GRIGOL ROBAKIDZE UNIVERSITY

ACADEMIC DIGEST

BUSINESS AND MANAGEMENT

II

TBILISI – 2013

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Content

Marketing

Maia Meladze Specifics of Tourist Product 128 Nino Jerenashvili Tourist Product Promotion in Georgia 132

Management

Tamar Koblianidze, Lela Kochlamazashvili, Ketevan Rizhamadze Theoretical Aspects of Strategic Management in Hotel Business 137

Jovan Shopovski, Frank Bezzina, Martin M. Zammit The Disqualification of Company Directors and Its Effect on Entrepreneurship 143

Ketevan Chiabrishvili, Nino Chiabrishvili Leadership vs Management 156

Maka Piranashvili The Role and Significance of Cultural Heritage in the Development of World 159 Tourism

Maka Gudiashvili Decision Tree Method in Energy Management 163

Business

Slava Fetelava Rules of World Trade Organization in the Field of Competition 170

Vasil Kikutadze The Concept of Intangible Assets in Valuation Activity 175

Givi Kuparadze Medical Tourism, Health Tourism and Wellness Philosophy 177

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Liana Kanchaveli Logistic Consulting 181

Ivane Pirveli Can the Clean Development Mechanism Projects Accelerate Investments to Build New Hydro Power Plants in Georgia? 185

Givi Gigauri Iternal and External Economic Balance 189

Finance

Tamar Gamsakhurdia Diversification of Bank Evaluation and Analysis of Management Practices in Georgia Banks 198

Gaioz Sanadze, Mariam Kurashvili Brief Review of Modern Depository Services 203

Gaioz Sanadze, Levan Gvalia Savings for Long Run 209

Malkhaz Bakradze Methodology of Investment Environment Assessment and the Role of Modelling of Company Investment in Its Management 218

Malkhaz Bakradze Company Investment Activity Management Model 227

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Marketing

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Maia Meladze Grigol Robakidze University

SPECIFICS OF TOURIST PRODUCT

Any definition is limited and limitation is never precise. That is why not a single science and especially social sciences do not provide “completed” definitions. The description accepted today may be rejected 50 years later.

Several centuries ago “goods” were defined as inanimate property (in Georgian “khvastagi”) and the property (“khvastagi”) itself – as any possessions and belongings (according to the Dictionary by Sulkhan-Saba Orbeliani).

In the twentieth century with regard to the development of production and trade, “goods” were defined as the product of work designed for sale, while property – the totality of things and various values in somebody‟s ownership [5]. The term “product” (Latin) simultaneously existed – thing, substance which is the result of work; products (Latin) - the totality of results or individual result of production activity [5].

According to the above mentioned definitions, goods are characterized by two features: use value and exchange value. Use value is determined by its utility and does not exist without it. Under all economic systems, the wealth in natural terms is a particular number of things which satisfies various demands of people, i.e. use value is the public form of the wealth. Exchange value is determined by the ratio of the amounts of different use values.

Goods represent the set of useful properties things. It combines all the elements which satisfy material needs of a consumer [10]. One can satisfy particular need by means of goods. Everything that satisfies demand or needs and is supplied to the market in order to attract attention, be sold or used [9]. Goods can be anything, service, product, idea, etc. which satisfy material and mental needs and is brought to the market to be exchanged [2].

As for the product, it is the outcome of work, economic activities of a person and is presented in material (material product) or in ideal, information form (intellectual product), or in terms of completed work and service [1, 3]. According to the traditional definition by this and the majority of other authors, a product has only use value and does not have exchange value.

But when we speak about the quality as the bundle of technical, economic and aesthetic characteristics of a product, which determine the level of its availability, the English equivalent for it is the “quality of products” [1].

According to the Explanatory English-Georgian Dictionary of Marketing Terms, Goods refer to material products such as soap, television set etc, and product refers to anything what can be offered to the market to attract attention, be purchased, used and what satisfies demand or need.

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According to the foreign authors, the term product is defined as an idea, physical entity (a good), a service, or any combination of the three that is an element of exchange to satisfy individual or business objectives [11].

According to the definitions given in the international statistics of the WTO [8], goods imply only physical products; commercial services category is defined as being equal to services minus government services, which, in its turn, is divided into: transportation services, travel, and other commercial services.

Transportation services cover sea, air and other including land, internal waterway, space and pipeline transport services that are performed by residents of one economy for those of another and that involve the carriage of passengers, the movement of goods (freight), rentals (charters) of carriers with crew, and related supporting and auxiliary services.

Travel includes goods and services acquired by personal travelers, for health, education and other purposes, and by business travelers. Unlike other services, travel is not a specific type of service, but an assortment of goods and services consumed by travelers. The most common goods and services covered are lodging, food and beverages, entertainment and transportation, gifts and souvenirs.

Other commercial services comprise communication, insurance, financial, information, licensing, etc. services.

In modern Georgian literature the term “goods” has two implications: the first is a narrow meaning of “goods”, i.e. physical goods which correspond with the English term: “goods”, and the broader meaning of goods which correspond with the term “product”. But in everyday economic life, in the activities of banks and firms, the term product is used to characterize the broad range of goods and services, while the term “goods” is used only in narrow meaning, as physical (material) goods. As for the tourism, both in literature and in everyday life, the term “tourist product” is used. While tourist goods imply physical goods needed to carry out tourist activities.

According to Medlik, tourist product in a narrow sense is what tourists buy, e. g., transport or accommodation, separately or as a package. In a wider sense, an amalgam of what the tourist does and of the attractions, facilities and services he/she uses to make it possible. From the tourist‟s point of view, the total product covers the complete experience from leaving home to return. As distinct from an airline seat or hotel room as individual products, the total tourist product – be it a beach holiday (vacation), a sightseeing tour or a conference trip – is a composite product [9, 168].

According to Phillip Kotler, tourist products include room in a hotel, holiday on Hawaii Islands, Potatoes “Free” in McDonald‟s, traveling by bus around historical places, etc. In complex terms it comprises core product, related product, additional product and product in a boarder sense [10].

The basic product of tourist industry is tourist service. It includes a range of services. Among them the most important are: accommodation, foods, transportation and targeted services. They may be offered to the market as one complex tour, or each independently. Except for the basic tourist service, there are related services, such as banking, insurance, and communications. Their importance is permanently rising and becoming more diversified. Except for services, tourist products comprise several goods too, such as souvenirs, special tourist equipment, food, etc. 129

The success of commercial activities in tourist market, first of all, depends on the attractiveness of tourist products, but at the same time tourist product is the combination of various complex elements.

In practice, the basic tourist product is represented in terms of complex service – a standard combination of services which is sold to tourists as one package. The necessity to satisfy some kind of demand underlies any tourist product.

Table 1 shows transformation of tourist production by the end of XX century which is manifested in a high level of individualization and elasticity. It became possible to regulate the tourist product quality worldwide and consumers became highly developed and solvent [11, 36].

A certain manifestation of tourist product is tourist centres and their services which represent dynamic formations and as all products (goods) are characterized by the life cycle. Their life cycles are largely different. Government policy in tourism field, presence of competitors and other factors may enhance or impede the progress of various stages of the cycle. There are examples of resorts that seized development at some stage.

The American scientist, S. Plogue made a significant contribution to the study of tourist centres. He argued that each development stage of tourism sites corresponds to a certain number of visitors. At the early stage of formation, tourist centre attracts allocentrics, with the adventurous character common to them. At the development and strengthening stage, allocentrics are replaced by middle-centrics, and at the end of the life cycle (stagnation and fall) - by psychocentrics who prefer a peaceful style of living [7, 153].

Table 1 Development of the tourist production system

Characteristics Tourism - XX century Tourism - XXI century Production concept Mass tourism Flexible travel and tourism options Products Rigidly packaged, mass and Holidays: standardized holidays. Flexible Mass markets Segmented Personalized Environmentally-friendly Production tools Tourism parckages Yield management1 Charter flights Specialized tour operators Franchises Competing destinations “Brand” holidays Independent holidays Offices, hotels, tourism centers Greater role played by suppliers and agents Organization of Economies of scale are very important; Economies of scale production Demand is anticipated, but future Flexibility

1 Yield management is the process of understanding, anticipating and influencing consumer behavior in order to maximize yield or profits from a fixed, perishable resource (such as airline seats or hotel room reservations) [14]. 130

capacity is required; Proximity to the market “Holidays are saved”, just in case Diagonal integration Human resources Seasonal labor Multifunction, specialized and and training Huge turnover of labour satisfying work with a value-added Work reputed to be badly paid component Little labour flexibility Marketing Mass marketing Maximum personalization Mass advertising Clients Inexperienced Experienced Apparently homogeneous Independent and flexible Sun fanatics Different values Predictable Mature and responsible Motivated by price Quality Undifferentiated Adjusted, monitored by the individual, importance placed on the process rather than the function

Except for supporters, there are also opponents for tourist product life cycle conception which consider that the beginning of each stage cannot be precisely defined and the evolution of tourist product is greatly influenced by external factors, such as economic situation of the country, inflation rate, consumer life style. We can agree to the opinion that it is impossible to provide stict and concrete identification of tourist product life cycle stages, but we believe that it is very useful and essential to identify tourist product life cycle stages and use the outcomes when making strategic decisions.

The following four characteristics are common to tourist product which distinguish services from material goods: intangibility, inseparability of production and consumption, changability and impossibility of preservation. Therefore, tourist product principally differs from ordinary product. Namely, it is not related to such concepts as delivery, storing, accumulation. Besides, production and consumption of a tourist product usually coincide with each other in time and space. Tourist product is characterized by other features too, such as seasonal prevalance, geographical distribution, etc.

Trade is known to be the form of commodity circulation which ensures movement of goods from producers to consumers through sales and purchases [4]. We can refer the same to tourist product, only with one exception – consumers move towards tourist products to purchase (book or buy in advance) and consume it in a place.

Proceeding from the above, we can refer to tourist product the same only with a small difference: it is impossible to demonstrate tourist product in advance. It is only possible to show model or video and photo materials.

Traveling and tourist industry products do not exist, until they are sold. When selling a tourist product, it only represents a piece of information in computer reservation system. Unlike from the majority of consumer products, such as TV sets, photo cameras and automobiles, tourist product cannot be examined, until we make the decision to buy it.

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Of course the goal of many tourist firm leaders is to sell products directly to the consumers without intermediaries and economize on commission costs. Nowadays, many organizations make Internet the central part of their distribution strategy as they realize that it enables them to save large sums of money. Availability of information material, knowledge of firm personnel about it and upon request its presentation to the customers represent the main requirements of creation and successful realization of tourist product in the market.

References

1. Asatiani R. 2003. Economics, Explanatory Dictionary. Tbilisi. 2. Bolokadze E. 2003. Marketing. Tbilisi. 3. Economic Dictionary. 2001. Tbilisi. 4. Economics of Trade Firm. 1996. Tbilisi. 5. Explanatory Dictionary of Georgian Language. 1986. Edited by Arn. Chikobava, Tbilisi. 6. Bearden W., Ingram Th., Laforge R. 1995. Marketing: Principles and Perspectives. USA, p.210. 7. Peter D. Bennett, ed. 1988. Dictionary of Marketing Terms. Chicago: American Marketing Association. 8. http://www.wto.org 9. Medlik S. 2003. Dictionary of Travel, Tourism & Hospitality. Third ed. 10. Kotler Ph., Bowen J., Makens J. 1998. Marketing for Hospitality & Tourism. Prentice Hall International, Inc. 11. Sport & Tourism. 2001. WTO, Madrid. 12. Aleksandrova A. 2001. International Tourism, Aspect Press. M. 13. Netessine S., R. Shumsky. 2002. Introduction to the Theory and Practice of Yield Management. INFORMS Transactions on Education, Vol. 3, No. 1.

Nino Jerenashvili Grigol Robakidze University

TOURIST PRODUCT PROMOTION IN GEORGIA

Tourism is one of the biggest industries in the world which is important and dynamically developing branch of economics. The development of tourism in Georgia will promote economic growth, the population will bring additional income, reduce unemployment levels; it will contribute to Georgian traditions and historical-cultural values promotion.

As it is known, Georgia has great tourism potential: 102 resorts, 182 resort places, 2004 mineral medicinal water sources, 12 000 historical and architectural monuments (4 of them are included in UNESCO world

132 heritage list), 7 long-range National Parks, etc[4]. The resorts and tourist bases have long gained wide recognition. Therefore, it becomes more and more attractive for tourists and foreign travelers.

Tourism is the area where success depends on how the country will be able to respond to the needs of tourists and ensure their safety.

As known, in August of 2008, the Russia-Georgia war affected the tourist business and reduced flow of tourists; but by 2012 the situation has improved. In January, February and March of 2012 - 677 278 visitors visited Georgia, while in 2011 it was – 485 835. The total number of Europeans passing the border of Georgia in 2012 is 648 478, but according to the date of 2011, this number was 468 278 [3].

Table1. The number of foreign citizens arrived at the border [4]

Country 2011: 3 months 2012: 3 months Change Change%

Total 485 835 677 278 191443 39% Europe 468 278 648 478 180200 38% Europe (without CIS) 170 115 297 414 127299 75%

Central and Eastern Europe 304 685 358 169 53484 18% C I S 298 163 351 064 52901 18% North Europe 3 307 3 944 637 19% South Europe 4 559 5 023 464 10% West Europe 5 356 7 016 1660 31%

Eastern Mediterranean Europe 150 371 274 326 123955 82% America 4563 6012 1449 32% Caribbean countries 142 180 38 27% Central America 11 46 35 318% North America 4 259 5 509 1250 29% South America 151 277 126 83% East Asia / Oceania 2930 4574 1644 56% Middle East 693 1262 569 82% South Asia 8218 14900 6682 81% Africa 878 1683 805 92% East Africa 358 871 513 143% Central Africa 8 13 5 63% North Africa 69 98 29 42% South Africa 160 152 -8 -5% West Africa 283 549 266 94%

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According to the World Tourism Organization‟s classification, the world is divided into 6 tourist regions [4]. It is important for every country to determine if a great number of tourists are coming from the region. The case of the incoming non-resident visitors to the region accounts for the largest share.

European travel market share in the tourism market of Georgia is due to the following factors: geopolitical proximity, culture, etc.

Effectiveness of the tourism product key in CIS a space is efficient. Russia remains the main export market in this area. This can be explained by the fact that on the one hand Georgia and Russia have a common border, on the other hand, historically Georgian tourist product is well known in Russia. Even in the period of the Soviet Union mainly Russian visitors visited the seaside resorts of Georgia. Armenia occupies the second place.

According to the Tourism Administration data, during January – March of 2012 46 438 visitors visited Georgia from Russia, while during the first three months of the last year 33 732 Russian tourists visited Georgia. It is an interesting fact that the increase of Russian tourists in Georgia is recorded from 2008; in 2008, Georgia accepted 114 459 Russian visitors, while in 2007 only 91 361 visitors visited the country from Russia [3].

Therefore, we can say that for the last two years there is a significant increase in the flow of tourists.

I think that the tourist information centers are responsible for the role of the tourism product promotion. Tourism information centers operate in the following cities: Tbilisi, Batumi, Mtskheta, Telavi, Sighnaghi, Borjomi, Bakuriani, Kvareli and Mestia. On April 26, 2011 tourism information center was opened in Gori and according to the data of the National Tourism Agency, 10 % of tourist arriving in Georgia visited Gori, while in 2010 65000 visitors visited Gori.

I suppose that occurrence of transnational corporations and investments in the tourism industry of Georgia and, particularly, in the hotel industry will enhance tourism. We think for Georgia as for a small and mountainous area it is much more important to invest for construction of small hotels, guest houses, especially in mountainous regions.

The American tycoon Donald Trump‟s investment for building a residential complex and a hotel in Tbilisi and Batumi can serve as a good example. At the first stage of construction 250 million U.S. dollars will be invested though, the organization plans to increase investment in the future.

A clear example of the development of tourist products in Georgia is Upper Svaneti region which in 2007 was recognized by the National Tourism Agency as the priority region in the sphere of the local tourism development. The new airport of Mestia will be available for daily flights which will contribute Mestia and Ushguli become an important tourism center.

Among the factor affecting the realization of tourist product, the country‟s political situation and the current legislation are most important. Tourism in Georgia is regulated by the following laws of Georgia: “On Tourism and Resorts” and “On Resorts and Resort Places Sanitary Protection Zones”. Rationalization of transport, especially, air transport service in tourism is essential for the improvement of tourist product.

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One of the main conditions for the development of tourism in the country is adopting a policy of the reduction of tariffs on air transport service for maintaining the purchasing capacity of tourist product.

In the recent years, the effective changes have been observed for the promotion of the tourist product. In particular, Georgia‟s participation in international fairs and exhibitions proves this fact. On 18-20 February, 2011, Georgia presented its tourist product on the international Exhibition-Fair “TOURET” of Estonia; on January 19-23 of the same year Georgia was presented in Spain, namely in Madrid [3].

As for the tourist product advertisement, though Tour Operators advertise their product placed in magazine, radio, television, Internet is most effective.

The tourist market is developing dynamically. It occupies the first place in the business sector, where business functions are almost exclusively using information and communication technologies (ICT) [1].

It is a well known fact that Internet, Mobile and Wireless technologies enable tourists to get deeper information about places around the world. Tourist product was the first that has embraced information technologies [2].

Travel companies are interested in Internet opportunities: 1. Communication and effective communication; 2. Marketing research; 3. Advertising and tourist product development; 4. Reservation systems.

References

1. Buhalis, D. 2003. Tourism: Information technologies for strategic tourism management. 2. JOO J. A. 2002. Business model and its development strategies for electronic tourism market, Information Systems Management. 3. www.gnta.ge 4. www.unwto.org 5. www.wikipedia.org

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Management

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Tamar Koblianidze Caucasus International University Lela Kochlamazashvili Technical University of Georgia Ketevan Rizhamadze AbsolutPlusi, Ltd

THEORETICAL ASPECTS OF STRATEGIC MANAGEMENT IN HOTEL BUSINESS

Hotel business in the tourism industry is the most dynamically developing subsection, which brings millions of profits for many countries‟ economy. Hotel business development is a key factor in tourism growth. Increasing number of tourists and effective functioning of hotel complexes create jobs and ensures filling of national and regional budget.

Modern features of hotel industry developed in the second half of the twentieth century. In 60-70s of the last century, drastic changes took place in the global hotel industry. If, at the end of 19th century and at the beginning of the twentieth century, hotel represented individual and mostly family establishment; modern hotel is a complex agricultural unit which performs a variety of industrial, agricultural and managerial functions. The service sector and in particular industrialization of hotel industry raised in the foreground a large, technically and technologically well-armed corporations, hotels, chain which combine thousands of hotel rooms around the world. Small family business moved towards the periphery of the tourist flows and occupied the market niche, which corresponds to their size and potential. Therefore, in modern conditions and from global perspective the placement means are presented as independent small and medium enterprises or hotel chains. However, it should be noted, that in countries with low tourism development rate, because of inadequate infrastructure, small hotel business is used very frequently.

Serious, evolutionary changes have occurred not only in hotel management principles and methods, but also in hotel product itself - it has become a high-tech and consumer-oriented, striving to meet the needs and desires of the most extraordinary people. In modern circumstances, hotel business operates in extremely tough competitive environment. Employing the progressive marketing strategies in hotel service market, absorption and consolidation and market segmentation, as well as new companies entering the market makes the competition fierce.

Tourist residency enterprises function in affiliation with the environment. Evolvement of microenvironment (economic, competitive, climate - environmental and political factors, criminal situation) has several impact on business, forcing hotels to take into account the above mentioned issues and other significant environment changes while developing hotel strategy. The main objective of the modern world managers tend to be development of company‟s strategy and its execution, if not implemented properly, attaining success in business becomes impossible.

Hotel strategy is logical unity of certain steps that the hotel has to carry out for managing successful business. Lack of direction in a business significantly increases the risk factor. If there is no decision making guidance and main concept, the issues are solved by gut feeling. Worse still, when tempted into 137 following competitors‟ moves in the hope of getting to a better place. Keeping an eye on competitors is, of course, a must; doing what they do is not, unless it fits with own goals. If it does, then you should question why you did not get there first. Do you want to lead or follow? Operating your hotel solely on the basis of what others are doing, or taking uninformed decisions will get you nowhere in the end because what seems like a smart move today often turns sour tomorrow.

In spite of the above mentioned, not everything in business life can, or indeed should, be planned and analysed to the nth degree. Gut feeling is good and has inspired many great decisions but it should not be the sole driver while making decisions. Without focused, goal-orientated decision-making, hotel business drifts into trouble.

Armed with strategic plan, the above mentioned problems can be avoided and risk factors condensed. It assists us to develop the plan which ensures long term success in business. With the help of the strategic plan, hotel business is result- oriented, which in turn, reduces the risk of failure.

The result of strategic planning for the hotel business, derived from the long term interest, tends to be making management decisions. Strategic planning must be effective - this is unalterable command of scientific approach regarding management and the main task of economic science. As a result of mistakes made during strategic planning sacrificing economic resource and market position is higher than sacrifices made during short-term planning.

The ability to create a realistic strategic map begins with a particular mindset; everything else stems from that. It implies how an owner views his/her own hotel business, and as a result, how it is managed. Thoughts determine act; so, having a certain mindset supports the creation of strategic map and indeed the quest for excellence.

Very often, businessmen view their business from the wrong perspective, believing that as they have a hotel they have stakeholders, such as customers and employees. However, there are some who truly believe in excellence and take a different approach. They see their stakeholders as being an integral part of their hotel, not external to it, or a result of it. They recognize that without certain stakeholders they do not actually have a viable business. Creating result-oriented strategy requires allotment of greater importance to stakeholders which should be divided into two parts:

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Differentiation between primary or secondary stakeholders happens according to the degree to over which they exert influence, or have an impact on to run hotel. Those who have significant influence and/or impact are seen as primary stakeholders and, as such, require most of attention. Secondary stakeholders are not unimportant; it is just that they are unlikely to have the same degree of power over the choices. However, their needs should be considered.

For hotel purposes, focus should be made on three primary stakeholders, as shown in the picture. Creation of the strategic map involves placing these stakeholders at the forefront of thinking. It also means recognizing that the path to excellence lies in satisfying their needs because, in doing so, hotel ultimately satisfies its own desire. For example: one of employees‟ needs is to feel valued and respected. In case an employer cannot deliver on that need, this will affect employees ability to offer excellent service to customers which, in turn, will sooner or later impact on profitability. It is this interconnectivity of stakeholder needs which provides the rationale for the creation of strategic map and underpins the journey to excellence.

Elements of a strategic map Not only can this process of strategic map-making seem confusing at times, but it is also riddled with concepts, models, frameworks and terminology. On the other side, there exist different interpretations of how best to develop strategic map. While trying to answer four vital questions, challenges are eliminated. When looking to work at it this way, things start to make a bit more sense. However, building strategic map fits closely the approach “Think, Do, Review”. ❑ First of all, it starts by thinking about the current position of the hotel (Where are we now?) and followed by description of the big picture (Where do we want to be?). ❑ Based on that, goals are defined and related strategies are developed: with action taken every year to make it happen (How do we get there?). ❑ It is crucial over time to review progress to see if moving in the right direction (How will we know we are getting there?). It is noteworthy that managers who learn lessons mentioned here, can adjust elements of strategic focus where necessary.

