified depending on the specific situation. There is no absolute duty. Norms that regulate our behavior are made according to the picture of eternity, but need to be applied at the time. The background of this study is the epistemology assumption that helps Pike: what is true today may not be true tomorrow, and even what is not true today may become true tomorrow. No human being can definitely say what is true. From the standpoint of the true no man is more successful. The ultimate goal that ethics can reach is universal law that applies to the individual. If two persons are disagreed about rightness of an action, who will decide who has right? How we can compare our attitudes towards values if we do not have an absolute measure? These settings are very well-fitting in the treatment of instrumental behavior. No wonder the famous American philosopher John Dewey believed the truth (in absolute terms) is dead and buried. It's not hard to jump from such claims to declaration of truth`s defeat and ideology winning. For example, communism is the measure of truth, he abolishes eternal truths. And this, on a pedestal raised interest that the majority recognizes as its own, is dangerous and goes hand in hand with deleting unique and irreducible individuality. Even on this level of description, we can see the connection between Masonic ethics and many unfortunate events in political life. Eperson writes that "at least one member of the Masonic organization believed literally that a Mason can sacrifice a man for the sake of others, as Paik claimed" and recalls Franklin Roosevelt's role in the Japanese attack on Pearl Harbor (Eperson 2005: 101). There is evidence indicating that the president knew in advance of the Japanese plan to attack U.S. military bases and did not react. Instead, he appeared after the tragedy with angry expression on his face, speaking on December 7 1941st as the "Day of shame." The justification for this oversight Roosevelt was able to find in the ranks of Pike`s book and oaths that masons take. "It is not true to say that one man, no matter how small he is, must not be sacrificed for the other, no matter how large he is, for most or all other people. It is not only a scam, but it is one of the most dangerous. Often one man and many people have to be sacrificed, in the ordinary sense of the word "(Albert Pike, Morals and Dogma in Eperson 2005). We will remind of only one logical difficulty about this: without absolute criteria to determine the role and position, who is stronger and who is weaker, who is small and who is (sufficiently) big? Political Influence and Activity of the Masonic Organizations Historical examples of political engagement

We can explain wide Masonic involvement in social events by the fact of transformed sociability that they adopt. From the 1747 public processions of masons, bearing the signs of Masonic Order, were prohibited unless there was a special occasion. Lodge meetings from 1813 were accompanied with prohibition of tobacco, alcohol and food consuming. Masonry has a duty to respect the law of the home country. Final codifying of the Anderson Constitutions brings to Masonic organization accuracy in many respects, so it resembles the political organization. Thus masonry became legitimate actor on the political stage. Also, the internal structures of Masonic organization practiced political culture, especially through voting and elections, with more prominent element of tolerance and the exchange of ideas. This is possible because the Masons were not performing ad hominem but in the name of ideals of human perfection. Secrecy made possible for Freemasonry to hide its political background. Because of secrecy, Masonic engagement was interpreted a social, not strictly political. However, in general, from a position of basic Masonic teachings and values, Masonry is not able to give birth to any ideology, and thus should be disqualified as a sort of permanent political power in the struggle for leadership. If there is a political engagement, it is engagement of persons, masons, not of Freemasonry. Code which requires political and religious tolerance can`t become a strictly ideological force. Even within the masonry there was an attempt to highlight its indifference to politics, but by emphasizing the religious moment. That is why masonry was brought close to the Knights Templar and freemasonry mystical Christianity. The main protagonist of this move was Andrew Michael Ramsey (Ramsey Knight, 1696-1743). The interpretation of Masonic participation or leading of political events is doubtful. The logic is on the side of arguments about the impossibility of consistent political orientation of masons given the political orientation of those who were Freemasons vary a lot. MacKenzie claims (MacKenzie 1990: 143) that Freemasonry as an institution remains neutral in the political sphere, while the Masons as persons were destined reformers and revolutionaries in appropriate social circumstances. Freemasonry could prepare a spirit that would be able to accept liberalism, and that is a thing we can only be grateful for. What role have masons had in one of the biggest events in history, the Revolution in 1789? Here are illustrations of the general controversy concerned with the character of political engagement mentioned above: "Masonry in France was completely surprised about events of 1789, and its initial disorientation during the Jacobin dictatorship transformed into a true mess. Although the directory was period of gradual recovering, masonry represents a minor social organization, which is best proved by the report of the Paris police during 1795. Therefore, Napoleon at first had intention to forbid it totally… Freemasonry, therefore, didn`t stand behind French bourgeois revolution, but the Revolution was behind the myth of political, conspiratorial and subversive activities of Freemasonry "(Žolt Lazar 2002:102; 105). 152 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2)