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It is important to emphasize that the strategic map will not be written in stone. Changing economic or competitive dynamics will naturally require to revisit the plan – review the section of “where you want to be” or to adjust the “how to get there” part. That is not to say that the strategic map will constantly change from year to year, for that, in fact it would mean that there is no strategic map.

Features of Strategic map (Enda M.Larkin)

Does not guarantee the achievement It does create a foundation upon which excellence can be built. of excellence.

It is not a straight. It will define what is hoped to be achieved and even if they are forced to change direction in the short period, they will have a context to guide with while making these decisions. Does not provide control over It can help to understand more clearly the forces influencing volatile business environment. business, so that to have a better chance of mastering, or at least managing them. Will not resolve the resource issues It will assist in channeling limited resources in the right areas for that hotel business faces. maximum impact

Does not mean that it will not get It helps to make proper decisions. Mistakes are costly, both in wrong from time to time. financial and reputational terms.

It does not mean that change in track It establishes a benchmark against which to measure progress, so in future cannot be made. that quickly to spot when there is necessity to change the direction.

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Accordingly, if a hotel is in its early stages of development, creating strategic map should be number one priority. In spite of scarcity of time, it is crucial to be considerate. It is not always so that good financial position means that hotel is heading in the right direction. It is of course a better sign than bad financial indicator, but unless having mapped out the direction, there might be shocks hiding behind what currently seems to be a healthy bottom line.

Despite the fact that strategic plan can help hotel to prosper and develop, if operation is based on a bad idea, in the wrong location, at the wrong time then a strategic map will be useless.

Within the development of strategic vision, it is important to develop right marketing strategy to ensure hotel's sustainable market position and competitive advantage. Often managers and owners of the hotel business utilize outsourcing strategy. Adopting this strategy means to concentrate on the main sections of value chain (value) and transfer other activities to independent companies. It should be noted that the use of outsourcing is not always appropriate, and it certainly has advantages and disadvantages, and if not considered it can create serious problems for the hotel. Below is defined different business functions transferred through outsourcing, advantages and disadvantages.

The functions of hotel business enterprise and activities of certain types of outsourcing, advantages and disadvantages (according to V. Kameneva)

Type of activities and Advantages of outsourcing Disadvantages of outsourcing business functions Accounting High qualification of provider specialists; For primary documents responsibility for breaking the tax law is due preparation keeping an to an outsourcer; decrease in taxes due to accountant; the risk of reduction in tax base (Salary Fund); no information disclosure; loss of necessity of purchasing informational efficiency in receiving the data. technologies for carrying out accounting activities. Personnel selection Economy of personnel selection and The loss of personnel and development training; high qualification of outsources; management; the need for highly informative about the labor market. understanding the specificity of the hotel business; the complexity among staff in the formation of corporate climate. Legal service High market value of qualified professionals; High-value of service invention the regularity of the demand. firms; specificity of business and legal issues in the hotel business. Marketing functions High qualification of outsources; reducing The need of increasing the the cost of advertising. level of specific knowledge in the hotel business; high cost of services. The appropriate level Appropriate level of quality while The need of small repairs;

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of maintenance repair maintenance repairs work; agreement about The need for quality control; work the dates of the works (mainly for the the risk of creating discomfort production of regularity); high qualification for clients. of provider group of specialists. Construction services No need to buy expensive equipment; Decrease in efficiency; ensuring the quality of service provision. necessity of quality control.

Computers and High qualification of provider group of Reduction in efficiency; information system specialists, which provides a level of modern specific nature of computer services technology needed; high market value of programs. specialists; regularity of demand; to support providing modern computational techniques. Technical services for High qualification of provider group of commercial specialists. equipments Cleaning rooms and Economy in personnel; attachment with The need for quality control; and common use current needs (no regularity); high-quality the need for specific knowledge places of service; use of expensive equipment; in the hotel business. complete complex of cleaning services.

Security and safety High qualification of provider group of Need for specific knowledge in service specialists. the hotel business.

Laundry and dry Economy in personnel; high quality of The need for quality control. cleaning service work; use of expensive equipments; attachment to current needs which depends on the hotel's non regularity factor.

We have many examples in the world where every year a large number of small and large companies face bankruptcy because of managers' lack of qualification and not having well defined competitive strategies.

In addition, training is particularly important for small and medium business representatives; in Georgia they often run business with gut feeling, without any specific business education and awareness of the hotel industry. Our analysis reveals that small hotel owners and managers have absolutely no idea about the strategic plan and its importance, or have the information, but in current situation, they ignore. Understanding the nature of the strategic map - why it is important and how it contributes to the management of the hotel – is the first significant step towards the search of perfection.

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References

1. Thompson A. Jr. (2009). Strategic Management. Concepts and business cases. 13th edition –translation. Batumi (In Georgian). 2. Baratashvili Evg., Bakashvili N., Paresashvili N., et al. (2011). Modern business strategies. Tbilisi (In Georgian). 3. Larkin E. M. 2009. How to Run a Great Hotel. Howtobooks, UK. 4. Kameneva V. 2009. Strategic aspects of enterprise management in the hotel industry. Dissertation of a candidate for the degree of economic sciences. Khabarovsk. (In Russian) (source: www.khstu.ru/rus/Science)

Jovan Shopovski University Ss Cyril and Methodius, Republic of Macedonia Frank Bezzina, Martin M. Zammit University of Malta, Malta

THE DISQUALIFICATION OF COMPANY DIRECTORS AND ITS EFFECT ON ENTREPRENEURSHIP

Introduction The disqualification of mangers or management structures in trade companies is an institute with which the European and other legislatures around the world are familiar with. The extent of its application depends primarily upon the traditions in the understanding of certain institutes in the field of the Company Law, Bankruptcy Law and Insolvency.

It is an act which entails prohibition, most often by court order, for members of management in companies whose conduct met certain legal conditions, which entails disqualification. We use the term „members of management‟ because this disqualification or exclusion from the market may encompass a wider circle of people beside directors who took part in the management of a particular company and who, whilts managing the company, violated in some way or other the respective legal norms to determine prohibition.

In accordance with the legislation, the disqualification in most cases involves prohibition for the persons to take part in the establishment, management and organization of the existing and/or other companies. Thus, persons that are under such constraint, become disengaged from the management positions of the companies for a certain period of time, and they are banned from that position in new companies. The duration of this exclusion is in proportion to the degree of illegal conduct and it is estimated by the institution that enacts it. To record the persons who have been disqualified from managing positions in

143 the companies, a list is produced, and it is kept by some of the administrative bodies in charge of companies‟ records. That list is at the disposal (with or without a certain fee) of the public, with sufficient transparency for the prospective creditors and investors.

As with every other prohibition, the restrictions imposed by the disqualification regime aims at achieving specific purposes. Historically, the main objective of directors‟ disqualification has been to seek out those who abuse of the privilege of Limited Liability for their personal benefit at the expense of investors and the general public at large. They are sanctioned from trading for a period of time as determined by the Court. The restriction also acts as a warning to raise standards of commercial scrupulousness, discourages unfit conduct and gives irresponsible directors the chance of rehabilitation. Williams [38] argued that it is now potentially developing into another means of control, with the onerous obligations of governance facing directors constantly increasing.

Aims of Study Firstly, this study provides a succicient overview of the literature on entrepreneurship and entreprise; namely on the meaning of the terms „entrepreneur‟, „entrepreneurship‟ and „entrepreneurial process‟. Secondly, it reviews the disqualification regime in relation to company directors and members of the management team in the United Kingdom, Germany and the Balkans (comprising the Republic of Macedonia and Croatia). Thirdly, the study focuses on the consequences of the disqualification of members of management on the entrepreneurial orientation of firms. More specifically, the study provides seven hypotheised facts relating to the disqualification regime that could directly or indirectly impact negatively on entrepreneurship, and consequently on the economic growth or revival of countries. One question looms in this regard: Is the disqualification regime the best course of action in a time of economic recession?

Entrepreneurship and Enterprise This section provides an overview of the literature on the meaning of the terms „entreprenueur‟, „entrepreneurship‟ and „the entrepreneurial process‟.

The Entrepreneur Entrepreneurs are those individuals that through their drive to do good for themselves in terms of material gain and social status, contribute significantly to material progress in society, and act as change agents for economic growth [15]. Through their energy, committed undertaking, and innovative behaviour, their embeddedness in society helps to transform industry and society by injecting money in the economy and providing a vital source of employment for many. Various bodies of literature provide an insight on typical characteristics of a successful entrepreneur. Four main components are central; strong innovativeness, a good knowledge of how the market functions, an ability to take risks, and the willingness to grasp opportunities [39].

The entrepreneur paradigm which can be traced back to Schumpeter [29] is underpinned by the innovation process. Innovation has many facets. Cooper [6] lists three prominent innovation dimensions: (i) radical versus incremental, (ii) product versus process, and (iii) administrative versus technological.

The literature affirms the importance of the role played by the entrepreneur in the creation and early development of a firm [36]. In this role the individual influences the firm‟s direction, and contributes to 144 the choice of strategy. This is more pronounced in small entrepreneurial firms. Studies attest that strategic decision making is affected by the entrepreneur‟s personality and management style. This is also evident in firms where entrepreneurs do not use formal techniques or specialized knowledge in strategic management, but implement „realized strategies‟ [22] which are formed from decisions made gradually, and sometimes unintentionally.

Entrepreneurship Analogous to other concepts in the social sciences there exist no unanimity of a universally accepted definition of entrepreneurship. Researchers agree that it is about creating something that has previously not existed. The dynamic process leads to a change of state and is characterized by innovation, venturing orientation, and strategic renewal [7] after the identification of opportunities [31]. Three main streams of research provide knowledge on this subject. The first stream [24] concerns the examination of socio- economic background factors, such as age, gender, social class, marital status, education, and ethnicity. The second examines the personal characteristics of owner-managers [4]; among which their attitudes, traits, and preferences. The situational and contextual factors comprise the third stream [32].

The subject has been researched through the examination of attitudes, traits, background, contextual circumstances, economic factors, gender, and geography. An accepted definition of entrepreneurship is that it is a process of creating and building something of value [34] through the pursuit of opportunity without regard to resources currently controlled [33]. The behaviour of the individual within this process results in outcomes that energize industry and the economy, and provide long-term sustainable benefits for society in general.

Entrepreneurship is viewed as having a functional and occupational character in the economics literature [26]; [12]. The functional element of entrepreneurship contributes to our understanding of the functions of the entrepreneur in the context of economic development and growth. Entrepreneurship contributes to employment. It enhances social and political stability, and it furnishes competitive power [37]. Econometric evidence suggests that entrepreneurship is a vital determinant of economic growth, and a cost in terms of foregone economic growth will be incurred from its absence [3]. Policy makers across the world promote entrepreneurship as a means of creating jobs, improving international competitiveness, countering rising unemployment, and sustaining economic growth. The high unemployment and stalled growth in most European countries has reinforced the determination of policy makers to use entrepreneurship as a vehicle for personal development in order to resolve social issues and strengthen economic growth.

The occupational aspect studies the person performing the entrepreneurial process as someone who starts and grows a business venture through innovation. Schumpeter [27] acknowledged that entrepreneurs transform static equilibrium into a dynamic process of economic development through the exploitation of an innovation. The entrepreneur contributes substantially to such economic progress and technological advances through the process of innovation. This is an important determinant in the competitive challenges of enterprises and nation states. The complexity of the innovation process requires not only an eclectic base of thinking and individual management skills, but also requires the appropriate fiscal and regulatory framework with which it can flourish. Herbig et al. [13] contend that innovation “requires three basic components: infrastructure, capital, and the entrepreneurial capacity to make the first two work”. It is now accepted that policy makers encourage firms to progressively adopt

145 an entrepreneurial culture. This can only be achieved through a business support infrastructure that embraces innovation.

Central to the study of entrepreneurship are the concepts of the entrepreneurial process and that of opportunity. The former focuses on the patterns of economic activity that arise from the interaction of a multidimensional, complex and dynamic set of factors and circumstances. This manifests itself in the start-up and growth of businesses. The latter focuses on the behaviour of the entrepreneur. Entrepreneurial processes change over time and exist in different formats depending on the type of firm [30].

Entrepreneurial Process The Austrian School of thought views the entrepreneur as a person with three propensities: (i) risk- averseness [18]; (ii) alertness to opportunities for economic profit [17]; and (iii) innovativeness and creativity when exploiting opportunities [29]. The entrepreneurial process of is embedded in market functioning. It disrupts market equilibrium through the introduction of new combinations or successful innovations of goods and services in the economy. During the process the new product/service combinations fuel economic development and growth and move the economy towards a newer equilibrium. Schumpeter [28] coined the term „creative destruction‟ to denote a "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."

A large body of research views the entrepreneurial process as an emergent phenomenon made up of individual and environmental components [20]. The central argument is contingency thinking which binds the entrepreneur‟s characteristics with the firm‟s context. Other researchers [35] remove environmental factors from their models and focus specifically on the characteristics of the entrepreneur, individual or team; resources; and opportunity perception. This school of thought investigates the traits manifested by entrepreneurs. In these studies the characteristics and attitudes of individuals, their genetic predisposition, and the social development in their culture lends themselves inclined towards entrepreneurship.

In all models the individual plays a central role in the entrepreneurial process which gives rise to the emergence of new opportunities. The exploitation of the opportunity progresses into the creation of a new product or service which the market will accept as novel. The on-going presence of the entrepreneur is central for success because he or she alone has the capacity to materialize and continually shape the organization so that value is created. In this view entrepreneurship is a long and complex emergent process comprising of repeated interaction which gives new meaning in the light of the sense that the entrepreneur makes of the market. An opportunity is therefore objective in the sense that it exists outside of the firm, but it is also socially constructed through activity interaction. The entrepreneurial process is thus “dynamic and constant emerging, being realized, shaped and constructed through social processes” [9].

It is the stream of social networks, structures and environments that an entrepreneur engages in that makes up the entrepreneurial process. Chang [5] states that opportunities are dependent on the nature of interaction and the pre-existing conditions that underlie such interaction. These are captured by the entrepreneur, who through a long and complex emergent process of sense-making provides value in the

146 market. The process has therefore no specific end, and there is actually no pre-defined goal taking the entrepreneur towards unforeseen directions.

Review of Disqualification in the U.K., Germany and the Balkans

United Kingdom The establishment of the Act “disqualification of managers” and its implementation in the Common Law system is based upon the notion of insolvency not only as a private legal creditor/debtor relation but also as an Act which is significant for Public Law as well as the whole community.

The liberal acts on the Island for establishment of a company, primarily the exclusion of the minimal capital as a prerequisite for founding a company, have certainly been a reason for introducing acts that will serve the purpose of protecting the company creditors. Legal provisions which entail institutes as “disqualification of managers” together with “piercing the corporate veil”- or the personal responsibility of the managers for the company debts (in particular cases) are exact such measures.

The Company Directors Disqualification Act 1986 seeks to protect the general public against abuses of the corporate form. The effect of a disqualification order is that a person shall not, without the leave of the court [8]:

Be a director of a company, or a liquidator or administrator of a company, or be a receiver or manager of a company‟s property or, in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company, for a specified period beginning with the date of the order [8]. (Section 1(1)).

A disqualified person cannot, therefore, act in any of the alternative capacities listed. For example, a disqualified director cannot participate in the promotion of a new company during the disqualification period, nor can he be „concerned‟ or „take part in‟ the management of a company by virtue of acting in some other capacity, such as a management consultant [8].

The Disqualified Directors Register is a register of persons who have either been disqualified through a court order or by an undertaking of the Insolvency Service from being directors of companies or members of LLPs. The register shows the length of time the director or member has been disqualified. It also shows the section of the Company Directors Disqualification Act 1986 that the director has been disqualified under.

The duration of the disqualification is between 2 to 15 years. In determining the duration of disqualification, previous disqualification orders of the individuals in question must be considered as well as the degree of guilt and the measure of incompetence [21, 264]. Violations of the disqualification order are punished by up to two years in prison or fines.

When can disqualification occur? Undischarged bankrupts and persons whose orders are revoked by the Court due to a default in payment under a county court administration order are automatically disqualified by the Court. 147

In practice, most of disqualifications are ordered on the basis of unfitness. According to this section, the court is obliged to issue a disqualification of legal or natural persons if this person is or was a director or shadow director of a company which has become insolvent. Additionally, the Court must be convinced that the conduct of this person as a director “makes him unfit to be concerned in the management of a company”. A director can be disqualified upon conviction for an indictable offence in connection with the promotion, formation, management, or liquidation of a company, or in connection with the receivership or management of a company‟s property, including the conducting of business without legal authorization - company law regulations are violated [14, 35]. A director can also be disqualified for persistently failing to comply with the provisions of companies‟ legislation requiring document filing with the registrar of companies. A disqualification order can be issued if it appears that, in the course of the winding up of the company, a person has engaged in wrongful and fraudulent trading, whether or not convicted or has otherwise been guilty of other fraud in relation to the company or of any breach of duty as officer, liquidator, receiver, or manager2. A disqualification on the basis of violations of competition law occurs when a company violates competition law and the court holds the director to be unfit to be concerned in the management of a company. “Capital Market disqualification”occurs whenever someone buys or sells stocks on the regulated market and uses insider information to his benefit and so is criminally liable. Whoever is sentenced for such a criminal act can be disqualified pursuant, assuming that the carrying out of the criminal act can be linked to the management of the company in question [21, 263-264].

Moreover, when a company has failed, the OR (or IP in a creditors' voluntary liquidation, an administrative receivership or an administration) has to send the Secretary of State a report on the conduct of all directors who were in office in the last 3 years of the company's trading. The Secretary of State has to decide whether it is in the public interest to seek a disqualification order. Any application is heard and decided by the court. Examples of conduct which may lead to disqualification include:  Continuing to trade to the detriment of creditors at a time when the company was insolvent.  Failure to keep proper accounting records.  Failure to prepare and file accounts or make returns to Companies House.  Failure to submit tax returns or pay over to the Crown tax or other money due.  Failure to co-operate with the OR/IP.

Germany Directors` disqualification is already used in certain fields of German Law. Corporate Law goes beyond the mere requirement that managers and the board members have such ordinary attributes such as legal capacity. For example, pursuant to s. 6 (2) s. 3, 4 GmbHG and s. 76 (3) s. 3, 4 AktG, a manager must also be free of any sentences related to insolvency criminality or of professional or occupational disqualification or any other form of civil legal disqualification [21, 257].

Insolvency criminality leading to a directors` disqualification under German law is exclusively connected to Chapter 24 of the Criminal Code. Therefore, this only involves bankruptcy (s 283 c StGB - Bankrott) grievous bankruptcy (s 283a StGB – Besonders Schwerer Fall des Bankrotts), violation of proper accounting (s 283b StGB – Verletzung der Buchfuhrungspflicht), the preferential treatment of creditors (s 283 c StGB - Glaubugerbegunstigung), and the preferential treatment of debtors (s 283d StGB

2 CDDA, supra note 7, s. 2(1) 148

- Schuldnerbegunstigung). Nevertheless, criminal act committed abroad may also be of consequence, though such acts must also be considered criminal by the foreign legal regime. The committed crime must be related to the commercial objective or occupation of the corporate entity in question. Other criminal acts are not penalized by s. 6 (2) 3 GmBHG and s 76 (3) 3 AktG.

The Balkans The Balkans, from a legal aspect, have always been inclined towards the German legal circle, adopting and adapting decisions characteristic of this legal system, which is rather different from the common law system. In the area of the Company Law, the same practice has been followed, so that the countries like Croatia and the Republic of Macedonia, in their company laws have included a number of laws which originate from and are applied in the German laws which regulate that field.

When such regulations as directors disqualification are concerned, it seems that in the Republic of Macedonia and Croatia, the approach is much more restrictive towards the circle of persons and the reasons for which such restrictive measures as directors‟ disqualification are imposed.

Republic of Macedonia In the Republic of Macedonia, a novelty has been introduced with the amendments of the law on companies from April 9, 2010, (Official Gazette no.48) by which a prohibition for founding companies is introduced if certain conditions are met, as well as prohibition in certain occasions for persons to be members of management and supervision bodies of companies.

Thus it is stated that: A company cannot be founded by: 1. Legal entities whose bank account opened at any of the carriers of the financial trade (the banks) is blocked3 and the persons who are members of the management or supervision bodies of these companies, for the period of time the account is blocked, or until it undergoes the procedure of bankruptcy. 2. Companies which undergo bankruptcy procedure, for the time of the duration of the procedure. 3. A person who is a member (capital owner) of a Company with Limited Liability (only Ltd. not public company ) the account of which has been blocked, for the period of time the account is blocked, or until it undergoes the procedure of bankruptcy. 4. Persons for whom the court has decided to have committed a criminal offence of false bankruptcy, causing bankruptcy by improper management, misapplication of the bankruptcy procedure, damage or preference of creditors.

The persons under 1, 3 and 4 are not allowed to be managers, member of a managing body or a supervising body of a company for the period of time that these restrictions are present.

3 Company`s bank account could be blocked (by the creditor, who has already provided a legal document which confirms the debt) due to the inability to pay its debts. It will be blocked until new finances arrive, so that the creditor can withdraw his amount. 149

For the persons who are under prohibition for founding a company and for those who are not allowed to take part in the company management and supervising bodies, there is a separate register within the Central Registry Office.

It is a fact that these acts are rather extensively set and plan prohibitions not only for the managers/supervisors of the companies but also for the members of the companies of limited liability, which represent the most common mode of the business organization in the country.

Apparently, a number of rather restrictive acts are imposed, that go further in their attempt to provide certain market safety and protection of the creditors. The justification is questionable, especially in a period of a world economic crisis during which the legislatures prefer acts which are liberal and motivating for the prospective entrepreneurs. For instance, recently, the Macedonian government introduced numerous measures in order to encourage the potential entrepreneurs in their business realizations.

In addition to this, in a time when the state itself as a result of the economic crises is late with its payments (debts) towards the private sector, such acts that impose prohibition to the managers or the capital owners because of the company insolvency and the block of its account, a consequence of temporary insolvency, look pretty severe.

Croatia The legislation in Croatia had even previously imposed upon the founder/s of companies when founding the company, to submit a signed statement (in addition to the other documents) by which they confirm that they are not owners or co-owners of a company that has a blocked bank account (insolvent company).

Apart from referring to the founders, the new legal regulations impose a prohibition on the members of the family of the person in possession of insolvent company in founding a company. Thus, the Croatian legislature imposes prohibitions that sanction persons that may have not previously participated in the market.4 It is hard to imagine being fordidden to establish a company because of a previous business failure of a member of your family!

Thus, the legislature decidedly imposes prohibition on establishment of new companies for those entrepreneurs who have had at least unsuccessful business venture and as a result have an insolvent company, which has still not undergone the adequate procedure for deletion from the register. This undoubtedly represents obstruction to entrepreneurship and sanctions the entrepreneur who for certain reasons has not managed in the successful realization of the business venture.

The authorities in the previously mentioned legislatures (U.K., Germany and Macedonia) focus most of these restrictive measures on the members of the management of the company. Unlike them, the Croatian legal decisions contain restrictions mainly referring to the capital owners.

Moreover, according to the new provisions, the institute “piercing the corporate veil”, with the forthcoming alterations, would mean that if the legal person is not able to clear the debts, the creditors in

4 Tax Law amends, Official Gazette, no. 78/12 150 order to collect the debts, apart from the personal assets of the founders, can also use the other legal entities owned by the same founder. Furthermore, the managing directors of the insolvent company are liable to the creditors with their personal assets.

The new alterations also plan the so called “shortened administrative procedure” with which the Inland Revenue Department are authorized, if they discover irregularities in the functioning of the company, (namely a procedure not conducted by the Court) to appropriate not only the property of the legal entity, but also the personal property of the founder.

Needless to say, these regulations generate insecurity for the entrepreneur. They significantly capacitate the state and its discretionary right in the decisions concerning the private property of the company holders. As a logical result of that, these regulations are demotivating for the present or prospective entrepreneur.

Impact of Directors‟ disqualification on entrepreneurship

Although delinquent directors and/or members of the management team who are guilty of misconduct deserve to be disciplined, there have been cases where honest persons have been disqualified “in a bid to save jobs by keeping the company trading” or because of what they might consider to be “quite small matters, such as errors in paperwork” (Damon Watt, as cited in Moules [23]). There are also cases where businesses go bankrupt because of bad luck or unexpected circumstances (e.g. economic downturn), and not because of irresponsible risk taking. In decision theory, a good decision is one that uses all the available information, considers all possible alternatives and is rational. In the same sense, directors of companies are required to be prudent in their decisions, to consider all the risks involved and to avoid reckless and speculative trades and/or investments. Apart from this, a director cannot be passive. When a director feels that the Board is taking the wrong decision, especially in the case of trading in the prospect of insolvency, the director is responsible to take a stand and to protest against the implementation of the decision s/he does not support. The director is also expected to resign in such circumstances, rather than staying on board for fees and status associated with his position. However, if the director decides not to resign, his/her conduct will be considered independently, not collectively.

Good decisions can be affected by unexpected or unfavorable circumstances, resulting in bad outcomes. In such cases, that original decision remains a good decision just the same. However, outcome-based decisions cannot be entirely avoided and good managers can suffer from bad outcomes, not of their own making. For instance, Ariely [1] gives an example of a chain that lost money when the stock went down, and the good manager incurs financial penalties or is fired, so that Board saves face and appears to be taking action. The founders of McDonalds (Ray Kroc) and Walmart (Sam Walton) failed in at least one entrepreneurial venture before making a success. What would have happened to these established world- renowned entrepreneurs if this Act was in place back then? What would have been the impact on entrepreneurship and the economy if they were disqualified? Isn‟t this proof that failure is only the stepping stone to greater heights?

Entrepreneurs take calculated risks while investors and creditors take financial risks in support of these enterprises. Laws and regulation are there to promote legal activities and to discourage illegal activities. With the exception of the illegal act, the market must remain free. In the long-run, capital moves away from the less efficient decision makers to the smart ones. Those who make bad decisions become victims 151 of their own decision making. This is how the free market operates. As Lee and Gladstone put it: “It is an unusual „enterprise‟ culture that protects investors from such individuals through heavy-handed legal insensitivity to the wisdom of economic forces” [19, 134]. They add that it is clear that the Act can effectively criminalize decision-making mistakes made by directors. Thus, the same laws primarily aimed at protecting the general public from directors who have contributed to the insolvency by negligence, misappropriation or misconduct of company assets, are also likely to stifle entrepreneurship and damage the health of our economy [19]. The following are a few examples of how the shortcomings and consequences of directors‟ disqualification could impact negatively on entrepreneurship: 1. They disallow experienced entrepreneurs and founders of failed firms from re-entering the market due to various factors such as long-term or permanent disqualification, or due to the lack of available credit, in cases where the entrepreneur becomes personally bankrupt after the insolvency. 2. After suffering disqualification procedures, some entrepreneurs may experience a loss of perceived ability or become risk averse to own or manage future companies after the disqualification. Hence, when these entrepreneurs take decisions based on calculated risks, they may choose not to the risk ever again, thus depriving the “economy of an experienced and vital force for innovation” [10, 55]. 3. They might potentially discourage innovative individuals with valid enterprise from entering the market for the first time, resulting in a loss of new engines which are crucial for economic revival and/or growth. 4. There are multiple reasons why a business can go bankrupt. However, with business failure becoming more and more stigmatised, a number of honest bankrupts continue to be stigmatised due to association with dishonesty. 5. When an honest director is asked to justify his/her actions in Court, acknowledging that the Court may not be the best place to appreciate risk-taking and enterprise, may tend to lead him/her to act in an overly protective manner to avoid disqualification, thereby discouraging genuine risk-taking and entrepreneurship [16]. 6. The process of disqualification is generally lengthy and not a very cost-effective way of establishing misconduct, since the exercise used does not determine whether the director is currently unfit but whether the he/she infringed some particular detail in the past [14]. With the rise in harsh economic conditions, there has been a rise in disqualification orders [23]. This means that the governments are spending more and possibly with limited benefit in protecting the public. It would be more appropriate if more cost-effective procedures are found and the money saved is invested in educational programmes for potential entrepreneurs and/or to support struggling businesses to cope with tough times. 7. The negative effect of directors‟ disqualification on entrepreneurship may be further extenuated when disqualification orders in other countries may lead to disqualification in a given country. The freedom of establishment principle of the Treaty which is set out in Article 49 enables an economic operator to carry an activity in more than one member state. The principle of the freedom to provide services, a set out in Article 56, gives the economic provider the freedom to provide services in more than one state without having to be established. These two principles are central to the effective functioning of the EU internal Market (European Commission, 2011). It is a known fact that entrepreneurs in a given country strategically take advantage of inexpensive and faster incorporation facilities in other countries and extend their services to other countries. The provisions to extend disqualification to those directors who have been disqualified overseas is legitimate, in the sense that it will help to prevent rogue directors from 152

taking advantage of incorporation facilities in other countries such as the UK . However, what about those cases where the honest director has been unjustly disqualified? Omar pointed out that there is the difficulty of obtaining reliable information from foreign authorities and “whether the automatic disqualification would infringe the right to a fair trial under Article 6 of the European convention on Human Rights” [25, 41]. This is a clearly major concern for directors who operate on a global basis and impacts entrepreneurial migration.

Conclusion

The fact that the Disqualification Act originally targeted only directors and singled them out for legal control has been described in the literature as illogical [19]. This criticism might explain why new disclosure regimes go beyond the directors and include members of the management of a company, as in the case of the U.K., Germany and the Balkans, which we reviewed in this paper.

In the case of the Balkans, the new legislation on disqualification incorporates restrictions even for founders of the companies in particular situations. More specifically, we saw that Croatians have provisions where "Due to current insolvency, if the firm has it‟s bank account blocked, the founder(s) is not allowed to establish new firms during the insolvency, and even his family members are subjected to these constraints". In our opinion, these restrictions go beyond providing market safety and protection to investors, and stifle further entrepreneuship in the Balkans; clearly not the right course of action in a time of harsh economic recession.

The government might see effective enforcement of the disqualification regime as a vital in its quest to support entrepreneurship and enterprise. However, the disqualification regime runs counter to the concept of free enterprise, where investors are free to take the risks with minimal government control, and can operate in an economic system that rewards on the basis of the investors‟ keen insight in their investment decisions.

We believe that the disqualification regime might inhibit genuine entrepreneurship, resulting in a significant drag on economic growth and prosperity, at a time when all governments should be findings measures in order to encourage potential entrepreneurs in their business realisations and to stimulate the economy in their country and to weather/overcome the recessional storm(s).

In conclusion, most of the points we raised in this paper are not backed with empirical evidence. We believe that there is a need for more focused empirical and inductive research that attempts to support or contadict our hypotheses. Such research would better inform policy makers in their quest to protect investors and the public at large from dishonest company directors and members of management, without stifling entrepreneurship in their country.

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Ketevan Chiabrishvili Grigol Robakidze University Nino Chiabrishvili Ilia State University

LEADERSHIP VS MANAGEMENT

The terms “leadership” and “management” are seen very differently by diverse people. Some individuals see these terms as synonyms and frequently use them interchangeably throughout phrases and sentences. Others approach them as extreme opposites; so extreme, in fact, that they would argue that you cannot be a good manager and a good leader at the same time. Still other people reside somewhere in the middle and realize that while there is a difference between leadership and management, with the right knowledge an individual can successfully navigate both from the same position.

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Today‟s groups, organizations, and teams need both effective leaders and effective managers to run a successful operation. While some obvious similarities (i.e. they both involve influencing constituents or employees; authority and power are generally given with both positions) can be found between leadership and management, there are also some striking differences (i.e. management is often more task- oriented; leadership is often considered more inspirational and visionary). For the purposes of this publication, leadership and management are defined somewhat differently; nonetheless, it is still understood that one person can work efficiently in mastering both fields.

In this document, we will address fundamental definitions of leadership and management, behaviors consistent with effective leadership and management, and the specific types of skills that contribute toward effective management. To conclude, a table will compare and contrast the major components within each field. Ideally, with the right training and development, anyone can successfully navigate the fields of management and leadership.

Leadership For a quick review, the definition of leadership is a process whereby an individual influences a group of individuals to achieve a common goal. Breaking this down even more, while there are a variety of leadership definitions out there, there are specific components that are central to the majority of these definitions. Leadership: ▶ Is a process ▶ Involves influence ▶ Occurs in a group context (you need to have at least one constituent) ▶ Involves goal attainment No matter how you operationalize leadership, these components play some small role in the definition or theory utilized.

Management For most, the definition of management is seen quite differently. This doesn‟t mean that an individual can‟t hold both management and leadership responsibilities simultaneously, but management is considered a term separate from leadership. The definition of management is to exercise executive, administrative, and supervisory direction of a group or organization. Leadership and management share many similarities. Both leadership and management involve influence, working with people, and working with effective goal management. However, the fields of leadership and management can also be considered very different. According to John Kotter, leadership can be considered an age-old concept that has been around for centuries, while management is a concept developed in the last 100 years, in part from the rise of the industrial revolution. Many other scholars share Kotter‟s viewpoint in differentiating between management and leadership:

 Bennis and Nanus define management as accomplishing activities and mastering routines; to lead means to influence others and create visions for change.  Rost asserts that leadership is a multidirectional influence relationship; management is a unidirectional authority relationship.  Zaleznik argues that management and leadership require different types of people.

Still there is an overlap between the two fields; when managers are involved in influencing a group of employees to meets its goals, they are operating under leadership. In addition, when leaders are involved 156 in aspects such as planning, organizing, staffing or controlling, they are operating within management. So while we are spending the majority of this publication distinguishing between leadership and management, suffice it to say that while different, they may never be completely separate.

Essential Management Skills Because management responsibilities are generally much more task-oriented than some leadership responsibilities, one important way to operationalize effective management is to discuss necessary skills. Skills are different from traits or characteristics in that they are the ability to use one‟s knowledge and competences to accomplish a set of objectives. Effective administration depends upon three personal skill sets: technical, human and conceptual. The following is a discussion of each:  Technical skill: knowledge about and proficiency in a specific type of work or activity. This may include competencies within a specialized field, analytical ability, or the ability to use appropriate tools and techniques. A good example of this is the knowledge of software language and programming, the company‟s software products, and how to troubleshoot for clients when working for a computer software company.  Human skill: knowledge about and ability to work with people, often considered “people” skills. These skills allow a manager to assist group members when working cooperatively as a group to achieve a task or assignment. Examples of this group of skills include being aware of one‟s own perspective on issues as well as your employees‟ perspectives, knowing the needs and motivations of your staff, and taking into account others‟ needs during decision-making.  Conceptual skill: the ability to work with ideas and concepts. This skill set doesn‟t involve working with people or things, but focuses on ideas. A manager with good conceptual skills will be comfortable talking about the ideas and details that shape their group or organization. He or she is good at seeing the bigger picture and can translate this understanding into words everyone understands.

Each of these types of skills is important for effective management, and are necessary within different levels of management within a group or organization. Not surprisingly, many of these skills are also useful for effective leadership, generally within a slightly different context.

Management vs. Leadership So how does one distinguish between leadership and management? In table 1 below you will see a direct comparison between leadership and management activities. An individual can be a great leader, a great manager, or both, but each area requires the mastery of slightly different skills and competencies.

Table 1. A Comparison of Management and Leadership Competencies.

Management Produces Leadership Produces Order & Consistency Change & Movement • Planning and Budgeting • Establishing Direction • Establishing agendas • Creating a vision • Setting timetables • Clarifying the big picture • Allocating resources • Setting strategies • Organizing and Staffing • Aligning People • Provide structure • Communicating goals

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• Making job placements • Seeking commitment • Establishing rules and procedures • Building teams and coalitions • Controlling and Problem Solving • Taking corrective action • Developing incentives • Motivating and Inspiring • Generating creative solutions • Inspiring and energize • Empowering subordinates • Satisfying unmet needs Source: Northouse, 2007, p. 10.

Leadership Characteristics As illustrated in Competent Leadership: What Effective Leaders Do Well (ELK1-101), some common characteristics and behaviors of effective leaders are as follows: ▶ Efficient coaching skills ▶ Confidence ▶ Consistency between word and action – “walking the talk” ▶ Creativity ▶ Empathic listening skills ▶ Being visionary ▶ Inspiring ▶ Long-term focus ▶ Maintaining a balance between individual needs and team needs ▶ Awareness of realistic conditions ▶ Strong self-esteem ▶ Sense of priorities ▶ Service mentality ▶ Sincerity ▶ Technical or contextual expertise ▶ Trust ▶ Willingness to share responsibility ▶ Willingness to share credit or recognition

With the mastery of each of these skills and behaviors, one can successfully navigate the fields of both management and leadership. It is usually just as simple as knowing what context is most appropriate to the situation and applying oneself in a leadership or management capacity.

References

1. Katz, R. L. (1955). Skills of an effective administrator. Harvard Business Review, 33(1), 33-42. 2. Kotter, J. (1990). A force for change: How leadership differs from management. New York: Free Press. 3. Northouse, P. (2007). Leadership theory and practice. Thousand Oaks, CA: Sage Publications. 4. Stedman, N. (2005). Leading teams. SEAL 2005 – Individual Advisory Member Development. Retrieved on November 26, 2008 from: http://extensionedu- cation.tamu.edu/SEAL/LeadingTeams-LP.pdf

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Maka Piranashvili Grigol Robakidze University

THE ROLE AND SIGNIFICANCE OF CULTURAL HERITAGE IN THE DEVELOPMENT OF THE WORLD TOURISM

Tourism appears to be one of the leading and dynamic branches of world economics. Due to the rapid rate and wide-scale development, tourism is recognized to be a phenomenon of the twentieth century. Tourism holds a special place in the system of human values. It not only promotes the development of economics, but also appears to be the most mass and civilized form of social-cultural activity and relationships of the society. At the same time, tourism is an integrated social-economic system which has an increasing effect on material and spiritual life of the society.

Since the second half of XX century tourism has become a subject of scientific interest. Various countries all over the world have the opportunity to develop many types of tourism. Generally, for the classification of the types and trends of modern tourism the directions of tourists‟ movement, the purpose of travel, the means of travel and accommodation for tourists, the quantity of the travelers, organization- legislation forms and other significant characters must be taken into account.

Each touristic region, country, city seeks to make rational use of the existing travel-recreative resources in order to get economic profit and revenue growth. For effective use of tourism resources it is necessary to explore their lifestyle, the features of national character, and the opportunity of adequate perception of the objects of tourist interest.

Proceeding from the above-said, tourism plays an important role not only in the mutual exchange and enrichment of the history, economics, traditions and culture of various regions and countries, but in the promotion of mutual respect, the support and establishment of human feelings of friendship among the nations. Regarding this, the acquaintance with the cultural heritage of different nations and its study should be noted.

Nowadays, the concept of heritage is actively being introduced into scientific vocabulary and in the system of functional category of modern public life. This concept is more widely used by politicians, statesmen, legislators, scientists and academic institutions. More actively it is used abroad. In many countries of the world the synchronism of the appearance of this concept in the innovation category allows us to consider the regularities of this phenomenon. In itself the heredity brings together such categories as the historic buildings and constructions as well as local agricultural values and it belongs to the sphere of cultural policy; later it extended to the sphere of ecology. This understanding of heredity became the object of public attention and concern in several European countries and North America in the 19th century.

In 1844, the first national non-governmental organization of protection of heredity in the world was founded in Norway. The similar organization - the first in the new world - was founded 45 years later in north-eastern America – the region where there were a lot of historical monuments of the nation having high ambitions. The organization declared the reliable approach to the protection and use of heritage. But such an approach, because of the high density of heritage objects, found more fertile ground in Europe. In 1895, three members of the British Organization of historical sights protection R. Hunter, O. 159

Hill and H.Ronsli founded the English National Trust in Ireland and Scotland with two regional committees, which eventually became independent National Trusts. In a short time, these organizations, which received state aid, became the most massive and reputable non-governmental organizations on the British Isles.

The example of the American and British Trusts became so attractive that such organizations were actively based in Europe, Australia and the Oceanarium, in the Southern and South-East Asia. The successes of the world's first national trusts for the protection and use of inheritance helped to popularize the concept of heredity, and received even more attention at the international level.

For the first time in the international practice, the question of state liability protection of objects of world culture and valuable cultural objects was put in the work of two (1899 and 1907 years) global conferences in Hague (the Netherlands) which, as is known, was convened on the initiative of Russia. The need to protect the monuments from the military actions was first recognized then. It was then demonstrated the absence of scientific ideas and recommendations for the protection of historical monuments and urgent need for them. During this period the social order for the production of the theory of cultural values was formulated as an important social phenomenon and its practical use.

The appeal of the Hague Conference first of all was heard by the professional associations of artists, especially architects and restorers. Namely, they experienced the dramatic results for civilization that could be caused by the loss of cultural monuments of the world and the deterioration of their condition, especially during World War I. Among the specific documents of that time, which created the scientific bases for heritage protecting, the "Athens Charter" should be noted which was obtained at the International Conference in 1931 by the restorers. The inestimable value of the artistic heritage of the past centuries was recognized in this document and the question on the provision of the use of all its abilities was raised.

In this respect, the final special agreement on the protection of cultural values adopted in 1935 in Washington was very important. But the mankind was not yet ready for such a human concept. As a result, the agreement was signed only by the countries of America and India and therefore, it did not become a universal legal act as it was intended. Despite this, it played its historical role in future shaping of heritage ideology which was implemented in the activities of UNESCO after World War II.

In the area of consideration of one of the most important actions of UNESCO became the "Convention on the protection of cultural values during armed conflict” adopted in 1954 in Hague. It is widely recognized that this convention appeared to be the beginning of the modern world movement for the conservation of cultural heritage. On receipt of the Hague Convention an international system for protection of cultural monuments of the past was formulated on the basis of the notion of “cultural values”, which was included in the international practice, namely in the above-said document. The Hague Convention provided the introduction of the “International Registry of cultural values” which became the predecessor to the future list of world heritage.

In the subsequent years, a special series of recommendations for the conservation of cultural values was developed at UNESCO which included the appropriate measures in respect of certain categories of monuments or certain activities. Among them, the "Recommendation on the conservation of beauty, landscape and location" deserves a special attention (Paris, November 11, 1962). 160

10 years later, the quantitative changes in the field of heritage protection transformed into qualitative all over the world: UNESCO's General Conference adopted the "Convention for the Protection of Cultural and Natural Heritage in the World" (Paris, November 16, 1972) which became the basis of a global policy in the heritage sphere. At the same time, the "Recommendation on the protection of cultural and natural heritage in a national aspect” was adopted which was aimed at introducing the heritage ideology in the practice. Since then, the concept of inheritance (cultural and natural) has been recognized to be the general category of world policy which was based on cultural and environmental public policy.

The above-mentioned convention has led to the creation of an unprecedented impulse in the development of the heritage ideology. Meanwhile, nonmaterial values were added to the category of natural, historical and cultural monuments. The logical development of this trend became the adoption of the "International Convention for the Protection of the Nonmaterial Cultural Heritage" (Paris, October 17, 2003) which expanded the concept of cultural heritage to the scale of cultural values of special significance. In this convention is given the explanation of the category of "nonmaterial cultural heritage” implying traditions and rituals, customs, and forms of representation of images, knowledge, experience, etc. This nonmaterial heritage, which is passed from generation to generation, is constantly updated and creates a sense of identity and promotes the respect for cultural diversity and human creativity.

Such acts stipulated the policy in the sphere of heritage which was initially spontaneous and then over time it became more and more focused. Traditionally, one of its main elements is to create a list of heritage objects. There are outstanding, well-known and legendary "Seven Wonders of the World" at the beginning of this list - Egyptian Pyramids at Giza, the Hanging Gardens of Semiarid in Babylon (Iraq), the Mausoleum of Halicarnassus (Turkey), a monument of Zeus (Greece), Colossus of Rhodes (Island of Rhodes), the Lighthouse of Alexandria (Egypt), the Temple of Artemis at Ephesus (Turkey). A significant place in cultural heritage also take “Seven New Wonders of the World” - Taj-Mahal at Agra (India), the Great Wall of China, Petra (Jordan), the Roman Coliseum (Italy), Chechen-Itza Pyramid in Mexico, Machu Picchu (Peru), the Statue of Christ (Brazil).

The question on the protection of cultural heritage has been repeatedly voiced by the UNESCO (Committee for Education, Science and Culture). At the same time the Inter-State Committee of the same name has been created which annually includes approximately 30 new objects into the world heritage list. Currently the most important 800 objects are included in this list. According to the Convention in 1972, the objects included in the list are divided into three groups: 1) cultural, 2) natural and 3) the cultural and natural objects.

The general term "World Heritage" takes the place of honour in the hierarchy of the objects. The attractions entered in this list are rightly considered to be unique, and they are awarded the title of world treasures, meaning that its conservation for the purpose of the inspection, study, knowledge and use is absolutely necessary for future generations. The inclusion in the list means that the monument appears to be the most important creation of culture and history of the country. According to the same convention in 1972, under the cultural heritage we mean:  Monuments: architectural monuments, monumental sculpture and painting designs, the elements of an archaeological nature, or structure, inscriptions, caves and elements of those groups, which have special universal value from the standpoint of history, art and science; 161

 Ensembles: the individual or combined construction groups, architecture, unity or connection with landscape which have special universal value from the standpoint of history, art and science;  Attractions: man-made or created by man and nature together as well as archaeological zones which have special universal value from the standpoint of history, aesthetic, ethnology or anthropology.

Almost according to the same scheme, the construction of the concept of "Natural heritage" takes place that implies the most important objects of nature. Today (after the 28th session of the World Heritage Committee which ended in July of 2004), out of 788 world heritage objects, fixed in 128 countries, 611 belong to the cultural monuments, 154 - to natural and 23 - the cultural and natural.

There are 35 000 historical monuments in Georgia, out of which 5000 are under the state protection. From the cultural monuments of Georgia, the following objects were included in the UNESCO list: the city of open-air museum - Mtskheta, Bagrat Cathedral - in Kutaisi, Gelati Monastery Complex and highland village in Upper Svaneti - Ushguli. In 2006, the National Commission of UNESCO Affairs in Georgia was refreshed which in 2006-2007 within the framework of the participation selected and approved 10 projects with the priorities of UNESCO, such as: Alaverdi Monastery Complex, Gremy Monastery, the Church of Nikortsminda, Samtavisi, Uplistsikhe, Vardzia, Shatili, Vani, etc.

In 2001, for the first time in the history of the world, UNESCO published a list of music not made by hands and nonmaterial masterpieces that included Georgian polyphony. It was a great victory and the recognition of Georgian folk polyphony. In 2003, the Research Centre for traditional polyphony was established. Thus, Georgian polyphony and folklore should be considered to be as an attraction of cultural tourism and a part of world cultural heritage.