"French Freemasonry in 18th century gathered people like Montesquieu, Saint- Simon, Condorset, Helvetius, Diderot, Mirabeau, Robespierre, Danton, Lafayette, La Fontaine, who prepared and participated in the Revolution of 1789. Declaration on the status of citizen, magna carta of civil freedom and liberalism, is not only a clear expression of the Masonic ideas, but also shows its symbolic origin- it is decorated with the 'All-Seeing Eye' and a number of other Masonic symbols "(Zoran Nenezić 1988: 61). The famous abbot Bariel compiled a Report about Jacobinism history, claiming that the great revolution was the result of a plan that was made in secret lodges. The crisis which struck France after the revolution and the age of terror weakened the Masonry, because it grows only in domain of freedom. Masons had different attitudes toward important issues that needed to be considered or done, which still supports the claim that Masonry is not political. I will now mention historical events that were ascribed to Masonry, and also were claimed not to have anything to do with freemasonry. These events are the source of controversies. U.S. struggle for independence and national identity-Thomas Paine, the proponent of the idea of Declaration, was a Freemason so were all proponents of the content of the Declaration: Thomas Jefferson, Benjamin Franklin, John Adams, Roger Sherman and Robert Livingston. The declaration was adopted 07/04/1776, and we already mentioned that among the first 56 of its signatories 51 were Mason. The U.S. Constitution was designed and enacted within Masonry 1787. Most U.S. presidents have been influenced by Freemasonry. American flag was created by Mason's widow and a cornerstone of the Statue of Liberty was laid by Freemasons. On the one dollar banknote there are two Masonic symbols (pyramid of thirteen bricks and all-seeing eye) and two labels (Annuit Coeptis and Novus ordo seculorum), testify to the chosen people who should rule. Great American astronauts followed the Freemason ideas. When the Masonry is described as a parallel system of government and decision-making, it is primarily about Bilderberg Club and the Trilateral Commission, made of prominent Freemasons. Bilderberg Group exists since 1954. The Trilateral Commission was officially established with the approval of the Bilderberg Group and works from 1.7.1973, the chairman was David Rockefeller. The governing idea of the commission is trilateral cooperation between nations in Europe, North America and Asia, and the seats are Paris, New York and Tokyo. Prominent members of the committee were George Bush and Gerhard Schröder. At the meetings behind closed doors important issues from all three regions are discussed. After reports analysis members decide on the action to be taken, and the action was controlled. The Assistant Secretary of the State Richard Holbrooke was a member of the Trilateral Commission. It is well known that the CIA is associated with Freemasonry, and that there are Masonic lodges in all major NATO bases. Masonry is widely involved in activities of the World Bank, the International Monetary Fund and UNESCO. Nearly 70% of the total mason population was Americans! Political Influence and Activity of the Masonic Organizations