Proceeding from all above said, it is obvious how important is the protection, conservation of cultural heritage and its transmission to future generations that gives a sense of pride to everybody.

References

1. Kvaratskhelia N. 2009. Cultural tourism. Tbilisi (in Georgian). 2. Ineson E.M. 2005. Current Issues in International Tourism Development. Oxford. 3. Kudriavtsev A.P., Mazurov Ju. 2005. Trust management of cultural and natural heritage in Russia (in Russian). Moscow. 4. Maksakovskii V.P 2004. World Cultural Heritage as an object of geographical study (in Russian). Moscow. 5. Goeldren Ch. R., Ritchie J.R., Brent, McIntosh R.W. 2000. Tourism: Principles, practices, philosophies. 6. www.unwto.org 7. www.museum.de

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Maka Gudiashvili Grigol Robakidze University

DECISION TREE METHOD IN ENERGY MANAGEMENT

Decision Tree Method is frequently used in Energy Management. It implies the energy project analysis in uncertainties. Decision tree analysis method connects present and future results and enables facilitates managers to make decision via grosser NPV. In the article is elaborated production and demand of transformers and generators, probabilities of demand (high or low) and cash flows for each combination. There is represented 2 year business- process decision tree, when a manager would choose the best result and make decision. Net present value of investment:

r NPV= -Yx +  NPVx * Px x1 Yx –Investment of each x period; NPVx- Net Present Value (NPV) of investment each x period; Px- Probability of demand each x period; r- Series of cash flow.

A schematic tree-shaped diagram is used to determine a course of action or show a statistical probability. Each branch of the decision tree represents a possible decision or occurrence. The tree structure shows how one choice leads to the next, and the use of branches indicates that each option is mutually exclusive.

A decision tree can be used to clarify and find an answer to a complex problem. The structure allows users to take a problem with multiple possible solutions and display it in a simple, easy-to-understand format that shows the relationship between different events or decisions.

The furthest branches on the tree represent possible end results. A decision tree is a diagram of nodes and connecting branches. Nodes indicate decision points, chance events, or branch terminals. Branches correspond to each decision alternative or event outcome emerging from a node. The root node represents the first set of decision alternatives. For each decision alternative draws a line, or branch, extending to the right from the root node.

Some branches may split into additional decision alternatives or outcomes. Let us label each branch with the decision and its associated investment cost. The root node is the small square at the left. Branch lines emerge from the root towards the right. Each branch represents one decision alternative.

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Cash 1.1 flows

1.2 1

1.3

2 2.1

2.2

1 2 3 Year (business period)

Pict.1. Tree-shaped diagram business-process

In the Picture 1 is represented a schematic tree-shaped diagram of 2 year business- process of production and demand transformers and generators. Production of transformers requires 1st year investment costs - 550 000 GEL. Production of generators requires 1st year investment costs -250 000 GEL and for the second year – additional investment costs - 150 000 GEL.

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960 000GEL 150 000GEL High Demand(0.8) High Demand(0.6) 220 000GEL Low Demand(0.2)

930 000GEL 30 000GEL High Demand(0.4) Low Demand (0,4)

140 000GEL -550 000GEL Low Demand(0.6) Transformers

800 000GEL High Demand(0.8)

100 000GEL -150 000GEL Low Demand(0.2) -250 000 GEL Increase Generators 100 000GEL High Demand(0.6)

410 000GEL High Demand(0.8) Not Increase

180 000GEL Low Demand(0.2)

220 000GEL High Demand(0.4) 50 000GEL Low Demand(0.4) 100 000GEL Low Demand(0.6)

Pict.2. Tree-shaped diagram business- process of production and demand transformers and generators

A schematic tree-shaped diagram shows production and demand of transformers and generators, probabilities of demand (high or low) and cash flows for each combination. Based on discount rate 10%, cash flows will be (see Table 1, 2):

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Table 1.

I year Cash flow Probability Demand

Transformers 150 000 GEL 0,6 High

Transformers 30 000 GEL 0,4 Low

Generators 100 000 GEL 0,6 High

Generators 50 000 GEL 0,4 Low

Table 2.

II year Cash flow Probability Demand

Transformers 960 000 GEL 0,8 High

Transformers 220 000 GEL 0,2 Low

Transformers 930 000 GEL 0,6 High

Transformers 100 000 GEL 0,4 Low

Generators 410 000 GEL 0,8 High

Generators 180 000 GEL 0,2 Low

Generators 220 000 GEL 0,4 High

Generators 100 000 GEL 0,6 Low

Payoff calculates as: (probability high demand * payoff with high demand) + (probability low demand * payoff with low demand). We calculate expected cash flows and discount: (0,6*150000)  (0,4*30000) NPVtransf = -550000 + + 1,10

0,6*[(0,8*960000)  (0,2*220000)]  0,4*[(0,4*930000)  (0,6*140000)] + = (1,10)2

102000 670000 = _550000 + + = 96000 GEL 1,10 (1,10) 2

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(0,6*100000)  (0,4*50000) NPVgenerat = _250000+ + 1,10

0,6*[(0,8*410000)  (0,2*180000)]  0,4*[(0,4*220000)  (0,6*100000)] + =52000 GEL (1,10)2

NPV comparative analysis shows:

NPVtransf = 96 000 GEL

NPVgenerat = 52 000 GEL P

Conclusion: investment for transformer production via grosser NPV is more attractive then investment for generator production. If we expand and invest additionally 150 000 GEL, choice would be different, because investment for generator production and its further expansion will bring more net present value (NPV) of investment.

Investment for generator production according to high demand (80%) would guarantee cash flow 800 000 GEL, or 100 000 GEL according to low demand (20%). In this case cash flow would be:

(0,8*800 000) + (0,2*100 000)=660 000 GEL

Present value of expanding: 660000 NPVgenerat= -150 000 + = 450 000 GEL 1,10

If we choose investment for generator production we expect to receive cash worth 550 000 GEL in year 1 if demand is high:

550 000 GEL (100 000 cash flow+450 000 NPV)

And cash worth 185 000 GEL if it is low:

(0,4*220000)  (0,6*100000) NPVgenerat= =135 000 GEL 1,10

185 000 GEL (50 000 cash flow+135 000 NPV)

The present value of investment in the generator production is:

(0,6*550000)  (0,4*185000) NPVgenerat=-250000+ =117000 GEL 1,10 167

A schematic tree-shaped diagram business-process of production and demand transformers and generators, probabilities of demand (high or low) and cash flows for each combination, gives opportunity to choose the best result and make the decision: investment for generator production and its expansion is more attractive via the net present value (NPV) of investment.

References

1. Brealey R. A., Myers S.C. 2000. Principles of Corporate Finance. London. 2. Turrner E.C. 2002. Energy Management. Handbook. Published by Fiarmont Press.

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Business

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Slava Fetelava Grigol Robakidze University

RULES OF WORLD TRADE ORGANIZATION IN THE FIELD OF COMPETITION

World Trade Organization (WTO) was established on December 8, 1994 as a legal successor of the “General Agreement on Trade and Tariffs” (GATT) created in 1947 (the Organization started activity from January 1, 1995). Georgia joined WTO as earlier as June 26, 1996 as an observer, while since October 6, 1999 it gained the status of the full member of WTO (Georgian Parliament ratified the Treaty on Joining Georgia with WTO on July 14, 2000).

The WTO is aimed at regulating the trade and economic relations of its members on the basis of multilateral obligatory agreements, while the main objective of WTO is a liberalization of the international trade through ensuring its justice, prediction and transparency that, in its turn, should assist a process of economic growth and increase of people‟s welfare [4, 191-203].

It is the fact that according to the rules of the “General Agreement on Trade and Tariffs” and the World Trade Organization, the trade cooperation between countries is based upon the preferential assistance principle (i.e. the preferential assistance regime), the main concept of which is that a custom preference granted by a GATT participant state to another GATT participant state shall be automatically spread over all GATT participants. Therefore, we can say that the World Trade Organization is a set of the legal documents (a certain multilateral trade agreement) determining the rights and duties of governments in the sphere of international marketing of goods and services.

As for the rules of the World Trade Organization in the field of competition, it should be noted that they form a comprising part of just this set of the multilateral agreements (legal documents) and regulate through its norms and principles more than 90% of the current world trade (with goods and services). However, it is noteworthy that there were/are no direct statements in the provisions of “General Agreement on Trade and Tariffs” / World Trade Organization in support of the principles of competition (they do not characterize the rules to be adopted as the “rulers of competition”). But, despite the above stated, we can say that just the core of the WTO regulations provides the competitive conditions of the foreign-economic deals through avoiding the discrimination and artificial barriers. But this does not mean at all that WTO fully relies upon the conditions of a free competition.

For the Organization, use of the methods of both tariff- and non-tariff regulations, among them – implementation of the anti-damping and compensation measures with a strong limitation, are acceptable, that is not aimed at the limitation of the competition.

“Generally, . . . for the purposes of “protection” of the national industry, the aforementioned provides an opportunity to cancel or cease those concessions in the trade which were adopted on the grounds of mutual agreements”.

The World Trade Organization envisages two categories of measures: The first – temporary measures which may be applied only if certain conditions exist; the second – the permanent measures which can

170 be considered as an exception from the obligations taken before WTO. Among the temporary measures envisaged by WTO, the most important ones are: - Urgent measures which must protect the national industry seriously damaged as a result of competition by imported goods. Each country shall have the right to take the “security” measures through establishing the quotes and imposing taxes on import of this or that type of product, in the event if an increased volume of import causes damage or creates threat to local manufacturers (Article XIX of GATT – urgent measures related to import of some products; WTO Agreement on Security Measures); - Introduction of the anti-damping and compensation custom charges against the non-honest import from one or more countries, that caused a material damage or created a threat of damage to the national industry (Article VI of ATT – Anti-damping and Compensation Custom Charges; WTO Agreement On Implementation of Article VI of 1994 General Agreement on Tariffs and Trade, hereinafter the “Anti-damping Agreement”; and WTO Treaty on Subsidy and Compensation Measures); - Introduction of the import limitations by the developing countries, for the purposes of protecting the payment balance and foreign financial state (Article XVIII “b“ of GATT – Import-related measures for Payment Balance)“ [1, 37-38].

At the same time, according to the Point 1 of the Article 8 of the WTO Agreement (Monopolies and Suppliers of Special Services) “Each member shall ensure that none of the monopolist supplier can act on its territory . . . in such a manner that may violate . . . the obligations . . . under the Agreement . . . Correspondingly, these obligations shall cover also the services provided by holders of special possessions, in case I they misuse their monopolistic state [9, 355-356].

Undoubtedly, each country implements its contemporary foreign-economic policy under the influence of development of specific historical conditions. It is a fact that often, a temporary protection of the local markets are fully justified (for instance, in the countries with transitional economy, where the national economy is unable to compete with major transnational companies) and, generally, strengthening the positions of the national companies on the world market is the unconditional priority for all high- developed industrial states in terms of the principles of the just competition and restriction of the monopoly on the local markets.

Therefore, we can say that the antimonopoly policy belongs to the local markets-related policy and is regulated under the national laws. As for the issues regarding the trade relations of the WTO member states, they are regulated in pursuance with the international treaties. Thus, occurrence of conflict situations cannot be excluded. That is why, currently, the circles of professionals are actively involved in discussions regarding introduction and enactment of the international rules of competition and inclusion thereof in the sphere of WTO activity. In other words, in conditions of the current globalization, a necessity of establishing and exercising a wide-range control over the anti-competition policy and achieving an agreement on regulation of competition-like relations with certain standard occurs, under which each WTO member state should be guided.

At the same time, it should be also noted that Georgia, like other countries with the transitional economy, is enforced to resolve not only the problems of legal protection and institutional provision of the competition, but the issuers of formation of the competitive environment as well, that is not a case for the high-developed WTO member states.

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Therefore, for recognizing Georgia as an equal partner by the WTO members, the country must necessarily have a perfect legislative basis to regulate the customs procedures and their administration, intellectual property rights and other similar business environments having impact on realization of the goods and services. Moreover, Georgia took such specific obligations upon signing the WTO Membership Agreement. Namely, “Georgia undertook not to implement the reprisals of trade (measures of protection, anti-damping and impose of the compensation fee) until the regulating legal acts corresponding to the WTO requirements will have been introduced. According to most part of the observers, Georgia really needs to adopt such the procedures despite the fact that none of the other WTO members are obliged to do so [8, 27].

At the same time, by technical assistance of the donor organizations [on October 17, 1997, by the assistance of the Canada International Development Agency (CIDA) the Georgian Center for Trade Policy Laws (CTPL) was established at the Ministry of Trade and Foreign Economic Relations of Georgia], “CTPL has developed the draft law “On Anti-damping, Compensation, and Security Measures” [2, 5] and submitted it to the government for reviewing. Moreover, as revealed, the said draft law was forwarded to the Georgian Parliament too, but it was not adopted finally. According to this draft law, the Antimonopoly Office was proposed as a governmental body responsible for administering the reprisals” [8, 27].

Proceeding from the above stated, the fact is that on this stage Georgia has not still introduced a national legal basis (legal acts to cover fully the security mechanisms) for regulating the anti-damping and compensation measures. This matter became more urgent after annulment of the Law of Georgia “On Monopoly and Competition” dated 25.06.1996. (Law No.1550-Ic dated 03.06.2005), Sub-point , “c“ of the Point 2 of the Article 9 of which stated that an non-honest competition is achieving a privilege in the competition through using the damping prices, that shall be prohibited.

Besides, according to the Point “g“ of the Article 13 of the same Law, an economic agent with a monopolistic power was prohibited to use the damping prices, etc. This seems to allow us to say (creates a threat) that a dishonest trade of other countries (i.e. import of goods with damping prices) can easily occur on the country‟s local market. However, it is also obvious that even if such law exists, a probability of applying it is too low, since a conduct of researches (and not only within the country) and application of the appropriate measures require bit expenses of administrative, research and legal nature. It is a fact that the “Administrative barrier is so high that the countries which were in the similar economic situations earlier, applied the mentioned measures in case of urgent need, only” [1, 38].

Thus, if looking through deeply (carry out a critical analysis) the existing (expecting) situation in terms of anti-damping measures (with all possible outcomes), we may conclude that on the given stage, inexistence of the legislative basis related to the reprisals is less catastrophic for Georgia. Like a certain part of independent experts, we also share the opinion that on this stage, use of the WTO provisions concerning the protecting measures would be more acceptable and even effective for Georgia, than charging the compensation duty and the anti-damping procedures. Namely, “There are more costless means with an immediate effect, such is the WTO Agreement on Protecting Measures” [8, 27] which, to say frankly, is a less stronger instrument but still, is able to play an important role in protecting the local businesses. Respectively, it stimulates the private sector to use the protecting measures against import for increasing the competitive ability.

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Here we would like to indicate that some of the countries with the transitional economy (Latvia and Kirgizstan) adopted the laws and legal acts on the anti-damping and compensation measures as earlier as by end of the XX century, for their integration into WTO.

Special attention deservers the positive side of the protecting procedures, namely, the fact that by their nature the procedures are “single-minded” and participation of a violating party is not a necessary requirement. In other words, any country desiring to adopt the protecting procedures is not required to prove that the imported product gains unjust funds or is of anti-damping nature. It is sufficient to determine easily whether the imported product causes a serious damage to the local competitive manufacturers of the similar products or creates a threat of such damage. In such cases, the standards of causing damage can also be specified easily than in case of conducting investigations in terms of the anti- damping procedures and compensation duties.

Finally, we can say that fulfillment of the obligations taken before WTO in connection to the protecting procedures is much simple and effective (costs saving) that increases a probability of their use by the countries with the transitional economy. Moreover, it is also profitable by political point of view, since it ensures protection of those local businesses, for which it seems to be difficult to adapt in the competitive environment. Correspondingly, the local companies are promoted and the government helps them with its policy to overcome the difficulties and take a position on the market.

Here we should take into consideration the fact that according to the WTO provisions, the protecting measures directed mainly to increasing the competitive ability of the private sector are of temporary nature. However, in case an increase of competition ability of the local manufacturers is not achieved in the course of implementation of such measures, it cannot be excluded that after removal of such measures the industries will be in the similar or even much difficult conditions than before introducing of the mentioned protecting means. Correspondingly, “. . . the protecting measures can be considered as the supporting means for the economic reforms and the regional integration, since they create an environment where the private sector must become more effective and gain the competitive abilities both on regional and global levels” [8, 29].

Proceeding from the above mentioned, it is clear that regardless of inexistence of the legal basis for regulation of the anti-damping and compensation duty charging procedures in Georgia, it seems really possible to implement the full-range competition policy within the frameworks of the WTO provisions (related to the protecting measures), if not its main barrier – indetermination (inexistence) of a state institution that should investigate (study) the protecting measures and make the relevant decisions.

This problem has become more actual after abolishing the State Antimonopoly Office of Georgia (on August 19, 2005) which was not directly charged with execution of the protecting measures envisaged under the WTO Agreement, but acting according to the monopoly legislation in force in that time (Article 9 of the Law of Georgia “On Monopoly and Competition”); it was involved in detection and suppression of the facts of non-honest competition on the specific (concrete) commodity markets of the country. But, after liquidation of the mentioned Office and abolishment of the Law “On Monopoly and Competition”, no other state agency works in this direction (detection and suppression of the facts of non-honest competition), that creates a real threat in terms of protection of the local businesses against the increasing imports [5, 114-115].

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Therefore, we consider it necessary to nominate as soon as possible a state agency that will serve as the institution charged with implementation of the protecting measures as per the procedures of the WTO

Agreement (we thing that such an institution should be the main agency responsible for the competition-related issues in the country). In parallel, it seems also necessary to improve the legislation on competition (in the current Law “On Free Trade and Competition”, the competition limiting mechanisms cover only the prohibition of the competition limiting actions by the side of the state (national and local) bodies) and harmonize it with the similar standards adopted by the high developed WTO member states.

And finally, we think that acceleration of this process (i.e. approaching to the WTO standards on competition) would be promoted also by the fact that the EU is an active member of WTO (since January 1, 1995), which repeatedly makes attempts to strengthen both the economic and political ties between its member states and those from Central and Eastern Europe still being remained out of the EU membership. Such an approach gives the non-EU countries a chance to enter the EU market through matching (harmonizing) their competition laws with the WTO and EU standards. Therefore, EU has a great potential to support maximally Georgia‟s integration into the WTO.

References

1. Barnevic A. 1999. Protection of Local Industry on the grounds of the WTO Agreement on Security Measures. Georgian-European Consulting Center for the Economic Policy and Legal Issues. Georgian Laws Review. 3rd Quarter, 3, 36-39 (in Georgian). 2. Beruchashvili T. 2000. The Period after Georgia‟s Integration into WTO. Georgian-European Consulting Center for the Economic Policy and Legal Issues. Economic Directions of Georgia. Quarterly Review. 2, 50-52 (in Georgian). 3. Lyont D. 2000. Membership to WTO. Economic Directions of Georgia. 1, 3-4 (in Georgian). 4. Raich N. 1998. The 1998 Comments on the Law of Georgia “On Advertising”. Preliminary observations (recommendations of the EU Experts to the State Antimonopoly Office of Georgia on the customers protection problems) Tbilisi. Archives files of the State Antimonopoly Office of Georgia. 12, Chanturia str., Fl.6 (in Georgian). 5. Fetelava S. 2007. Theory of Competition and Antimonopoly Regulation in Georgia. Tbilisi, LOY (in Georgian). 6. Fetelava S. 2007. On Problems of Improvement of Competition (Antimonopoly) Laws of Georgia. Tbilisi, LOY (in Georgian). 7. Kemoklidze D. 2000. Trade and Competition – Multi-sided Discussions on Trade. Georgian- European Consulting Center for the Economic Policy and Legal Issues. Economic Directions of Georgia. Quarterly Review. 2, 53-54 (in Georgian). 8. Bearing Point. 2004. Formation of the Trade Policy and Observance of WTO Requirements by Georgia. Tbilisi. 5th of July (in Georgian). 9. Yacheistova N. I. 2001. International Competition: Legislation, Regulation, and Cooperation. New York & Geneva: UNO (in Russian). 10. Georgian law on “Monopolistic Activities and Competition”. 25th of June 1996 (286-IIs). 11. Georgian law on “Free Trade and Competition”. 3th of June 2005 (1550-Is) 174

Vasil Kikutadze Grigol Robakidze University

THE CONCEPT OF INTANGIBLE ASSETS IN VALUATION ACTIVITY

The term “intangible asset” has many definitions which are related to the fields of legal, accounting and taxation activities. However, as a rule, those definitions are specific according to their meaning. According to the valuation purposes, intangible asset primarily should be considered as a property. Independently, whether asset is tangible or intangible, it should be the object of property rights. In order that asset be an object of property right, it should be identifiable. As for an intangible asset, it should have an exact and narrow definition which identifies it as a unique proprietary object. If the intangible property object cannot be identified and specifically described, this object cannot be qualified as an intangible asset. This property may be an idea or term. But, such description is very general to qualify such property as intangible asset. In order to classify intangible asset as property, legal rights must apply on it. It should use all of the legal rights, benefits and privileges. Often the main distinction between tangible and intangible assets is their physical difference. But disparity between tangible and intangible assets is not reduced only to the physical difference. Of course, machines, equipments, cars, land, buildings, instruments, materials, etc. can be seen and touched; all of them are material assets. But, obviously, we can also touch and see the contracts, licenses, franchisee agreements, projects, integrated circuit topographies, patents or copyrights on registration certificate, laboratory journals, etc. The question arises: “Do they represent material assets as well?” Of course they do not, because the main difference between tangible and intangible assets is the following: first of all, value of material assets is created by their tangible substance, and secondly value of non-material assets is created by their intangible substance. Tangible assets in turn represent important elements for creation of intangible assets.

Intangible assets can be classified in the following categories: rights, relationships, non-identifiable non- separated assets or intellectual property; rights are represented in accordance with the terms of contract, written or by other form which gives economic profit for every party. For example, delivery contracts, sales contracts, supply contracts, license agreements and other interconnection between parties, as a rule, do not have contractual nature. They may be short-term and highly valued by both sides. Examples are: staffing by the workforce (staff), relations with the customers, suppliers, distributors or structural (hierarchical) relationship between parties and other. Non-identifiable non-separated assets represent the residual value of intangible assets which is left after identification of all identifiable assets value and the deduction of their value from the total value of intangible assets. Alternative terms are: customer loyalty value for the given economic subject, revenue surplus (super profit) and residual value. Non-identifiable non-separated assets are often called goodwill. Goodwill is (1) the tendency of buyers return in economic entities service, (2) economic subject‟s surplus income on identifiable assets‟ real returns (super profit) and/or (3) value surplus of enterprise, as a whole, of the aggregate (net) value of identifiable assets. Intellectual property is intangible assets specific category, because, as a rule it is protected by the law from the use by others without any permission. Examples are: trademarks and trade names; copyrights; patents; commercial secrets; know-how and other rights and privileges, by which the owner of intangible assets is equipped. Intellectual property objects include all elements of economic value which other intangible assets have. However, because of their special status, intellectual property objects use 175 special legal recognition and legal protection. Intangible assets are often formed in the process of business operations. But, intellectual property objects are created by the way of human‟s intellectual or creative activity. In order to enable intellectual property owners to fully realize their intangible assets economic value, intellectual property objects‟ information need special protection. According to the generally accepted classification, intellectual property is divided into: creative (e.g. trademarks, copyrights, computer software) and innovative (e.g. patents, industrial designs, industrial secrets). This classification defines sufficiently well those two reasons why intellectual property objects use special legal recognition and protection. As for creative intellectual property, law-abiders think that their owners need the protection. The corresponding law should be developed and finally adopted to ensure that a property owner, who has spent a lot of time, strength and abilities to create trade mark or musical composition, not to occur in such a situation in which other person will be able to use his/her work while realizing own interests.

Intangible asset‟s value is derived from the intangible asset‟s ownership property rights. In general, intangible asset‟s value does not derive from the document (paper), on which it is printed. The cost of intangible asset is derived from the property rights which are connected with its untouched value; the intangible factors that are acting on it and on what the asset is acting itself. Intangible assets have separate and different value from the tangible assets. Similarly, material assets have separate and different value from the intangible and other material assets. This is the truth despite the fact that those material assets may require the use of intangible assets to fully realize their value. E.g. the computer hardware assurance (tangible asset) may require the software (intangible asset) to fully realize its value. Intangible assets, which may have separate value, can increase those tangible assets‟ value, on which they are linked. Although, this does not mean that the total value of intangible asset is transferred to the material asset, or, that the total value of tangible asset is transferred to the intangible asset. The value, which makes intangible assets related with the material assets, is sometimes called surplus value. It means that intangible assets often increase the cost of those tangible assets which are linked to them. Similarly, material assets often increase the cost of those intangible assets which are linked to them.

According to the economic analysis and evaluation purposes, intangible assets can be divided into intangible immovable property and intangible movable property. Intangible immovable property consists of all those individual material rights, profit and other rights which are typical of a real property. Real property differs from the real estate. Real estate is associated with the material assets: land, organization of territory elements, buildings, and improvement and modernization elements for buildings. Real property ownership represents individual legal rights which are related to the material real property. In fact, real property categories include all those untouchable rights and benefits which are associated with the real estate ownership. As all legal rights are intangible, real property is also intangible. Thus, real property categories include all intangible rights and benefits which are linked to real property.

References

1. Tsipulov P. 2005. Intellectual Property Valuation. Kiev. 2. Reilly R., Schweihs R. 2005. Valuing Intangible Assets. 3. Edited by Carsten Fink and Keith E. Maskus, 2005. Intellectual Property and Development. The International Bank for Reconstruction and Development / The World Bank. 4. http://www.piipa.org/ 176

5. http://www.patentarea.com/ 6. http://www.ifacts.se/intangible-assets/

Givi Kuparadze Grigol Robakidze University

HEALTH TOURISM, MEDICAL TOURISM AND WELLNESS PHILOSOPHY

Jerome Klapka Jerome, the English writer humorist was born on May 2, 1859 in Walsall, the county of Staffordshire. He got married to Georgina Elizabeth Henrietta Stanley Marris (a.k.a. Ettie) on June 21, 1888. They spent their honeymoon in a little boat on Thames and it is considered that this fact conditioned creation of the most well-known novel of the writer “Three Men in a Boat (To Say Nothing of the Dog)”. Prototypes of personages became the writer‟s friends George Wingrave and Carl Hentschel. Comic circumstances are described in the story where friends meet each other and all this happens around the river Thames and its surroundings [1].

The aim of the given article is not to discuss the novel. The author described perfectly the benefit of traveling for health.

Everything starts with introducing the medical directory when the main character remembers that he has Podagra decease, his friend Harris suffers from dizziness and George - from insomnia. After consultations, the friends decided that the reason of all deceases was strain. “What we need is – repose. Reposing and changing environment, tension of brain caused debilitation of nerve system. Changing atmosphere, non-necessity of thinking will regenerate mental balance.” After that they decided to boat “… where will be fresh air and calm. Changing landscape permanently will contain our mind and increased physical activity provides good appetite and tranquil sleep”. The only who was not delighted with this idea was the dog Montmorency.

As soon as the decision was made, three men to say nothing of the dog started their trip to restore health. All these in modern medicine are called: Wellness Tourism, Medical Tourism and Health Tourism.

Wellness

“Wellness – it is money spent in order to feel yourself healthier despite the fact that according to the ordinary medical parameters, you are not “ill”. Nowadays, majority of people have more demand on health than on money”, - says Paul Pilzner, economist and analyst, consultant of the President of United States in the field economy.

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Wellness is a balance of mind, body and soul. The term unites physical and mental health, right nutrition, regular physical activity, getting rid of bad habits.

The main task of wellness is to avoid and make prophylaxis of deceases and outer as well as inner signs of aging. Wellness is philosophy of feeling good in spiritual, social and physical spheres. Those who live with wellness philosophy, in spite of any age, are lucky, successful and full of energy optimists. They pay enough attention to their bodies‟ outer condition, follow healthy nutrition principals. The main principals of this philosophy are:  Movement;  Mental activity;  Relax and harmony;  Beauty and physical care;  Balanced nutrition.

Wellness first of all means changing lifestyle and not curing any particular decease.

According to researches of 2002, the basic services of wellness were directed to prophylaxis (70%) and repose (23%). Wellness basically is for big cities, where in spite of strained rhythm of life and frequent stresses people take not one-time long term vacation, but multiple weekends with additional rest-days.

In literature, the term “wellness” was first used in1654, but as culture it was introduced in the 60s of 20th century in the United States when the American doctor, Halbert I. Dunn, M.D. introduced the term “wellness” and determined the principles of high quality life. In addition to Dunn M.D. following scientists: Deepak Chopra, Michael Roizen, Mehmet Oz, Don B. Ardell, John Travis, David F. Duncan, and Andrew Weil [4] contributed to developing and popularizing wellness.

Since 90s of the past century, wellness has been taking place in Europe and step by step getting popular what cannot be said about the situation in Georgia. Furthermore, even the term “wellness” is outlandish in our country but fitness is already an ordinary, fashioned and frequently used term.

Nowadays, fitness is a part of wellness as this latter is a broader concept which includes diet and rehabilitation programs, psychical improvement, spa and use of other complex procedures. All these together improve health and, accordingly, impact on spiritual balance.

Wellness equipment is divides in two groups:  For intensive exercises (tonus tables, vacuum simulators, balance-platforms, vibroplatforms, etc.);  For passive procedures (press therapy, magneto therapy, thermo therapy with infrared ray, massage beds, etc.).

Differential particularities of wellness equipment are: complexity, multi functionality, simplicity and use of modern technologies. The mentioned equipment allows improving body and the body‟s general condition in order not to be necessary to follow hard physical strain and hard diet.

Despite some particular cases, there is no principal difference in the term “Wellness Tourism” in different countries. Wellness tourist has quite good health and group of such people is only 7-8% of the

178 total population. Besides, wellness tourists always look for ways to increase health reserves who try to avoid exacerbation of chronicle deceases [2].

Health tourism

People, who travel to the further progression of disease prevention, belong to the second category that is called the Health tourism.

At the beginning of the article is described the case about the three man. If the "three-man, to say nothing of a dog” travelled by spa center Cruise ship, instead of the boat, that would be the Health tourism.

In the Law of Georgia “on Tourism and Health-Resorts” the Health tourism is explained this way: “the use of health resorts for the treatment and medical examination, as well as for other medical services” [5].

Medical Spa - The International Association of Centers defines Health Tourism as follows: "This is a journey to improve health which considers visit to the resort or to weight lifting center.”

Considering the Georgian resort potential variety, the Health tourism is one of the perspective fields which can bring the country serious economic effect. We should also recall the fact that during the existence of the Soviet Union the Resort Industry was most developed in Georgia. According to Statistics Committee evidences of that time, in 1989, 980 thousand patients passed the course of treatment and relaxation in Georgian resort facilities. Considering the fact that the one resort pass comprised 12-18-24 days, it is very easy to count what an enormous number of days are we talking about.

Though this was a planned socialist economy period of the Soviet Union, and the similar number of tourists is unreal for today, the fact that the significant activity should be implemented on the development of Health tourism leaves no doubt. However, it is indisputable that an existed resort infrastructure requires cardinal changes and update. Also the staff needs a fundamental training and retraining.

Medical tourism

Medical Tourism - this term implies the practice of receiving medical care abroad which is combined with relaxation and high qualified medical care.

In Wikipedia the following is written about Medical tourism (the same as a medical journey or global health) - "the term has been introduced by travel agencies and mass media”, and is pointed to the fast growing segment of international travel whose goal was to obtain health care.

Services which these types of travelers consume comprise procedures as - special operations, for example, change of joints (knee / pelvis), heart surgery, dental and cosmetic surgeries. However, it comprises virtually every type of health care, including psychiatry, alternative treatments methods, etc [6].

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Medical tourism has a very long history. From time immemorial, patients were covering long distances to meet well-known doctors. The reasons why people travel to foreign countries to get medical care are numerous. Medical tourism is very popular in the United States, Canada and Western Europe. In United States -about 110 million people suffer from various chronic diseases whose treatment is not reimbursed by insurance. That is why many Americans go abroad for treatment of cardiologic, orthopedic or other diseases. For instance, sometimes the same treatments have got a quarter or even tenth of the price in Thailand or India than in the United States.

The different situation is in Canada and Great Britain where citizens have the state insurance, but it takes them months or even 2 years to reach doctors. That is why they prefer to go abroad for medical treatment [7].

The medical tourism is actively developed in Georgia as well. Many Georgians are going to Turkey, Austria, Israel, Germany or the United States. This, certainly, does not happen because treatment is cheaper in these countries - just the opposite. But here are other reasons, such as: better equipped medical centers, more highly qualified doctors, modern methods of diagnosis, etc.

However, not only Georgian people go abroad, but also foreign patients come to Georgia. The hair transplantation clinic Talizi can serve as a good example which has many patients from foreign countries (France, South Korea, Ukraine and others) [8].

“Over 50 countries have identified medical tourism as a national industry. However, accreditation and other measures of quality vary widely across the globe, and some destinations may become hazardous or even dangerous for medical tourists” [6]. Georgia has got a good perspective for developing kind of tourism. Georgian doctors‟ professionalism and qualification is doubtless in many fields of medicine. Technical equipment of newly established medical centers and hospitals in most cases is satisfying. In my opinion, The Ministry of Health, Labor and Social Affairs of Georgia of Health, should intensify their efforts in this aspect to enable Georgian clinics to pass through accreditations meeting the international standards and and implement quality control mechanisms. After this, medical tourism development master Close-up should be worked out together with the national tourism agency what should gradually be realized.

References

1. http://en.wikipedia.org/wiki/Jerome_K._Jerome 2. http://www.sankurtur.ru/world/land/565/ 3. http://ru.wikipedia.org/wiki/%D0%92%D0%B5%D0%BB%D0%BD%D0%B5%D1%81 4. http://en.wikipedia.org/wiki/Wellness_(alternative_medicine) 5. Law of Georgia “On Tourism and Health-Resorts”, 6 March of 1997, Article 2. 6. http://en.wikipedia.org/wiki/Health_tourism 7. http://ru.wikipedia.org/wiki/%D0%9C%D0%B5%D0%B4%D0%B8%D1%86%D0%B8%D0%BD%D1 %81%D0%BA%D0%B8%D0%B9_%D1%82%D1%83%D1%80%D0%B8%D0%B7%D0%BC 8. http://ge.talizi.ge/

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Liana Kanchaveli Grigol Robakidze University

LOGISTIC CONSULTING

Consulting – advising. Consulting is able to identify new targets.

Straight away we would like to stipulate that there are many consulting companies; many call themselves the number 1 consulting companies in Russia without going through the usual way of logistics, suppliers, who have never worked in a warehouse, who just have a general idea of transport, but skillfully insert in their conversation the English abbreviations ABM (“Activity Based Management”), BPR (“Business Process Reengineering”), and so on. We are the consultants not only in words, but in deeds as well that benefit the business.

We would like to note that modern logistics covers and unites date exchange, transportation, inventory management, warehousing and freight processing in a single process. The operational task of logistics is to arrange reasonable placement of sources of raw materials, work-in-process, finished products reserves which would be balanced in the needs involving minimal costs. Logistics creates the added value if the reserves are located appropriately to facilitate the sales process. It should be noted that logistics management is to create and establish such systems of material resources, flow of work-in-process and finished products reserves, which would serve as a support for business strategy of an economic unit.

The overall objective of logistics is to ensure the intended (target) level of customer service at minimum total cost [2].

The rating of industry competition is reduced to a systematic study of the opportunities and potential limitations of the company at the industry market, taking into account parameters such as size and growth of the market, potential profitability, the key success factors, foreign competition and labor relationship. The analysis of competitive forces should include the influence and the degree of control belonging to industry leaders, international competition, rivalry and hostility acuteness, consumers and suppliers influence, the key areas of competence of major competitors. In order to understand what a basic level of service is sufficient for successful competition in the specific industry, a comparative analysis of competence in logistics compared with competitors should regularly be carried out [2].

The services sector is an integral part of the national economic complex and represents an area of value creation, increasing the total consumption fund. A distinctive feature of the modern period is a transition from an industrial economy to a service economy as the service sector becomes a driving force for economic development. A civilized state is characterized not so much by the level of production as by the presence and level of services. Thus, the share of services in gross national product of industrialized countries is 65-70%. The U.S. service industry employs 70% of the whole number of workforce, Japan - 60%. These are logistical goals and priorities for our country. In recent years, the market of logistics services has changed significantly - in addition to the traditional multi-service logistics company, a new area - logistics consulting has appeared. The analysis of the overall situation in the industry (macro environment of the company) provides the basis for the development of a competitive corporate strategy (it is enough to answer to seven posed questions). It also defines the principles of competitive markets

181 setting the five competitive forces (the model of the “five forces” by Porter). As a result, we have chosen the matrix of “qualitative” strategic analysis as the regular primary tool of strategic management, or a matrix of the SWOT-analysis (Strengths; Weaknesses; Opportunities; Threats).

Opportunities Strengths

(favorable factors of the (advantages of the company) external environment)

Philosophy of the strategy

Rating

Threats Weaknesses

(opposition to the external (shortcomings of the company) environment)

) Good (+) Good )

- Bad( Environment

External Internal

Picture.1.1. Matrix of the primary strategic SWOT analysis.

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The most attractive in this method is that the information field is formed by the managers and by the most competent employees, based on generalization and harmonization of their own experience and vision of the situation.

In addition, strategic decisions involve more external than internal problems of the company, particularly, those solutions which are associated with the choice of the product range and market segments.

The choice of effective strategies that meet the internal parameters of the company and its position in the market and, in general, in the external environment is made by constructing a matrix of correlation SWOT-analysis.

Following is an example of such a matrix for choosing a corporate strategy:

Internal Strength Weakness

Opportunities Threats

Intensive growth Joint enterprises Integration

External

P

Integration Rejection of possession Diversification Liquidation

Picture.1.2. Matrix of correlation SWOT-analysis.

Thus, the development strategy of the company is based on the analysis of specific market segments to assess the favorable penetration in the intended scope, their use to strengthen its position. Herewith, the success depends on the formal, precise, complete and comprehensive description of the enterprise‟s interaction with the external environment. This provides some assurance that strategic decisions are

183 taken by “Select-Group” on the basis of the analysis of the whole available information and nothing is missing.

In recent times, the concept of “logistics consulting” becomes more common in the media, in advertising materials of companies on the Internet, but without giving its definition as the term. To determine the nature of the “logistics consulting” concept, it is necessary to investigate its constituent parts-concepts – “logistics” and “consulting”.

The term “logistics” - is treated as “relevant to the logistics, associated with it” [1].

Logistics is the science of control and optimization of material and associated flows (information, financial, service, etc.) in micro-, meso- and macroeconomic systems.

The basis for the understanding of logistics is the using of the so-called systems approach in which the various functions - transportation, handling operations, packaging, inventory management, warehousing and order processing are treated as interrelated and interacting elements of the system. The systems approach involves the optimization of the entire system, rather than any of its individual parts.

“Logistics is management of material flows, flows of services, and information and financial flows associated with them, in the logistic system to achieve its assigned goals” [3,248].

Logistics consulting, both in a restricted and a broad sense, can be considered from different points:  as a kind of activity. In this sense, logistics consulting is the process of optimizing the material, information and financial flows in the enterprise;  as an art, because it requires certain skills, experience, personal skills and talents of consultants;  as a field of activity, which combines the specific process of logistics consulting, art and science, and demonstrates the growing professionalism of logistics consultants.

The scope of application of logistics consulting, as opposed to other types of management consulting, is optimization of logistics activities which can be understood as a “logistics activities, operations or functions to improve any process” [3]. Logistics consulting is designed to optimize the functional areas of logistics - procurement, warehousing, manufacturing, transportation, sales, and inventory management. Optimization can be carried out in fragments - for example, technological design of a storage system, or in complex - the formation of logistic concepts and its development strategies by optimization of relevant business processes.

Logistics consulting uses the methods, models and knowledge of sciences such as logistics, logistics and marketing research, economic and mathematical methods, informatics, management, marketing, project management, psychology, etc.

The basic methods of solving the problems in the framework of logistics consulting services are the following:  modeling of business processes using IDEF and ARIS methodologies;  expert methods;  modeling of enterprises‟ activity in the field of logistics with the help of probable-statistical methods of simulation modeling; 184

 methods of heuristic analysis and synthesis;  methods for linear, nonlinear, dynamic and stochastic programming to solve the economic problems of optimization;  methods of structural analysis and structural optimization.

References

1. Botsvadze L., Eradze K., Botsvadze V. 2010. Logistic management and modeling. Tbilisi, DesignPrintExpress. 2. Bowersox D., Closs D. 2006. Logistical Management. Moscow, Olimp-Business. 3. Sergeev V. 2006. Logistics in the business. Moscow, INFRA.

Ivane Pirveli Grigol Robakidze University

CAN THE CLEAN DEVELOPMENT MECHANISM PROJECTS ACCELERATE INVESTMENTS TO BUILD NEW HYDRO POWER PLANTS IN GEORGIA?

Introduction The Georgian energy sector has already been modified substantially over the last ten years. Important reforms and transformations were conducted in order to establish a market-based energy sector, especially its electricity segment.

Currently, several actions have been taken to increase the incentives for private investors to invest in the electricity sector:  All the newly built HPPs (built since 2008) are deregulated and investors are free to choose the market and the price for selling their output. In addition, HPPs of up to 13 MW have a special right to sell electricity to any retail customers.  A potential investor is offered a unique ownership advantage BOO (build, operate, and own).5  No license is required to export electricity.  There is no special fee for connecting to a grid of a newly built HPP.

5With a BOO contract, a private company is granted the right to develop, finance, design, build, own, operate, and maintain a project. The private sector partner owns the project outright and retains the operating revenue risk and all of the surplus operating revenue in perpetuity [7].

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In addition, the system operator in Georgia, ESCO, guarantees purchase of all electricity from the newly built HPPs during the next ten years (three winter months each year), which reduces the risk that a new plant will not use its full capacity.

Finally, the Black Sea Transmission Network (500/400kv) Project, which aims at the rehabilitation and construction of 500kV overhead line Gardabani-Akhaltsikhe-Zestaponi (about 270km) as well as the construction of 400kV line from Akhaltsikhe to the Turkish border (35km), will enhance the transmission system and will increase export opportunities from Georgia to Turkey. It is expected that the line connecting Georgian and Turkish energy systems will be put into operation at the end of 2012.

In spite of these actions, private investments in new HPPs continue to fall short of what would be expected and needed. The current situation arises one fascinating question: “Is Georgia‟s hydropower potential only technical or does it have also economic valuation?” In other words, is utilization of Georgia‟s whole hydropower potential economically justified at the current situation? To answer this question it is important to observe an investor‟s behavior regarding investing money in new Georgian HPPs. As the last years‟ experience has revealed, investors and especially regional companies are interested to invest in Georgian HPPs; its indicator is large number of signed Memorandum of Understandings (MOUs)6 between investors and the Ministry of Energy and Natural Resources of Georgia (MENR) [7]. This clearly shows that there is interest from the private sector of investing money and there are investors who believe in profitability of new HPPs. However, it is observed that most of investors choose strategy only to sign MOUs and than delay investing money. The behavior of investors dictates that something is wrong with status quo and they are waiting for the “better future”.

Probably, the best explanation of this phenomenon is that Georgia still faces high political and economic risks, and investors remain concerned that the country is not a secure place to do business. According to Euromany Magazine, in the list of countries‟ risk rankings Georgia is on the 76th position among 100 countries [9].7

If this is the case, the main challenge now is to convince foreign businessmen that it is worth investing in the Georgian energy sector. This can be done either by reducing the investors‟ perceived risk or by increasing the investors‟ expected returns by including enough to compensate them from the excess risk of investing in the Georgian energy sector. In other words, an investor should get a risk premium which is equal to the return in excess of the risk-free rate of return an investment is expected to yield. An investor should be compensated for tolerating the extra risk.

Applicability of CDM Projects in Georgia

6 Currently 40 Projects are under the MOU, their total capacity is 1872 MW and their estimated generation is 7391 GWh. All these projects are hydro power plants except Paravani wind power plant with 50 MW installed capacity [7]. 7 Combined Euromoney Country Risk (ECR) score combines six categories; ECR score for Georgia in March 2011 was 47.77 out of 100. By categories - political risk 44/100 (30% weighting), economic performance 55.34/100 (30% weighting), structural assessment 60.56/100 (10% weighting) debt indicators 8.56/10 (10% weighting), credit ratings 1.88/10 (10% weighting) and access to bank capital markets 1.50/10 (10% weighting).

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Help in this direction could come from the Clean Development Mechanism (CDM) project. Georgia ratified the United Nations framework Convention on Climate Change (UNFCCC) in 1994 and joined the Kyoto Protocol on June 16, 1999. Georgia, as a Non-annex I party, can participate in CDM project since it satisfies all three requirements:  Georgia voluntary participates in CDM;  Georgia has nominated CDM “Designated National Authority” (DNA);  Georgia is a party to the Kyoto Protocol. CDM is a scheme for greenhouse gas (GHG) reduction through cooperation between developed countries (the parties included in Annex I) and developing countries (the non-Annex I Parties), which do not have any obligations to reduce GHG emissions. CDM will help the non-Annex I Parties to achieve sustainable development and help Annex I Parties to obtain their quantified emission constraints and reduction commitments under the Kyoto Protocol [3].

The most common greenhouse gas produced by anthropogenic activities is a carbon dioxide (CO2). Fuel consumption for power generation constitutes the main source of CO2 emissions. Renewable energy (hydro, solar, wind, etc.) utilization for power generation is one of the most efficient ways to reduce CO2 emissions.

To calculate Certified Emission Reductions (CERs) achieved by the CDM project, it is necessary to determine the baseline emissions8. Building new HPPs in Georgia could be awarded with CERs, since “clean electricity” generated by new HPPs could substitute electricity generated from thermal power plants which are source of CO2 emissions and, additionally, substitute the country‟s import (Georgia imports electricity from the neighboring countries where electricity is mostly generated from burning fossil fuel). To conclude, Georgia has the necessary legal base and potential to participate in CDM projects which could become an accelerating force for the necessary investments in the electricity market.

Can CDM projects influence an investor‟s decision making process? One of the most desired methods to increase profits of new HPPs is additional revenues raised from the implementation of Clean Development Mechanism Project. This way of mobilizing financial resources is most acceptable from the country‟s perspective, because it fosters to utilize hydro resources that would substitute electricity produced by thermal power plants. Reduction of TPP production has double benefit for Georgia: it reduces harmful greenhouse gas emissions and dependency on imported natural gas. Thus, implementing CDM projects through building new HPPs has financial benefits for an investor and significant positive externalities for the country.