Italy's crisis was the result of papal bank involvement in the large financial deceit or Masonic conspiracy? The event is related to the name Licio Gielli, Mussolini`s cooperator, and the Italian who used Freemasonry for global fascist conspiracy. Lodge Propaganda Due(P2) where Gielli was the Grand Master since 1975, was founded in 1877 as exploration lodge within Great Orient (Grand Lodge of France from 1773.). Gielli was a Freemason since 1963. P2 has been receiving help from CIA, according to its journalist members (Mino Pekoreli, later killed) argued that it was funded by the CIA. P2 was dropped from the official Italian Freemasonry. Gielli invited Michele Sandon, Vatican financial adviser, and he invited Robert Calvia, the owner of Banco Ambrosiano, into the lodge. Together they made business over the Institute for Religious Affairs. Vatican bank became majority owner of shares and Calvi was found guilty, so he flew to London in 1982. He was found hanged over Dominican bridge and the official police report claimed that it was a result of suicide. Also, his secretary was pushed through the window few hours earlier. Sindona was found dead in his cell, poisoned by cyanide, as he was sentenced to life in prison. Gielli was hiding. His friend, Prime Minister Andreotti was prosecuted for his relations to Mafia. However, Gielli was a business partner with a Nazi war criminal Klaus Barbi, who was the guest of honor at the inauguration of Ronald Reagan, and also was a financial supplier of Juan Peron, the South American fascist dictator and Ford's friend. During a search of Giellis house a long list of Freemasons and the document "Strategy of tension" were found. Gielli wrote about the ways of weakening Italian government through terrorist activity. The ultimate goal was the establishment of new, fascist order. RUSSIA: communism, the KGB and the rest-there is no doubt that Marx was a member of the Illuminati, and that its ideas opposed with Proudhon and Bakunin, who were Freemasons. Otto Meizner, who issued Marx's Capital, was a Freemason. Trotsky recognized that there was a large number of Masons among Party members, so he clearly distanced himself from Freemasonry: the revolutionary spirit is totally and absolutely incompatible with the Masons, because the masonry is a tool of big, narrow-minded bourgeoisie. This was the Communist Party declaration of the war to masonry. In time period until 1923 each communist must have publicly stated that didn`t have anything to do with masonry, or should be excluded. It is strange because some sources claim that Trotsky himself was a Freemason from 1914. Moreover, he was devoted to reading masonry literature and noticed change in its grounds. The character of Freemasonry is such that it was incompatible with both communism and to fascism. It is well known that Hitler and Mussolini persecuted Freemasons. It is possible that fascism discredited masonry, connecting them exclusively with Jews in famous Protocols of the Elders of Zion. KGB has been successfully using masonry to put spies into two classes of domestic security, M15 and M16, because the Masons were forbidden to work there. Thus masons had influence in the military and state leaders of England. Spectacular breakthrough of Soviet intelligence services in England, who once made Burgess and Philby, had happened through Freemasonry. 154 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) End notes about masonry role in politics

My conclusion is this: If we still have a chance to save our civilization, we must be aware of the requirement to be a political animal, in order to try to reach that goal. That animal should be responsible to succeed. What could masonry bring about to the great institution of human civilization, called politics? It is impossible to exclude the interaction of Freemasonry and politics, because history confirmed it many times. However, we should be careful when it comes to claiming the same nature of these two phenomena. Was a struggle for independence depended on Freemasons? Probably it was. But whether it was a part of an intended Masonic conspiracy which determinate history and made us forget about the value of freedom? We are not satisfied about daily politic events, and we are inclined to talk about Masons passionate, reducing them to some persons who are related to the Mafia. We need to simplify their motives. Masons are men, and men are all fallible. What is the secret principal who managed to uniform so remarkable figures among Masons and silenced them by an authoritarian, hidden and simple fiat? The basic elements of the Masonic teaching can help us to make a proper insight of the political dimension of Freemasonry. Emphatically advocate for freedom of conscience, freedom of choice and critical examination is not compatible with the mentality of imposing ideas and winning followers around certain political parties. Lodges are defined as pluralistic organizations and that feature is essential for freemasonry. Masonry holds together the members using the idea of better in every man. If the number of those who failed is too big and if they brought to dangerous historical consequences, it does not change the nature of the thing itself. Mason is obliged to respect the laws of his country. Political involvement needs a man as a citizen who has a duty to make policy decisions. Masonry does not have exclusive right to intervene in the public sphere. It is one factor, defined as being very powerful and influential. Besides, "Man is not only homo politicus or homo economicus, but he is also the 'scientist', 'poet', 'philosopher', 'actor' ... The politics is not the whole man, as it is sometimes stated; that is vague and simplified formulation. What is the meaning of such a statement? What purely political meaning should be given to Einstein's theory of relativity? What is the political meaning of Boudlair`s Invitation to Journey or Valerius Young Parka? What is the political meaning of the Beethoven`s Moonlight sonata or Schubert`s Unfinished Symphony?” (Tor-Nuges, 2004: 206). We need to keep away from this kind of reduction, although this is not a strict epistemological reductionism. The great failure is to make a principle of something we question on the bases of our pathos to get to know the principle, because we would be power enough. The political dimension of reality is very important, but it is not the whole reality. Politics gains if we are sure about its true nature. Freemasonry refuses to prison a man in one system and want the man right in the plurality of its dimensions. Masonry is celebrating values of friendship and reason. This is certainly not in accordance with violence. Are we going to believe the Masonic teachings and their story about intellectual honesty or will we held that claims the secret ground of fraud, conspiracy and hypocrisy? Political Influence and Activity of the Masonic Organizations References