However, in the present paper estimation of ecological benefits is beyond the scope of my research. Instead, focus is on the financial benefits from the implementation of CDM projects for potential investors, since the aim is to determine how additional financial resources from CDM projects influence an investor‟s decision making process, whether invest money or not.

8 The baseline for a CDM project activity is the scenario that reasonably represents the anthropogenic emissions by sources of greenhouse gases that would occur in the absence of the proposed project activity. Consequently generated by the CDM project emission reduction is difference between baseline and project emissions. 187

For the analysis I have used Internal Rate of Return (IRR) approach. Calculating IRRs for three proposed HPPs for four different scenarios (without CDM project, with low, medium and high CO2 price scenarios9) and comparing them to the maximum rate of return on the risk free assets in Georgia makes it possible to determine how price of CO2 can influence the investor‟s decision making process. It is assumed that Treasury bond issued by the Ministry of Finance of Georgia is a risk free asset10.

Chart 1 below represents Internal Rate of Returns (IRRs) for the 3 different size potential HPP projects11 in Georgia.

Chart # 1

25.00% Rate of return on risk

20.00% free assets: 15.9 %

15.00%

10.00%

5.00%

0.00% Low Price of Medium Price High Price of Without CDM CO2 of CO2 CO2

Poka HPP,IRR 16.73% 18.24% 19.44% 21.12%

Stor1 HPP, IRR 14.09% 15.36% 16.45% 17.72% Alpana HPP,IRR 13.73% 15.00% 16.13% 17.32%

The important measure of profitability that could affect inventors‟ behavior is the marginal increase of IRR caused by implementation of CDM projects. As one could observe, this change is not large especially when there is low price of CO2, as depicted on the graph. However, when the prices of CO2 are high,

9 The prices of the CO2 is extracted from the Synapse research paper that forecasts CO2 prices for 30 year time horizon [5]. 10 A Treasury bond is a medium-term coupon government security issued by the Ministry of Finance of Georgia. Treasury bonds are issued with maturities from 1 to 10 years, with coupon payments made every six months. The maximum rate of return on the treasury bonds - 15,9% in Georgia was observed on 8 September, 2010 [8]. 11 IRRs for those HPP projects might be substantially different compared to standard power plant modeling results, because those numbers are got under the several assumptions which I have made since those assumptions reflected some characteristics of Georgian power market. For example project life time is divided in two parts “planning horizon” that is investor‟s subject of interest and far future –“salvage value”. “Planning horizon” in my calculations is assumed to be 20 years and consequently revenues from those years are counted.

188 then all three projects have higher rate of return than risk free assets. Positive difference between risk free assets and those IRRs can be perceived as a risk premium for some investors.

Based on this analysis, it is clear that implementing CDM project has small value added if the price of the carbon credits is not high. Additionally, the Kyoto protocol ends in 2012 and it is difficult to predict what will be the future of the environmental projects and moreover, price of carbon credits. To conclude, financial benefits from CDM projects could not be counted as reliable (because of uncertain carbon prices and ending of the Kyoto protocol) and, therefore, it would not have significant influence on an investor‟s decision making process invest money or not. Other sources, including improving enabling environment, should be explored in order to encourage investments in hydro power projects.

References

1. Boardman A., Greenberg D., Vining A., Weimer D. 2006. Cost-benefit analyses. Third edition. 2. Bushnell J., Ishii J. 2007. An Equilibrium Model of Investment in Restructured Electricity Markets. Berkely, California. CSEM WP 164. 3. Jung M. 2005. Host Country Attractiveness for CDM Non-Sink Projects. Hamburg University of International Economics, 312. 4. Limbu T., Saha T., McDonald J. 2010. Generation Investment and Risks Modeling in a deregulated Electricity Market. International Journal of Emerging Electric Power Systems, Vol.11: Iss. 3, Article 5. 5. Schlissel D., Johnston L., Biewald B., White D., Hausman E., James C., and Fisher J. 2008. CO2 Price Forecasts. Synapse Energy Economics. 6. The research of Econ Poyry. 2007. The Electricity System in Georgia – A Risk Assessment. 7. Official web-site of the Ministry of Energy and Natural Resources of Georgia, www.minenergy.gov.ge 8. Official web-site of the National Bank of Georgia, www.nbg.gov.ge 9. Euromoney web-magazine, www.euromany.com

Givi Gigauri Grigol Robakidze University

INTERNAL AND EXTERNAL ECONOMIC BALANCE

The purpose of economics is to increase economic welfare. This lack of clarity makes it difficult to achieve a common vision. That is why economists have identified some intermediate goals. For a long period it is related to of economic growth and distribution of income. In terms of short-term priority is given to achieving a balance in the intraeconomic development what generally implies employment and

189 price stability. These two elements are interrelated, but each has an independent character and one dimension of two extreme forms: high unemployment leads to stopping of the rise of inflation in prices, while full employment on the contrary, increases it. Thus, all of this concerns achieving the intraeconomic balance. In addition, there are other goals as well which refer to the attainment of equilibrium. Unlike the intraeconomic balance, foreign economic balance indirectly affects economic prosperity.

It should be noted, however, that Tools are necessary for the implementation of the policy, without which the goal will not be achieved. Toolkit for evaluating the effectiveness of economic policy should be called forthcoming economic situation in certain circumstances where they will have a different weight and capacity. As an example, we can consider the open economy model, where the local fixed prices and fixed, but the rate of exchange will be developed in accordance with the international foreign exchange markets.

In addition, government spending increases, and reducing policy may perform equally. Result in an increase in the level of government expenditure, revenue and employment growth, which is accompanied by a deterioration of the condition - the balance of payments deficit. Devaluation will lead to improvement in the balance of payments and the increase in income and employment levels too. These results are depicted graphically by Alan Winters [1, 1985]. (Chart - 1) as follows:

Chart - 1. Policies for internal and external balance

Exchange B Y Rat H deficit unemployment

F G

surplus unemployment E deficit over-full employment

C A B surplus Y over-full employment

G O Government expenditure

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The line YY plots those combinations of government expenditure (G) and the exchange rate (r) thet produce internal equilibrium. Starting from point A on YY, suppose G is increased; this increases employment and to bring it back to equilibrium along YY, a rise in the exchange rate is necessary; hence YY slopes upward. Conversely, BB the locus of points ensuring balance of payments equilibrium, slopes downwards. Starting from C, an increase in G produces a deficit and this must be counteracted by depreciation to restore balance.

It is plain from Chart 1 that, if YY gives all combinations of G and r for internal equilibrium and BB gives those for external equilibrium, the only policy combination that ensures both is (Go, ro), i.e. point E.

Unfortunately, life is not so simple, because the government does not know the precise locations of BB and YY. even so, it can make some progress as follows. BB and YY divide the graph into what Swan, the originator of this analysis, called four zones of “economic unhappiness” [2].

Any point above and to the right of BB involves a balance of payments deficit, while any point below or left of it involves a surplus. Similarly, any point above or left of YY involves unemployment, while any point below or right involves over-full employment. Thus, the schedule revealed four potential areas, which the government already knows how to use the Tools for Economic Policy.

R. A. Mundell [3, 70-79] provides a short-term solution, which brings Tools for monetary and fiscal policies, as well as Emphasis the importance of capital movements. Revenue growth too, the policy of increasing the demand for money, which in turn will provide a good service to fiscal policy. As a rule of fiscal expansion leads to an increase in the interest rate, the monetary expansion, including capital inflows, the balance of the current account deficit. In general, in terms of income, changes in fiscal policy have little impact on the balance of payments, rather than monetary policy.

Domestic economic policy and the exchange rate. Open economy is an important topic for discussion domestic economic policy tools for effective governance. Especially interesting is the impact of international capital flows and flexible exchange rates on monetary and fiscal policy.

Closed economy macroeconomic analysis process used in the so-called IS-LM Model, which was first presented in 1937 and the Nobel Prize Laureate economist John Hicks [4] and later found in the R. Stern‟s [5] and V. Argy‟s [6] works. This model is also well described by J. Sax and F. Lapen‟s book "Macroeconomics - a global vision" [7, 396-456].

This model is given in the diagram (chart -2), the curve connects the combination of interest rate and income, in order to protect the goods and services on demand-supply ratio: Y = C + I + G + X – M where Y is income, C consumption, I investment, G government expenditure, X export and M imports.

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Chart 2. Equilibrium in the open IS-LM model

Interest B B’ rate I’ I’’ I M’ H G M

L’

S’’

F B’

L E S’

B S

Income

The IS curve slopes downwards because lower interest rates stimulate higher investment and require higher income/output to equate supply and demand. If the exchange rate falls, exports rise and/or imports fall; hence, with constant interest rates, demand rise and the IS curve moves outward. Similarly, expansionary fiscal policy shifts IS outwards.

The LM curve plots combinations of I and Y that ensure equilibrium in the money market. The supply of money is assumed exogenous in nominal terms, but the demand depends on both interest rate and income. Income affects demand positively through the transactions demand: The more income, the more money you can spend. Interest rates have a negative effect by affecting the costs of holding cash: the higher the interest rate, the more the interest forgone by holding money instead of bonds. Hence a higher income must be offset by a higher rate of interest if demand is to equal a given supply and so LM slopes up. Money demand also depends on price. Income and interest rates determine the real demand for cash and this must be multiplied by the price level to find the nominal demand to be equated with the nominal supply. When prices raise, LM shifts up and to the left because, with given nominal supply, real demand must fall if equality is to continue.

The BB plots level of interest rates and income consistent with external balance, recognizing both capital and current accounts. Higher income worsens the current account and so must be offset along BB by a rise in interest rates. The slope of BB depends on the degree of capital mobility, which in turn depends on the degree of substitutability between foreign and domestic assets in desired portfolios and on the extent of transaction costs. If the assets remain the same or a series of transactions prices extremely high and the BB curve is vertical, which means that it depends only on the current account of balance. Thus, given income, is quite independent of the rate of interest. On the other hand, when transaction costs are minimal, BB is horizontal and any deviations between the world and domestic interest rates causes capital to flow or outflow.

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The intersection of LM and IS defines internal equilibrium, but we can have full equilibrium only if all three curve intersect at one point. If not, we assume that domestic equilibrium is maintained and that there is balance of payment disequilibrium. Above and left of BB there is a surplus and below and right a deficit. The simplicity of the analysis we assume an expression, because of economic processes requires a comprehensive approach. However, this approach is quite popular in among macro-economists.

The Mundell-Fleming analysis. Fleming [8, 369-379], and then Mundell [9, 475-485] considered the effectiveness of monetary and fiscal policy as controllers of income. They think that monetary policy will be effective only under flexible exchange rates and that fiscal policy was effective only under fixed rates. This is a neo-Keynesian one and the nature of their results is simply explored in the LM-IS framework.

Chart 3. Monetary and fiscal policy with capital mobility

Interest I’ rate I M

F M’

E H B

iw

G L L’ S

Income

Perfect capital mobility makes the BB horizontal at the ruling world rate of interest. Any other interest rate would lead to an infinite inflow or outflow of capital, preventing equilibrium. Starting from complete equilibrium at E (chart-3.), imagine fiscal expansion, shifting IS to I‟S‟. The potential domestic equilibrium would be at F, with a higher interest rate and income. High interest rates will cause a huge amount of capital inflows (Balance of payments surplus), which in turn will expand the money supply and push out the LM curve. Only when LM had reached the L'M ' would equilibrium be re-established in all three markets. At the new equilibrium, incomes would have risen and the balance of payments would show a current account deficit, which is financed by a capital account surplus. Higher income generates higher imports, which shall be reimbursed at the cost of borrowed capital.

In the case of monetary expansion LM shifts out to L'M', implying domestic equilibrium G. This entails a large foreign deficit (capital flowing out because of the fall in interest rates) and this serves to drag L‟M‟ back. Only when it has reached LM again does the process stop. Thus, under a fixed exchange rate the government cannot control the money supply, monetary policy is therefore vain and useless.

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Turning to flexible exchange rates and start again from E and let fiscal policy shift IS to I‟S‟. Again we have a potential domestic equilibrium at F, but now the capital inflow appreciates the currency and brings I‟S‟ back towards IS as exports fall and imports rise. The final equilibrium is reached again, the point E, where the balance of payments current account deficit is balanced capital account surplus. On the other hand, monetary policy is very effective and necessary for the same reason. Expanding the money supply to shift LM to L'M' produces payments deficit and depression. This shifts IS out to I‟S‟ and produces equilibrium at H, where income has risen and a current surplus is balanced by capital deficit. hence, shifting from fixed to flexible exchange rates completely reverse the comparative advantages of monetary and fiscal policy. Under fixed rates government is pursuing a monetary policy, but under flexible rates we still find some use of fiscal policy.

Rational Expectations. Mundell - Fleming analysis assumes that people will never expect any changes in the currency exchange rate from its present position. Under fixed-rate system this may be reasonable, but not under flexible rates. Anticipated changes in the exchange rate alter the relationship between the domestic and the foreign rates of interest. If appreciation is expected, the domestic interest rate will have to fall below the world rate if capital flows are to be avoided.

Expectations can be formulated as a model, which includes wealth and price effects of exchange rate formation. Under flexible exchange rates, but without expectation monetary policy shifts the economy from E to H. Chart 4. Monetary policy with flexible rates and rational expectation I’

Interest I M rate M’

E H B iw

L I’’ M’’ J B’ iw-r

L’ S L’’ S’’ S’

Income

At the H the exchange rate has depreciated and there is a current account surplus. Over time, these conditions can raise the level of the exchange rate, which will restore the old balance. Assume that it is known in advance and expected increases future prices of national currency. People will start to buy domestic currency to avoid losses and earnings, so H cannot be considered even a temporary equilibrium. Indeed, until the economy reaches the H point, people would have started buying in anticipation, with the result that, under rational expectations, the ex mood changes, change rate will not fall as far as without expectations. 194

The anticipation appreciation (r) also has another effect. By raising return on domestic bonds it reduces the domestic rate of interest consistent with capital equilibrium from iw to (iw-r). This fall below the external balance curve B to B‟ curve. For equilibrium under rational expectations, I‟‟S‟‟ and L‟‟M‟‟ must intersect at this lower rate of interest at J. Later, in the absence of information, we cannot change the place of J exactly. It depends on the expected rapid price rise, thus it depends on whether the expected diminish the causes of the decline. As before, the wealth effect on the economy gradually returns back from the J point. As the price increases will have less of an expectation that B 'is gradually returned to the B-century. This also means that the interest rate should be increased and become equal to the world level.

Assets and the exchange rate. If in the past we have considered the impact of the goods and money on the formation of foreign exchange rate. We must also take into account the impact of the assets on the formation of exchange rate. Assets as the wealth of the local currency, as well as Treasury bonds , which is released by the local government or received from abroad. Savings in the three types of wealth (goods, money, treasury bonds) depends on two factors: The profit rate of return and risk factors. Usually it is possible to reduce the risk through a diversified portfolio. Concentration of one type of asset can get more profit, but such a choice may be wrong, in anticipation of the big losses. Therefore, the reduction of the risk factors reducing the rate of return on profit. The placement of the various types of assets in wealth, overcome by creating a diversified portfolio. Convert assets into cash without loss or their liquidity, determines their attractiveness. The risk and rate of return on assets placed in the form of wealth. Some assets may be in luxury goods, whose share of the portfolio increases with the increase in wealth. On the other hand, if the wealth is growing, we want to transform there in assets. Increasing attractiveness of assets at the present time, it generates demand in the future. Third, wealth is experiencing revaluation as well: When depression occurs, it immediately leads to an increase in the value of foreign assets in local markets. Fourth, if the wealth is flowing from one country to another, and these countries have different requirements for assets, then the demand is change for different assets. We take the total wealth, the profit rate of return and risk rate, residents are investing money in various types of assets and create an investment portfolio. Thus, we can estimate the demand for assets. Exchange rate is involved in some form of shares trading. First of all, assets portfolio optimization may require changes in the current account, and this is usually achieved by changes in an exchange rate. For example, we know that foreign investment and the current account surplus - is one way to accumulate wealth; if the government does not rule out the actual release additional capital and loan commitments, this will be the only way. If income growth is increase the wealth or stimulating demand for foreign assets, it may be noted devaluation of the exchange rate and has helped us achieve current account surplus. On the other hand, the high value of foreign assets means more profits abroad. After accumulation of funds, the necessity of achieving a positive balance of foreign trade to be raised in order to balance the current account, which means the exchange rate increases. Expected changes in the exchange rate will also increase the return, so it will have an impact on asset markets. On their side, the balance of the stock market will have an impact on the current exchange rate.

References

1. Winters L. A. 1985. International Economics. London.

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2. Swan T.W. 1955. Longer-run problems of the balance of payments. Paper to the Congress of the Australian and New Zeeland Association for the Advancement of Science. 3. Mundell R.A. 1962. The appropriate use of monetary and fiscal policy for internal and external balance. IMF Staff Papers. Vol. 9. 4. Hicks J. 1937. Mr. Keynes and Classics: A Suggested Interpretation. Econometrica. April. 5. Stern R. M. 1973. The balance of Payments: Theory and Economic Policy. Macmillan, London. 6. Argy V., Porter M.G. 1972. The forward exchange market and the effects of domestic and external disturbances under alternative exchange rate regimes. IMF Staff Papers. Vol. 19. 7. Сакс Дж. Д., Лапен Ф. Б. 1999. Макроэкономика - глобальный подход. АНХ при Провителъстве Российской Федерации. М., изд. “Дело”. 8. Fleming, J. M. 1962. Domestic financial policies under fixed and under floating exchange rates. IMF staff Papers. Vol. 9. 9. Mundell R. A. 1963. Capital mobility and stabilization policy for under fixed and flexcible exchange rates. Canadian Journal of Economics and Political Science. Vol. 29.

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Finance

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Tamar Gamsakhurdia Grigol Robakidze University

DIVERSIFICATION OF BANK EVALUATION AND ANALYSIS OF MANAGEMENT PRACTICES IN GEORGIAN BANKS

The bank's profit is increasing along with growth of consumer demand. Despite the fact that banks are trying to maximize its utilization, the banking market is only partially used.

The banking sector faced several challenges in 2010-2011. The main challenge for 2009 was to overcome unprofitable trend and get irreversible profits. 2009 proved to be disastrous for the banking sector that was linked with recessive inheritance problems from 2008. Although the country has received substantial international aid, overdue loans growing trend in 2008 had significant influence on the banking sector. Besides, the expenses of amortization and restructuring of problematic loans eventually led the system to losses. The August war damaged the banking sector and the analysis shows that it accelerated events as the crisis in the banking sector was already close to start.

Most of the apartments owned by construction companies were sold on credit, most of the developers borrowed money from the banks. Many analysts said that strong inter-relationship between banks, insurance companies and construction companies would end with failure and this huge pyramid would create the problem.

Recently, banks were getting more and more revenue, profitability figures were diminishing. If in 2002- 2007 average ROA (return on assets) was 3.1, in 7 months period in 2007 it was dropped to 1.7. As for ROE (capital gain), this rate was decreased from 13.5 to 8.3 for the same period. Since 2007, competition of the banking market has increased. For July 2007, the ratio of loan loss reserve in the banking system and the volume of lending had been lowered to 3.3%.

It is clear that before the famous events of August of 2008, the banking system was facing difficulties and these difficulties and problems were significant and obvious. The conflict of 2008 revealed all of the domestic economic (including banking) contradictions and disproportion which already existed before that period. In September - November, when the world economic crisis escalated, it became clear that those disproportions of the economy became deeper and the banking sector was significantly affected.

By 2010 the second serious challenge was the inflation that was linked with economic disasters proceeding in the entire world. Net profit of the banking system has increased significantly in 2010-2011, while in 2009 the system had a loss of 65 million GEL. After relatively low credit activity in 2009, in 2010-2011, banks became active in the credit policy of the investigation. After recession, the credit portfolio raised by 30% - very high growth rate, in addition in the case of some banks, this figure was even higher.

The priority of conjuncture of the economic development of the sector was trade development; thus, in the credit portfolio trade finances raised to 65%.

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Development of regional and tourism infrastructure, together with employment growth, will contribute to transferring of the banking market and the service from the center to regions. Profit is growing with the growth of consumer demand. Growth of employment and demand for credit resources from the business will influence the profit figure for the banking sector.

There are three types of Banks in Georgia: 1. Banks that had Diversified assets and were not linked with Construction & Mining business assets ("ProCredit Bank Georgia," Cartu Bank”); 2. Large banks ("the Bank of georgia", "T - B - TBC Bank," “Bank of the Republic / Societe Generale Group)” that developed the plan of salvation and used foreign funds to remain as the leading banks; 3. Banks linked with constructions which had assets of less diversification (the Peoples bank).

In 2008, new banks joined the banking sector. Kazakhstan "Halyk Bank of Georgia" which invested 50 million dollars in 2008. On June 23, 2008 "HSBC Bank” joined the banking sector with the capital of approximately 16.7 million dollars. "First British Bank" created on the basis of the Bank "white", which bought its assets for 8.5 million GELL. In March of 2008, the owner of “Standard Bank"(Salford Capital) sold bank to "Bank of Kor” for 42 million dollars and the new owner is "Dhabi group". Experts consider that due to the current situation in the banking sector, it is not ruled out that new small-sized banks with foreign capital be skipped out from the market. Categorization of banks indicates that for the solution of problems in the banking business, encouraging of depository services and promotion of deposit placements should continue. In addition to the deposits placed by local citizen, banking industry needs to attract foreign funds to solve the liquidity problem. To overcome the problems, it is important to increase the number of banks founded by foreign capital. The biggest player in Georgian banking sector is the European Bank for Reconstruction and Development. EBRD is trying to buy shares of all large and relatively large Banks. Some experts appreciate EBRD to enter Georgian banking sector deeply, because, they believe that banks where EBRD has bought shares, management is improving; at the same time, EBRD will never buy a controlling stake. EBRD involvement in Georgian banking sector is important for customers as well, because credit resource prices will become cheaper. To support the banking sector, EBRD has allocated 351 million Euros that is distributed over three years.

Diversity in Georgian banks is very low. Banks diversify their assets mainly in construction, leasing and trading companies.

In Georgia, there are a number of problems that hinder the implementation of innovations. In our opinion, these problems are as follows: - poor packaging of a new product and lack of public awareness; - unavailability of effective communication technologies caused by insufficient knowledge; - improper consideration of the mental qualities, typical for Georgians.

Georgian banks should take in mind to: - Consider compatibility on new product with typical mental qualities before launching the product; - Reduce information in order to make it understandable to the user; - Try to cover all segments of the population, develop a product that is acceptable and will be used for the entire social layer; - Prepare basics in a high level before the introduction of new products; - Receive information actively about new technologies and inventions from leading foreign banks and adapt them for Georgian environment.

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Geographical diversification is especially important; geographically diversified banks have more profit than non diversified banks.

According to banking experts, the main institution of the country's financial area - bank must be free of ownership of development or the insurance companies, as well as any trade organizations in order to fit the international standards. The current economic crisis makes especially obvious the problems caused by different interests which, according to experts, aggravates the situation and also poses many new problems.

In terms of production diversification, discussions in the article include two leading banks and bank management.

1. “The Bank of Georgia” and its subsidiary companies are divided into three business-directions: 1) asset management, 2) Wealth Management, 3) Galt & Taggart Securities. The last implies the ownership of subsidiary companies mentioned above.

Liberty Consumer (LC) managed by a subsidiary of the Bank «galt end taggart management" is a joint stock company organized according to the laws of Georgia. It invests in Georgian companies that are interested in the retail sale of daily consumer goods, business service and real estate.

The company owns a significant share of the leading companies in the retail and everyday use, such as, retail companies, "Populi", winery "Teliani Valley" and the food processing company Nikora ".

At the end of 2007, LC acquired controlling shares of the press release company "Planet of Forte" (51 percent). In addition, the company owns interests and property shares of a “SB in real estate” which was founded in 2006 and invests in the real estate, development and property management.

The Bank of Georgia is the owner of 100% shares of Aldagi BCI. Insurance market share of Aldagi BCI is 20% of the market.

2. TBC Bank. In 1999 TBC Bank took part in establishment of Microfinance Bank of Georgia Bank that is now called as ProCredit Bank.

In 2000 the International Finance Corporation and the German Investment and Development Company bank became the owner of 10-10% share of TBC Bank; the same year TBC Bank received international rating.

In 2001, it participated in the established of Pension and Insurance Holding (GPI Holding). The company introduced a comprehensive range of innovative insurance products and specially treated to the local market. 3 years later the initiation of GPI Holding was in the list of four largest insurance companies. The company has been developing dynamically and has very ambitious plans for the future.

In 2003, TBC Leasing started operations that were established by the Bank. A year later, "TBC Leasing" managed to occupy an important position in the leasing market: In 2004, the volume of total leasing portfolio was increased 15 times. Nowadays, the "TBC Leasing" portfolio is worth of 7 million USD which is 70% of the total market. "TBC Leasing" has funded 132 projects of various types of equipment 200 purchase, total cost of 9 million dollars. The European Bank for Reconstruction and Development (EBRD) decided to buy 10% of shares of "TBC Leasing". This is the first investment of the EBRD in Georgian leasing sector. Financial leasing is the main type of the service of "TBC Leasing".

TBC Bank is also the owner of "Elite - Electronics" controlling shares -55%.

There are several methods to measure the bank diversification level according to proceeds from investments. Among them, one of the perfect methods is to measure proceeds by Herfinal-Hirschman index which, better than other indexes, shows the income received from different spheres of the bank.

The index will be recorded as follows:

where INT indicates the gross income from interest, COM - the total commission income, TREAD - income from other activities, OTI - all the rest net income. TOR is the total income, so it is equal to the total sum of the counters.

DIV coefficient value can be 0 - up to 0.75, depending on the bank specialization level. When the bank is specialized in fewer directions, the ratio is the closer to zero. If the bank returns are of the mixed type and consists of different areas of returns, the higher is the ratio.

Since TBC Bank has more experience in diversification of the banking system of Georgia, let us measure the mentioned index on its example.

2011 Financial Highlights: Net Income Bank - 000 43,050 - 43,050000 * 80% = 34440000; Interest income - 80% = 239,926000 * 191940800; commission income 25,069000 * 80% = 20055200; Other non-interest income 44565000; GPI Holding is 100% net profit 11.290000 - Elite Electronics 55%, 90% of TBC Leasing.

Index is approximate value what means it does not accurately reflect the reality since the profit indicators of TBC Leasing and Elite Electronics Profit are not included in the above formula; however, some conclusions are possible. If the bank is specialized in only one direction, the mentioned ratio is closer to zero. If the bank returns are of mixed type and it consists of different areas of returns the ratio is higher. In our case, we can conclude that the diversification of the bank is at the average level. The bank has opportunities to increase diversification that will have positive impact on financial indicators.

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Actually, there is no business-area in Georgia where banks and its subsidiaries do not have their own share of interest. Though this is permitted by the legislation, experts state that this legislation is written not to improve healthy banking system, but was tailored to specific interests.

Experts talk about banks‟ direct interest in various businesses and negatively estimate the fact that banks are shareholders of various companies, including trade organizations. When a bank is the owner of the brokerage, trading, insurance companies and property developers, we are dealing directly with the conflict of interest.

It is unacceptable Bank to set up a construction company, asks a former employee to lead this company and lend money from the bank. In fact, it is lifting a loan from one pocket to another. There is one problem: When you lend money to the company and organization you own, the main principle is violated: to invest money in the best proposal. Owing to the fact that banks have their interest in different organizations, the country's banking crisis has started.

If the bank invests in its own company, actually, a depositor who has money in the same bank is under the risk. The Development Business is in the worst situation, and it is very risky to give loans to such businesses from the side of the bank. Moreover, just after developing business companies have problems, and the owners of those companies are banks, they will have problems as well.

All the aforesaid do not mean that diversification has the only negative consequences for the bank. Diversification has always a positive result if the investment areas are properly selected. In Georgia, banks are diversifying assets mainly in three areas: insurance, construction and trade. In my opinion, it is necessary to diversify in areas that are less related with banking activities.

The diversification of the banking system of Georgia has a very short history. However, it should be noted that the diversification process is very fast growing. In 2010, according to the diversification of the sectors, only three banks had 19 commercial banks, according to the data of 2011, the situation dramatically changed. Bank of the Republic applied for the diversification strategy which now is the shareholder of 30% of shares for Elit Electronics, Liberty Bank has two sister companies, such as Smarteksi that is offering e-mail - Courier Services in Georgia and the Bass Stop which is the exclusive operator for about 300 busses.

Owing to the lack of data it is bit difficult to make the final conclusion. However, based on these three banks financial performance, we can say that the diversification has not had have any negative results in this field so far. On the example of the Bank of Georgia, according to the data of 2010, profits from the subsidiary company were rather high. The bank's gross profit was -16.755 million GELL. Aldagi BCI's income was - 4.5 million GELL.

Today banks are offering multi-deposit accounts to their customers; the tendency of the diversification growth of banking products is visible which allows clients to insure currency and interest rate risks that are not available for the mono-deposit billing accounts. Diversification of banking products is high enough, especially in the major banks: Bank of Georgia and TBC Bank that are offering a variety of banking services to customers. Nowadays, the priority of conjuncture of economic development of the sector is trade development, so in the credit portfolio trade finances raised to 65%. If we take in mind the

202 country's development prospects for the next years, this figure will reduce compliance and increase funding for tourism infrastructure and agriculture.

References

1. Stiroh K. J. Diversification in Banking: Is Noninterest Income the Answer? http://www.questia.com/googleScholar.qst?docId=5007705395 2. Acharya V.V., Richardson M. 2009. Restoring Financial Stability: How to Repair a Failed System. 3. Kovzanadze I., Kontridze G. 2009. Some of the problems of the banking system before August of 2008. The Economy of Georgia (1). 4. Gvasalia Z. Georgian banks begin the gaining. Chairman of the Association of Banks of Georgia. Http://www.abg.org.gr 5. Ganiashvili M. 2009. How to fight the financial crisis in the Georgian Banking System. The Economy of Georgia, (3). 6. Khitarishvili M. 2010. Banking innovations in XXI century. www.businesscafe.wordpress.com

Gaioz Sanadze Grigol Robakidze University Mariam Kurashvili Caucasus Business School

BRIEF REVIEW OF MODERN DEPOSITORY SERVICES

The suggested paper aims to briefly discuss and describe activities and functions of modern securities depositories considering an example of the United States, shortly review its Georgian analogue and at the end, determine how closely a country‟s securities depository and a stock exchange market relate to and influence each other.

One of the first securities depository appeared in the late 60s and early 70s in the United States [1], [2] as a solution to the so-called “paperwork crisis”. At that time, brokers still exchanged paper certificates and checks for each trade, sending hundreds of messengers scurrying throughout Wall Street. Only on New York Stock Exchange used to circulate around 10-12 million paper securities and a single broker used to received and send thousands of them on a daily basis. It seriously hampered the trading process and in order to help reduce the backlog, brokers were forced to stop trading on Wednesdays and additionally reduce daily trading time. This solution on the other hand led to severe financial losses [1].

Two ways were developed to tackle the infamous crisis. The first solution was to immobilize physical stock certificates by maintaining them in a central location or depository, and to record changes of ownership using "book-entry" accounting methods where no certificates actually change hands [1].

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The second approach to solving the paperwork crisis involved a concept called multilateral netting. If one broker does 100 trades in IBM, both buying and selling at different prices with a variety of different brokers, there are few opportunities for netting. By interposing a central organization as the counterparty to all trades, that broker's all trades in IBM can settle to one net position, and all money for trades in all securities can settle to a single dollar figure owed to or from the central counterparty [1]. The first modern type depository was created to support the process of immobilization. It was led by New York Stock Exchange and named Central Certificate Service (CCS) [3, 81], [4]. It was succeeded by the Depository Trust Corporation (DTC) and its oldest subsidiary, National Securities Clearing Corporation. In 1999 a holding company the Depository Trust & Clearing Corporation (DTCC) was established to combine the two [1], [2].

In fact, securities depositories can be divided into three categories: those offering settlement services, the so-called custodians and those of a general type – central securities depositories. The first mainly offer clearing and settlement services during securities trading. Such depositories often assume a role of a guarantor during a trade; give loans to trade participants, etc. They may even hold a bank license. Central securities depositories offer such services as well.

Under a target group of custodians fall various shareholders, investors and companies whose stock is traded publicly. The services offered include making deals on behalf of a customer, underwriting securities, securing clients‟ interests, providing them with necessary information, consulting on various financial issues, etc. Custodians usually offer two stock underwriting alternatives, selling it either under the best efforts or a private placement agreement [5], [6, 591-599].

In the best efforts agreement a securities depository sells the securities on a commission basis with no guarantee regarding the price the issuing firm will receive. In a private placement, securities are sold to a limited number of investors rather than to the public whole. The buyers of private placements must be large enough to purchase huge amounts of securities at one time [6, 591-599].

Lower level depositories like registrars usually keep a registry of securities traded and serve mainly smaller companies and their stockholders.

Countries having rather meager securities exchange market do not need more than one depository and as a rule, a single central depository can easily satisfy needs of customers. That is why usually there is a word “central” attached in front to the depository name to emphasize its status. In fact, Georgia belongs to countries where securities are traded in small quantities.

Establishing and implementing the unified securities accounting to the system that will be adhered by all types of depository and similar institutions (like banks, brokerage companies, non-resident depositories, etc.) is a core function of a country‟s central securities depository.

On the other hand, a depository might also intervene in affairs of pension funds. Such funds usually hire another company to manage and invest their customers‟ deposits to accumulate a serious amount of money. Without gains from investments a fund will be able to give away only as much as there was initially deposited. Usually, a securities depository controls the investment process to make sure that funds are being used in a proper manner and invested according to the country legislation. In another

204 words, a depository overlooks and keeps an eye on a structure of pension funds‟ portfolios, their content and profitability [19].

According to the legislation of Georgia, safekeeping, consulting and accounting of securities is a privilege of their nominal owners that usually are represented by brokerage companies, commercial or investment banks as well as a central depository. These institutions open securities and money saving accounts for their clients. Although securities are registered under the name of a nominal owner, a depository has a responsibility to deliver dividends paid out on those securities to the investors who really paid for and invested in these capital issues. Nominal owners attend shareholders‟ meetings and secure interest of their clients [15], [16].

A fortune of a securities depository is closely related to a stock exchange market. The more securities are traded the larger is a demand on services offered by a depository. Thus, as its incomes increase, the organization‟s motivation and possibility to develop and grow rises.

In order to better imagine what a modern depository looks like, let us consider an example of the abovementioned Depository Trust and Clearing Corporation (DTCC), the US depository. It has more than 40 years of experience and is nearly 30 years older than its Georgian counterpart - Georgian Central Securities Depository. DTCC is a holding company having several subsidiaries and joint ventures and its head office is located in New York [7].

DTCC together with its subsidiaries clears and settles virtually all broker-to-broker equity, listed corporate and municipal bonds, offers support and services regarding mortgage-backed securities, money market securities, and over-the-counter derivatives [8, 9]. Today, DTCC serves not only the securities issued in the US, but also the ones issued abroad [7]. By March 31, 2012 unaudited amount of its total assets reached almost 3,4 trillion US dollars [10].

One of the most interesting and useful services DTCC offers is Inventory Management System (IMS) that allows participants to centrally manage their own settlements as a way of furthering straight-through processing. IMS offers features that allow participants to have greater control over the order and timing of the submission and recycling of their deliveries into the processing system. This eliminates need for each participant to build and fund its own system. IMS offers ability to re-introduce dropped transaction, greater participant control over the order and timing deliveries, etc. [11].

Moreover, DTCC‟s Mortgage-Backed Securities Division is the sole provider of automated post-trade comparison, netting, risk management and pool notification services to mortgage-backed securities market. Its mission is to reduce the costs and risks associated with trading in the mortgage-backed securities (MBS) market. This service provides real-time automated trade comparison and confirmation, net settlement and pool notification services, assessing and managing financial risk, evaluating and improving MBS market systems and technologies, and enhancing communication among MBS market participants [12].

The division provides its specialized service to various major companies, such as: Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC) and Fannie Mae (FNMA) MBS programs [12].

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In addition, DTCC‟s Insurance and Retirement Services offer a suite of streamlined processing and compliance-driven solutions for carriers and their distribution partners through a secure, centralized infrastructure. Financial Activity Reporting (FAR) enables insurance carriers to provide distributors with daily annuity and life insurance financial transaction information, giving them a comprehensive and accurate picture of client accounts and helping them supervise and manage those accounts. With FAR, customers can improve compliance oversight by using data to monitor investment activity related to investment suitability, market timing, late-day trading, money laundering, etc. DTCC‟s Securely Managed and Reliable Technology (SMART) network secures confidential data and provides centralized, end-to-end managed communications for all post-trade clearance and settlement processing [13].

The first securities depository in Georgia appeared in 1999. Today it is known as the Georgian Central Securities Depository (GCSD) [14]. Despite the presence of a word “central” in its name, Georgian legislation does not prohibit having more than one securities depository for establishing of which a special license is required [15].

Joint Stock Company GSCD mostly serves brokerage companies and investment banks. The founders of the depository consist of the Georgian Stock Exchange and commercial banks: Bank of Georgia, TBC Bank, VTB Bank Georgia, and Kartu Bank. Nowadays, there are eight brokerage companies in total using the services of GSCD.

The central depository accounts for securities issued in Georgia and stores them under its name as a nominal owner. During nominal ownership capital issues of an investor are kept and registered under a name of a broker, bank or a depository. Despite it, the only person that can manage the securities entirely is the investor himself. In addition, the depository offers to open, properly maintain and close securities accounts for various individuals and entities. The central depository has a right to be a securities registrar and keep securities register [14], [15], [16].

GCSD offers its customers settlement and clearing services as well. This includes netting, assuming a role of a guarantor for trading parties to fulfill their obligations and controlling the trading process [15], [16]. The depository has a right to dematerialize securities. It is quite the same as immobilization with one exception – during dematerialization securities exist only virtually and are listed in an electronic registry [1, 15, 17]. This ensures that securities stay safe and do not take up space for storage.

In addition, the central depository is responsible for disseminating information about international standards of depository service and participating in creation and propagation of national depository service and electronic registry standards [14], [15], [16].

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Number of Securities Deposited in 2011

1,576,469

1,004,848

781,841 638,189 574,272 503,829 377,938 357,705 326,986 247,203 192,954

34,665

Figure 1

By December 31, 2011 in GCSD it had been deposited total of 6.6 million securities and 14.3 million GEL (see figures 1, 2) that is 0.34 times less than the figure of the previous year. In 2011, 366 843 operations were conducted. As mentioned above, there is a positive correlation between a stock exchange market and a securities depository. In order to find out how closely they correlate, yearly cash flows of the two have been compared. It was found that the correlation is 0.83 meaning that the two are quite interrelated as expected (for calculations see annex 1).

Amount of Funds Depostied in 2011

1,502,949 1,549,965 1,482,401 1,339,842 1,280,278 1,214,458 1,158,350 1,116,034 1,114,883

901,674 907,634

743,671

Figure 2 207

As DTCC is far more refined and sophisticated compared to GSCD, making a parallel between the two is useless. DTCC serves a huge market whereas GCSD is making its first steps right now. Actually, it is no wonder why two depositories are not alike - the difference between the two is 30 years. However, GCSD has some advantages as it can use the expertise of other more developed depositories and not make the same mistakes they made.

Nowadays, GSCD as well as GSC is an exotic fruit in Georgia. In order the right people to find about them, it is necessary to give them all the needed information. When GSC starts to grow, the demand for depository services shall rise and, eventually, we will get a more stable and stronger economy.

Annex 1

Total Cash Inflow/Outflow (GEL)

2006 2007 2008 2009 2010 2011

GCSD 183 254 -193 883 120 598 -100 372 7 072 -18 502

GSE* 223 568 -134 800 27 508 40 748 -264 28 641

Total Cash Inflow/Outflow from Investing Activities (GEL)

2006 2007 2008 2009 2010 2011

GCSD 190 257 21 447 45 448 834 20 384 -20 892

GSE 262 896 9 905 189 031 128 518 129 978 -58 879

*JSC Georgian Stock Exchange

Correlation was calculated by using the following formulae:

1 푋 − 푋 푦 − 푦 푟 = 푛 − 1 푆푋 푆푦 r1 = 0.83 r2 = 0.77

References

1. http://www.dtcc.com/about/history/index.php 2. http://www.nyse.com/about/history/timeline_technology.html

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3. Haack R. W. 1972. New York Stock Exchange lists 1971 progress in efficiency and ability to serve shareowners, and previews important changes for the new year. Schenectady Gazette. January 5. 4. Remarks of Richard B. Smith, commissioner United States Securities and Exchange Comission, before the American Bankers Association, National Bank Division, Honolulu, Hawaii. September 29, 1969. 5. http://finance.mapsofworld.com/finance-theory/financial-services-company/custodian-bank.html 6. Eakins S. G., Mishkin F. S. 2006. Financial Markets and Institutions. 5th edition. 7. www.dtcc.com/about/business/ 8. http://www.dtcc.com/products/cs/equities_clearance/ps_index.php 9. http://www.dtcc.com/products/cs/equities_settlement/ps_index.php 10. http://www.dtcc.com/news/press/releases/2012/insurance_dec_data.php 11. http://www.dtcc.com/products/cs/equities_settlement/ims.php 12. http://www.dtcc.com/products/fi/fixed_income_mbsd/ps_index.php 13. http://www.dtcc.com/products/insurance 14. The General Meeting of Partners of the Limited Liability Company Georgian Securities Central Depository Minutes #1, Tbilisi, Georgia. October 18, 1999. 15. Rules on approval of licensing, financial reporting, determination of minimum capital and provision of services by the central securities depository. 16. Rules, Operations and Procedures of the GSCD. 17. http://www.investopedia.com/derms/d/dematerialization.asp#axzz1v1s4GGQl 18. The Georgian Central Securities Depository JSC, Financial Report, year 2011; The Georgian Central Securities Depository JSC, Activity Report, year 2011. 19. Law on Non-State Pension Insurance and Security.

Gaioz Sanadze Grigol Robakidze University Levan Gvalia Caucasus Business School

SAVINGS FOR LONG RUN

In the given article we will discuss the savings for long run by viewing the pension funds. There are different types of pensions, including: employment-based pension, social pension and disability pension [2]. Pension is social when the government helps citizens and pays certain amount of money to those people who are retired till their death. Disabilities‟ pension is when disabled people receive assistance from the state without taking into account the retirement age; and at the time of employment- based pension a citizen finances him/herself (nongovernment pension funds). During following the last type of pension plan are formed private pension funds. According to the newspaper "The Economist", the world's pension funds hold 20 trillion dollars in assets.

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Below will be discussed how the employment-based pension works in the USA. We will compare it to Georgia and see how it does or does not work in our country. * * * Accumulation of pension funds is as follows: a citizen keeps a certain percentage of his/her income for some time in order to use it at the retirement age. But in reality, it is more complex and in order to make clear, we have to make some assumptions.

First of all, let us assume that a citizen is going to work until he/she is 65, and he will live 25 years after retirement, so he/she "intends" to die at the age of 90; this figure is higher than the average duration of life in the United States [2]. Let us also suppose that the starting salary is 50,000 dollars per year, which is, approximately, equal to the average of the United States [2], while assuming that 15 percent of salary is going to be kept. To see how much people will spend each year, we will have to take into account the annual increase in salary, inflation rate, taxes and the exemption, interest rates and real consumption [1]. According to this data, let us draw up table 1. The rules of drawing this table will be discussed below.

Table 1 A B C D E F G H Age Salary Deflator Exemption Taxes Savings Cumulative Savings Real consumption 30 $ 50 000 1 $ 15 000 $ 8 750 $ 6 188 $ 6 188 $ 35 063 31 $ 53 500 1,03 $ 15 450 $ 9 605 $ 6 584 $ 13 143 $ 36 224 59 $ 355 713 2,36 $ 35 348 $ 94 835 $ 39 132 $ 1 081 011 $ 94 097 60 $ 380 613 2,43 $ 36 409 $ 102 266 $ 41 752 $ 1 187 624 $ 97 474 61 $ 407 256 2,50 $ 37 501 $ 110 253 $ 44 550 $ 1 303 432 $ 100 978 65 $ 533 829 2,81 $ 42 208 $ 148 611 $ 57 783 $ 1 874 346 $ 116 365

First of all, in this and other tables the numbers are shown in rounded figures, but the formulas are used in the full sense, therefore the direct calculation of the shown numbers may not give accurate answers.

What does column A point to? Let us suppose that a citizen is going to accumulate money from age 30 to age 65, retirement age, in some kind of asset, by which he/she will earn additional interest profit. In order to avoid unnecessary complexities, all the years from 30 to 65 are not shown in the table shown below; the figures are just hidden in Excel file.

A Age 30 31 59 60 61 65

Let us assume that the salary will grow in constant percentage during the next 25 years. If annual increase in salary is 7 percent, then for the next year the salary will be 50,000*(1+0.07)=53,500. It is written in Table 1 - the B column.

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A B Age Salary 30 $ 50,000 31 $ 53,500 59 $ 355,713 60 $ 380,613 61 $ 407,256 65 $ 533,829

As for the C column, it is the deflator, by which can be found how worth is the money for the following year, in today‟s value. Assuming that the inflation rate is 3% - that is an acceptable level for the US, then the next year deflator will be 1 * (1 +0.03) = 1.03, while the following year‟s will be 1.03 * (1 +0.03) = 1.06, and so on, which is written in the C column in the table. This tells us that $1.03 of the next year equals to $1 in today's dollars, and in order to find out the value of money for next random year, that amount of money should be divided by the same deflator for the year.

A C Age Deflator 30 1 31 1.03 59 2.36 60 2.43 61 2.50 65 2.81

Let us discuss the F column. Here is the money which is saved by a person at the end of each year. Suppose that a citizen has decided to retain 15%. We should not forget about the fact that a person will be able to save only those parts of salary that remains after paying income tax. Assuming that the first tax is 8,750 dollars per year (the rules for counting taxes and deductions will be discussed later), then he/she will be able to keep (50,000-8,750) * 0.15 = 6,188 dollars. So for the next years, taxes should be deducted from the salary and must be multiplied by 15%, in order to receive savings‟ amount.