[1]Berberova, N. (2002), Ljudi i Lože, Paideia, Belgrade. [2]Eperson, R. (2005). Masonerija, Plavi krug, Belgrade. [3]Harding, N. (2006). Tajna društva (Vladari sveta), Babun, Belgrade. [4]Lazar, Ž. (2002). Nastanak masonerije, Visio mundi, Belgrade. [5]Marz, Dž. (2005). Vladavina tajnom, Narodna knjiga- Alfa, Belgrade 2005. [6]Mekenzi, N. (1990). Tajna društva, Nova knjiga, Belgrade [7]Moyers, B. (1987). The Secret Government: The Constitution in Crisis, documentary [8]Nenezić, Z. (1988). Masoni u Jugoslaviji (1764.-1988.), Izdavačka grupa ZODNE, Belgrade [9]Piatigorsky, A. (1997). Who is Afraid of The Freemasons?, The Harvill Press, London. [10]Robinson, Dž. (1995). Rodjeni u krvi, Narodna knjiga- Alfa, Belgrade. [11]Simmel, G. (1906). „The Sociology of Secrecy and of Secret Societies“, American Journal of Sociology, vol 11, Issue 4, p 441-498. [12]Tor -Nuges, A. (2004). Masonska ideja, EVRO, Belgrade. [13]Volis, R. (1984). Elementarni oblici novog religijskog života, Narodna knjiga, Belgrade.

APSTRAKT

Vreme u kome živimo je doba globalizacije. Brojni mehanizmi javnog života pomažu da se postigne unifikacija i gubitak individualnosti u mnogim sferama. Čini se da tema masonerije, koja je moćan i uticajan činilac društvenog života i promene, nema primerenu pažnju istraživača. Cilj ovog rada je da podseti na kompleksnost korelacije masonerije i politike i da ovu kompleksnost istakne. Suštinu masonerije shvatili smo u kontekstu masonerije kao tajnog društva i ukazali smo na karakteristike njenog društvenog angažovanja. Naglasak je prvenstveno na prirodi fenomena o kojima se raspravlja i mogućim praktičnim posledicama tako shvaćene prirode.

KLJUČNE REČI: masonerija, tajna društva, politika, zavera, sloboda Article history:

 Received 2 April 2013  Accepted 7 May 2013 Faculty of Business Economics and Entrepreneurship International Review (2013 No.5‐6)

From Knowledge to Financial Management

The review of the book Financial management of the following authors: Dr Slavko Karavidic, Dr Dragana Ivkovic and Dr Goran Kvrgic

Edita Kastratovic Multi multa sciunt, nemo omnia

The textbook Financial management written by Dr Slavko Karavidic, Dr Dragan Ivkovic and Dr Goran Kvrgic is a scientific, functional, applied and pragmatic work written for the students of Faculty of Business Economics and Entrepreneurship, but also for the students of other schools and faculties where economy, finance, management and entrepreneurship are studied. It is the result of authors’ work, their years-long scientific work and interest in finance and management. Compared to other authors in the field of financial management, these authors have risen from the categories and theoretical descriptions and discussions about the phenomenon of financial management; and they have focused their recognizable research spirit on clarification of real processes and problems, giving the managers and entrepreneurs a safe instrument for efficient and effective business management in financial and other organizations. The textbook is always welcoming the modern intellectual flows and scientific findings in the world. It fits completely the world intellectual surroundings, because it contains what is relevant and currently popular in the world. As such, it helps to overcome various gaps which were checked and well-known, and which still exist, gaps between our surroundings and the world. Regardless of the numerous scientific works in the existing fund of theoretical and empirical knowledge, this textbook will enlarge the existing knowledge fund, by enabling to a great number of relevant individuals to develop their own knowledge, by studying what was known before this textbook and proven in practice. Program composition of the study subject Financial management, as well as the individual functional managerial and economic disciplines, determined the structure of this book. The textbook Financial management contains ten chapters From Knowledge to Financial Management 157 and three additions. With the aim of considering the structure and the dimension of presented topics of the textbook, chapters refer to the following: I: Introduction to financial management– dedicated to the term, role, tasks, goals of financial management and it introduces the reader to the basic categories of the financial management phenomenon; it gives the answer to the question if the economy can function properly without the well developed financial management and top experts from the area of finance; II: Business, tax and financial environment – deals with introducing the business, tax and financial environment, as well as realizing the place, role and the significance of globalization; it gives the overview of tax system of Serbia; III:Basic principles and rules of financing – studies the starting principles of financing, politics, sources and rules of financing, using the resources and establishing the system of financial marketing; IV: Financial business of economic society– considers the subject and components of financial business of economic society; financial situation and structure; explains financial politics as an appropriate activity directed towards the source of financial strategy and tactics for realization of financial results; V: Capital of economic society– deals with the structure, price and changes in capital; significance of reservation for the financial business, liquidity and solvency of economic society; as well as financial leverage; VI:Debt instruments – deals with debt instruments, long-term securities, advantages and disadvantages of financing through bonds, as well as portfolio management; VII: Money and time value of money– explains the complexity of money phenomenon, national currency, convertibility and money value; explains the term foreign currency, exchange rate, currency reserve and currency market; understanding of the term money laundering, roles and functions of payments; VIII: Financial system – explains the structure and the types of financial system, its functions and elements; discusses the place and the role of banking system, the way of banks functioning as intermediary institutions; IX:Process of financial management– explains establishing of the financial system and understanding of the process of financial management and decision making; role and significance of control management and financial reporting; explains and gives examples of ratio analysis, indicators of liquidity, activities, financial structures, rentability, Z test etc. X: Financial management in the public sector – explains state revenue and public expenditure, the term budget, models on which the budget is determined, performance plan, budget surplus and deficit and the ways of their management; the role of treasury in budget system and overview of budget system of Serbia; The advantage of this textbook is its purely formal characteristic. Glossary of terms is one of them, which increases the readability of this textbook. It makes the textbook more approachable without decreasing the level of its presentation, it 158 Faculty of Business Economics and Entrepreneurship International Review (2013 No.1‐2) increases the effect of its basic text and it expands the circle of readers who will accurately register its messages and that will produce its emphasized practical impact. The same, mutatis mutandis, can be said for the literature, laws and regulations which are used in this work. Besides its utility for this textbook, the glossary of terms, literature, laws and regulations, reflect and signalize the seriousness with which the authors approached its creation. The analogue value is also given to this textbook by other additions. There are two added chapters: Practicum for the practical usage and acquiring of knowledge and Questions for knowledge check and the test. The important role of these added chapters, and probably the motive for adding them to the book, is to give examples from the real business environment that students will face in the practice, and then to check their own knowledge and skills using the test. Based on the given material and used literature, the textbook Financial management deserves full attention of scientific and expert public, with the following characteristics emphasized:  It is current and extremely significant for studying the problems of financial management;  Textbook, from the point of view of the content and total opus, represents the novelty at our market in the area which the authors represented;  Textbook covers all important aspects of financial management and gives the practical examples of corporations from the aspect of its real atmosphere of business. I am assured that this textbook will become essential material and a guide not only to students, but also to the ones that deal with problems of financial management; therefore I recommend it with pleasure to the readers.

Belgrade, April 2013. Prof.Dr Edita Kastratović

Faculty of Business Economics and Entrepreneurship International Review (2013 No.5‐6)

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INTERNATIONAL review / editor-in-chief Mirjana Radović-Marković. - 2012, no. 1/2- . - Belgrade (Mitropolita Petra 8): Faculty of Business and Entrepreneurship, 2012- (Valjevo: Valjevo print). - 30 cm

Dva puta godišnje ISSN 2217-9739 = International review (Faculty of Business and Entrepreneurship) COBISS.SR-ID 192516620