A B E F Age Salary Taxes Savings 30 $ 50,000 $ 8,750 $ 6,188 31 $ 53,500 $ 9,605 $ 6,584 59 $ 355,713 $ 94,835 $ 39,132 60 $ 380,613 $ 102,266 $ 41,752 61 $ 407,256 $ 110,253 $ 44,550 65 $ 533,829 $ 148,611 $ 57,783

There are cumulative savings in column G. So here is the amount of money that a citizen has accumulated over the years. We should not forget that every year the interest gain is added to accumulated money. Suppose that the nominal interest rate is 6%. So this year, the total amount stored in savings consists of the previous years‟ cumulative savings, plus interest gain on them, and plus the money he/she has retained this year. For example, in the second year the total saving would be 6,188 * (1 +0.06) +6,584 = 13,143, and then it is calculated the same way for every year.

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A F G Age Savings Cumulative savings 30 $ 6,188 $ 6,188 31 $ 6,584 $ 13,143 59 $ 39,132 $ 1,081,011 60 $ 41,752 $ 1,187,624 61 $ 44,550 $ 1,303,432 65 $ 57,783 $ 1,874,346

Tax exemption and double taxation should be considered while drawing up a column E. Exemptions are given in column D which means that a person paying the income tax shall be taxable only for that part of the income that equals deduction between income and exemption. Assuming that the exemption equals $15,000, while the income tax rate is 25%, then the tax would be (50,000-15,000) * 0.25 = 8,750. 15,000 is a today‟s exemption, but the next year for determining the amount of exemption, we shall take into account inflation and in order to get today‟s value of future money you must multiply it by the deflator. The exemption for the following year will be 15,000 * 1.03 = 15,450. It is written in the column D.

A C D Age Deflator Exemption 30 1 $ 15,000 31 1.03 $ 15,450 59 2.36 $ 35,348 60 2.43 $ 36,409 61 2.50 $ 37,501 65 2.81 $ 42,208

As to double taxation, not only the income is taxed, but also the interest gain on savings. So, the taxes for the second year will be (53,500-15,450) * 0.25 +6,188 * 0.06 * 0.25 = 9,605, from which 6,188 * 0.06 * 0.25 = 93 is the tax charged on interest rate on the savings. Since the first year does not have the interest rate accumulation, only the income (minus deduction) will be taxed, but for each subsequent year, we will have to consider double taxation. See the column E.

A B D E G Age Salary Exemption Taxes Cumulative savings 30 $ 50,000 $ 15,000 $ 8,750 $ 6,188 31 $ 53,500 $ 15,450 $ 9,605 $ 13,143 59 $ 355,713 $ 35,348 $ 94,835 $ 1,081,011 60 $ 380,613 $ 36,409 $ 102,266 $ 1,187,624 61 $ 407,256 $ 37,501 $ 110,253 $ 1,303,432 65 $ 533,829 $ 42,208 $ 148,611 $ 1,874,346

The last column H is real consumption. Real consumption is equal to the nominal consumption brought to today's dollars. Nominal consumption equals income minus taxes and savings. The first year‟s nominal consumption will equal 50,000-8,750-6,188 = 35,063. In the first year, the nominal is equal to real consumption, because the inflation is not taken into consideration, and for the next years, it should be considered. This means that some next year‟s real consumption equals nominal consumption divided by

212 the deflator for that year. For example, in the second year the real consumption will be (53,500-9,605- 6,584) / 1.03 = 36,224. It is written in the column H.

A B C E F H Age Salary Deflator Taxes Savings Real consumption 30 $ 50,000 1 $ 8,750 $ 6,188 $ 35,063 31 $ 53,500 1.03 $ 9,605 $ 6,584 $ 36,224 59 $ 355,713 2.36 $ 94,835 $ 39,132 $ 94,097 60 $ 380,613 2.43 $ 102,266 $ 41,752 $ 97,474 61 $ 407,256 2.50 $ 110,253 $ 44,550 $ 100,978 65 $ 533,829 2.81 $ 148,611 $ 57,783 $ 116,365 * * * The table above refers to the years before a person‟s retirement age. Now we need to present a table which describes the situation after retirement. But before that we need to establish an equal annuity, brought in today's dollars, which will reduce the total stored amount to zero in 25 years (retirement age, duration). It will be easily understandable for students of the Faculty of Finances if we compare it to loan amortization. Financial calculator will aid us in calculating PMT [4], for the data: N = 25, PV=1,874,346/2.81 (the final cumulative saving before retirement brought in today's dollars), FV = 0, and i = 0.0291. While calculating the i, we should remember that the interest rate above was the nominal interest rate, and we need a real interest rate which will be a nominal rate minus inflation rate, i.e. 6% - 3% = 4%. But this is not enough; we must also take into account the deflator [1], so i = (0.06-0.03) / (1 +0.03) = 0.0291. This means that we will get PMT = 37,882. We cannot get equal annual amount of money by simply dividing the whole accumulated money by 25, because the interest will be accruing on the left cumulative savings each year after retirement, i.e. the cumulative savings are leveled down by cash withdrawal each year on the one hand, but on the other hand, it is leveled up by interest. PMT is that exact amount which will reduce the whole savings to zero nor more, nor less, exactly in 25 years.

After this it is easier to construct table 2. The numbers shown there will be explained below.

Table 2 A B C D E G H Age Nom. Withdrawal Deflator Exemption Tax Cumulative savings Real consumption 66 $ 109,792 2.90 $ 43,474 $ 17,247 $ 1,877,014 $ 31,931 67 $ 113,086 2.99 $ 44,778 $ 16,961 $ 1,876,549 $ 32,200 75 $ 143,254 3.78 $ 56,724 $ 12,200 $ 1,721,015 $ 34,656 81 $ 171,053 4.52 $ 67,731 $ 4,411 $ 1,337,279 $ 36,905 85 $ 192,521 5.08 $ 76,232 $ - $ 883,895 $ 37,882 90 $ 223,185 5.89 $ 88,374 $ - $ (0) $ 37,882

The column A of age remains, part of which in the table is still hidden, in order to avoid complexity. Columns C and D are as in Table 1. Here is continued multiplication of exemption and deflator the same way, as already described above.

Column B is nominal withdrawal. We should not forget that the amount calculated by PMT is in today's dollars and to calculate what amount will be available for withdrawal in the future, PMT must be

213 multiplied by the deflator for the desired year. For example, at the age of 66 a citizen will withdraw 37,882 * 2.90 = 109,792 dollars. It is written in column B.

A B C Age Nom. Withdrawal Deflator 66 $ 109,792 2.90 75 $ 143,254 3.78 81 $ 171,053 4.52 85 $ 192,521 5.08 90 $ 223,185 5.89

In column G is shown the money, the amount of which decreases by nominal withdrawal, but increases by interest gain which is added to the previous year‟s cumulative savings. We should not forget that there is no every year‟s saving; that‟s why there is no column F. Let us recall that the interest rate is equal to 6%. For example, at the end of the age 67 the total saving will be 1,877,014 * (1 +0.06) -113.086 = 1,876,549, and so on in G column. Look at the end of the age 90 - the cumulative saving is zero.

A B G Age Nom. WithdrawalCumulative savings 66 $ 109,792 $ 1,877,014 67 $ 113,086 $ 1,876,549 75 $ 143,254 $ 1,721,015 81 $ 171,053 $ 1,337,279 85 $ 192,521 $ 883,895 90 $ 223,185 $ (0)

Although a citizen does not have a salary, column E of taxes still remains, because tax is charged upon interest gain; also, there remains the exemption which is multiplied by deflator and is deducted from the taxable income. For example, for the age 67, the tax is charged on that amount of money which is calculated by deduction of exemption from the interest gain added to the previous year‟s cumulative saving. So if tax is 25%, for the age of 67 the tax would be (1,877,014*0.06-44,778)0.25=16,961. But look at the age of 85, when there is no tax. That is because the interest gain on the previous year‟s cumulative saving was smaller than the exemption; so, in that and the following years there are no tax payments.

A D E G Age Exemption Taxes Cumulative savings 66 $ 43,474 $ 17,247 $ 1,877,014 67 $ 44,778 $ 16,961 $ 1,876,549 75 $ 56,724 $ 12,200 $ 1,721,015 81 $ 67,731 $ 4,411 $ 1,337,279 85 $ 76,232 $ - $ 883,895 90 $ 88,374 $ - $ (0)

And finally, the most important column H, which shows us the amount of money available to a citizen in retirement years, transformed into today‟s value. This amount should have been known to us while calculating the PMT, but we have not considered the taxes and exactly in the years, when there are no taxes, the real consumption is equal to PMT. Such is age of 85. But when there is a tax, this tax is

214 deducted from the nominal withdrawal and is brought to today‟s value; in other words, it is divided by the deflator. For example, at the age of 67, real consumption is calculated: (113,086-16,961)2.99=32,200.

A B C E H Age Nom. WithdrawalDeflator Taxes Real consumption 66 $ 109,792 2.90 $ 17,247 31,931 67 $ 113,086 2.99 $ 16,961 32,200 75 $ 143,254 3.78 $ 12,200 34,656 81 $ 171,053 4.52 $ 4,411 36,905 85 $ 192,521 5.08 $ - 37,882 90 $ 223,185 5.89 $ - 37,882

* * * We have described above how the pension plan works in US. In order to understand how this will work in Georgia, we have to get the local data of the average annual salaries and inflation. This can be acquired from the Web site of Georgian Statistical Service. For some people (including us), this information may be inaccurate, unreliable, but since it is difficult (if not impossible) to find a better source, we must rely on these data.

First of all, let us discuss the average annual salary. According to Geostat (Georgian Statistical Service), in 2010 (information for 2011 is not known yet) average monthly salary is 597.6 GEL [3]. So the annual average would be 597.6*12=7,171.2. The annual growth would be (597.6-556.8)/556.8=7%.

In 2010, the inflation rate is 11.2% [3] (the data for 2011 has been published already, which is 2%, but we should not use this figure, because we have used the data of 2010 for calculating annual salary; thus, we should use 11.2% for inflation).

For the interest rate I will use rates of some different banks, which would be approximately 10% on GEL. 215

In order to complete the table, we should make clear some details about taxes. Income tax is 20%. And as for the exemption, it is not included in Georgian tax law; so, the salary is charged fully what increases taxes, but Georgian tax law excludes double taxation; thus, the interest gain is not charged. Absence of these two simplifies the calculations.

We have all the required data for the table. Let us again make assumption that a citizen is going to collect money from the age of 30 to 65, every year 15% of salary. After these years, he/she will retire and spend all the money accumulated during 25 years. Table 3 is constructed in such a way.

Table 3 A B C D E F G Age Salary Deflator Tax Savings Cumulative Savings Real consumption 30 7,171 Lari 1 1,434 Lari 861 Lari 861 Lari 4,876 Lari 31 7,673 Lari 1.11 1,535 Lari 921 Lari 1,867 Lari 4,692 Lari 32 8,210 Lari 1.24 1,642 Lari 985 Lari 3,039 Lari 4,515 Lari 37 11,515 Lari 2.10 2,303 Lari 1,382 Lari 12,202 Lari 3,724 Lari 38 12,321 Lari 2.34 2,464 Lari 1,479 Lari 14,901 Lari 3,584 Lari 64 71,553 Lari 36.95 14,311 Lari 8,586 Lari 499,843 Lari 1,317 Lari 65 76,562 Lari 41.08 15,312 Lari 9,187 Lari 559,015 Lari 1,267 Lari

It is very interesting that the real consumption, shown in column G, declines. That is because the inflation rate by the data for 2010 is higher than the same year‟s income growth. At the end of column F is shown that amount of money which has been collected for these years. This nominal value must be enough for 25 years. In order to find out how much will be available for a citizen annually during retirement, we should calculate PMT again what is shown in table 4.

Table 4 A B C F G Age Nom. Withdrawal Deflator Cumulative Savings Real consumption 66 21,528 Lari 45.68 593,389 Lari 471 Lari 67 23,939 Lari 50.80 628,788 Lari 471 Lari 68 26,620 Lari 56.49 665,047 Lari 471 Lari 69 29,602 Lari 62.82 701,950 Lari 471 Lari 76 62,237 Lari 132.07 946,094 Lari 471 Lari 89 247,407 Lari 525.03 250,106 Lari 471 Lari 90 275,117 Lari 583.83 0 Lari 471 Lari

If a citizen pursues the employment based pension plan in Georgia, during the retirement age he/she will be able to spend 1,794 GEL (21,528/12), which in present value is equal to 40 GEL.

Of course, the inflation rate used by us is highest in the years after 2006 by Geostat, and the salary growth rate is lowest. It means that we have used the most pessimistic variant. Let us see what will happen if we use more optimistic variant: inflation rate - 7.9%, monthly salary - 423 GEL, salary‟s annual growth 26.03% (these figures are calculated by averaging of Geostat‟s last few years‟ data. For example, salary‟s growth rate is calculated by finding out the last year‟s growth rate and then counting average), let

216 us take 8% of the interest rate (that is because when the inflation rate is lower, the nominal interest rate is lower too). See table 5 below.

Table 5 A B C F G Age Nom. Withdrawal Deflator Cumulative savings Real consumption 66 604,476 Lari 15.44 14,340,704 Lari 39,139 Lari 67 652,230 Lari 16.66 14,835,731 Lari 39,139 Lari 68 703,756 Lari 17.98 15,318,833 Lari 39,139 Lari 69 759,353 Lari 19.40 15,784,987 Lari 39,139 Lari 76 1,292,985 Lari 33.04 17,976,593 Lari 39,139 Lari 89 3,474,341 Lari 88.77 3,471,124 Lari 39,139 Lari 90 3,748,814 Lari 95.78 - 0 Lari 39,139 Lari

It means that during such conditions, a retiree will be able to consume monthly 3,300 (39139/12) GEL, in present value. For those who think that these figures are too optimistic (including us), we will consider the third variant as the more balanced one.

Let us take inflation rate of 8%, salary annual growth – 11%, interest rate – 12%, starting salary monthly 550 GEL and we will construct a table by leaving other required data unchanged. See the table 6.

Table 6 A B C F G Age Nom. Withdrawal Deflator Cumulative savings Real consumption 66 86,568 Lari 15.97 1,360,859 Lari 5,421 Lari 67 93,493 Lari 17.25 1,430,669 Lari 5,421 Lari 68 100,972 Lari 18.63 1,501,377 Lari 5,421 Lari 69 109,050 Lari 20.12 1,572,492 Lari 5,421 Lari 76 186,893 Lari 34.47 2,013,356 Lari 5,421 Lari 89 508,278 Lari 93.76 490,125 Lari 5,421 Lari 90 548,940 Lari 101.26 - 0 Lari 5,421 Lari

In the retirement age, a citizen in his/her first year will be able to spend monthly 7,214 GEL (86.568/12), which is in present value of 450 GEL. When the reality is the same as these figures shown above, when the inflation rate is lower than the salary growth rate and also is lower than the interest rate, then a citizen will be able to finance his/her older ages and will not rely on the government‟s pension lower than living minimum.

References

1. Bodie, Kane, Marcus. Essentials of Investments. 5th edition. 2. Wikipedia - The Free Encyclopedia. 3. National Statistics Office of Georgia. 4. Brigham E. F., Ehrhardt Michael H. Financial Management: Theory and Practice.

217

Malkhaz Bakradze Grigol Robakidze University

METHODOLOGY OF INVESTMENT ENVIRONMENT ASSESSMENT AND THE ROLE OF MODELLING OF COMPANY INVESTMENT IN ITS MANAGEMENT

Introduction

On January 27-31, 2010 in Davos (Switzerland) was held the World Economic Forum‟s 40th anniversary meeting, with the motto: “Improve the State of the World: Rethink, Redesign, and Rebuild.”

On the opening day of the Forum Nikola Sarkozy stated: “Globalization has created such a world where everything has appeared in hands of financiers. Everything! And almost nothing - to working people. Entrepreneurs have found themselves in captivity of speculators who have created the system where gambling with other‟s money became a norm… Without interference of the state everything would have been destroyed and the system would have collapsed totally. After we said that “the market is always right”, the globalization has been beyond the control. The market economy has no alternative but the capitalism and market economy can survive only if we reorganize it.”

These words of the President of France, who is known for his right-wing tend, are the apparent evidence of the fact that the liberal doctrine of Adam Smith about the “invisible hand of the market” that provides the balancing and sustainability of economic development has been seriously questioned. In fact, on the order of day now is raised the issue on the role, importance of quality of interference of the state in the regulation and control of economic processes. The current political and financial elites have the opinion that the crisis will not be overcome in the nearest future and so far it may be coped only through colossal financial investments in the bank system and implementation of a number of state programs, or with participation of the state funds in various segments of economy that factually means the partial nationalization of those segments!!! This implies the bank and production business sectors, investment mechanism.

The Government of Georgia and “big business” have not yet understood a new reality that implies modernization of its investment policy and realistic perception of the situation in the capital market. Our article is devoted to consideration of these problems and we will try to outline the mainstreams in the sphere of analysis and development of investment environment, stimulation and attraction of domestic and foreign investments.

In general, based on the market principles, a private investor first of all makes capital investments for gaining profit. Hence, since the politico-economical situation in the country is unbalanced, it is hardly to expect long-term strategic investments in the Georgian economy. And without such investments rehabilitation of production, technological revival, creation of new working places or change of the social background, etc. is impossible.

There are two main indicators and premises to overcome the economical and financial crisis: stabilization of the rate of exchange of Georgian lari (not expansive but through improvement of the foreign trade

218 balance) and reduction of the rate of interest. However, this will not provide the automated effect in kind of the increase of investments in production. In the first place this depends on the following factors: 1. Lack of qualification of enterprises, the potential investment beneficiaries, and their unreadiness to use the funds effectively because of poor management; 2. Unreadiness of investors to invest in the idle, non-refitted and non-reorganized enterprises. This, in its turn, is related to high risks (vulnerability of ownership right, poor payback because of poor management, etc.) The most problematic is the adequate assessment of such risks because of lack of transparency of financial standing of enterprises, problems with liquidity and investment activity.

The Role of Investment Policy in Overcoming of Crisis and Attainment of Economic Stability

In the current practice, the saving and investing are mainly implemented by different persons. However, once the situation was quite different. At present if a farmer spends a part of his time for drainage and melioration operations instead of cultivation of plants and cropping, he simultaneously saves and invests in his farm. He saves as he desists from consumption today in order to provide more consumption tomorrow. The amount of this saving is determined by the difference between his actual income and the funds spent for consumption. Simultaneously, he invests as improvement of the capital assets means net capital investment. On the example of a common farmer we can see not only the saving and investing but the matching of those objectives for what the farmer has implemented those processes in general. The farmer desists from the current consumption (saves) only for that reason that he wants to perform the drainage operations, i.e. to invest. If he was not able to invest, he would not even think to make savings.

In the modern economy the net investment is performed by industrial or trade organizations and, first of all, by corporations. However, if a corporation or a small enterprise has large-scale investment opportunities, its owners have objectively a wish to invest a great part of their income back. Therefore, the production savings rather depend on the production investments.

At the same time, various groups of population, individuals and households, make savings. A person can have various motives to make savings: to ensure a worthy old age or to save some money for future expenses (the annual leave or purchase of a car). He also can feel the instability of own status and save money for a rainy day. He can be driven with a desire to leave legacy to own children and grandchildren, etc. Whatever the motive which drives a person who makes saving will be, it is not often directly related to the possibility of direct investing. This takes place for a reason that in our everyday life the term “investment” always has not the definition it has in the economic concept. We refer the term “net investment”, or capital formation to a thing which represents the net increment of the actual capital of the society (buildings, equipment, stock and supplies etc.). An average man refers to the investment when he buys a plot of land, circulating securities or another title. For an economist those are pure transfer operations. One man can invest in a thing where another man de-invests. The net investment takes place when a new real capital is created.

As it has been mentioned above, the actual investments are made mainly in the industrial and trade spheres. Their amount periodically varies and almost always is of cyclic nature. Such instable dynamics is explained by the fact that the investment opportunities depend on new products, new territories and borders, new resources, new population and increasing production level and revenues. Investments depend on the dynamics and hardly formalized elements of the extended public system: the levels of 219 machinery and technologies, politics, optimistic and pessimistic forecasts of development, state expenses and taxes, legal environment, etc. Investments are financed from internal and external sources. The internal sources include: equity of enterprises and public savings; budget appropriations (from the central and local budgets) and long-term credits and loans (governmental and commercial). The external sources are: foreign private direct and portfolio investments, foreign credits and loans (including those secured by the state).

The analysis of investment process in a new economic system is not possible without the determination of the main point of the investment. Despite many researches, no universal approach has been developed in this matter.

While defining investments, Keynes highlights their qualitative properties and dual nature. In his opinion, the investment, on the one side expresses the amount of income accumulated for the purpose of savings or determines the potential investment demand, and on the other side, it represents the expenditure which determines a significant growth of the capital assets as a result of realization of the investment proposal. Specifically, in the author‟s opinion, the investments represent the growth of value of the capital assets as a result of the economic activity in the reporting period as well as the part of the income which was not used for consumption. According to a more adequate opinion, the reason of joint production and income fluctuation in Keynes system is the change in the amount of desirable investment expenses. At that the author suggests the definition according to which the investment means the acquisition of a certain good for those revenues which we can expect to receive in future. The most generalized definition of investment is that it is the act of exchange of satisfaction of the current demand to the future satisfaction of demand by means of invested funds, i.e. the investment means the following: invest more today and get more in future.

In general, in the contemporary economic literature investments are considered as the long-term capital expenditures in any form (cash, specific deposits, interest, shares and their securities, intellectual values and so on) in enterprises, production projects, social-economic programs, innovation projects inside the country and abroad with the purpose of gaining profit in a certain term after the investment.

Under the Georgian law, “the investment is any material and intellectual value or right the placing and use which for receiving anticipated profit is totally and unconditionally protected in the territory of Georgia.” That is the investments imply the growth of amount of the capital operating in the economic system. Therefore, it can be said that the investment is the integrity of certain expenses implemented by various instruments today and anticipated extended demand in the future. Hence, we can conclude that the investment may be defined in dual way: the first one is the economic or essential definition according to which the investment is the act of satisfaction of future demands in the increased amount, and the second one is the technical definition according to which the investment is the total of expenses. Both those aspects are closely interrelated and interdeterminated.

For a long period of time no financial investments were available in Georgia whereupon investments and capital expenditures were equated to each other. According to the analysis of definitions of capital expenditures, there are several conceptual approaches: the first one is the spending concept of capital expenditures (capital expenditure is the integrity of expenses of specific directions); the second one - the borrowing concept of capital expenditures (capital expenditure is the resource of development of the society or any of its spheres); the third one - the purposeful concept of capital expenditures where are 220 separated not only the cash expenses but the purposes of the given expenditures (creation of material and technical base, accumulation and update of capital assets); the fourth one is the synthetic (mixed) concept of capital expenditures (the spending character of capital expenditures is connected with the purposes of the given expenses).

In connection with emergence of the stock market and beginning of market transformation in the society, the concept of capital expenditures has transmitted to the series of technical definitions. The spending concept has survived as well: the capital expenditures are investments in the capital stock (capital assets), including the expenses in new construction, extension, reconstruction and retrofit of operating enterprises, acquisition of machines, equipment, instruments, stock and supplies, R&D and other activity. In our opinion, such definition comprehensively determines this category.

Under the modern conditions, the capital expenditures factor does not express the profoundness of the investment concept to the full extent. For this reason, their consideration as the capital forming investments is justified. Such definition has already been adopted in our country for the full-scale assessment of those investment flows which are reflected in the operation of the real sector of economy. This category includes: overhaul expenses, investments for acquisition of plots of land, investments for acquisition of patents, licenses, software, investments for development of R&D plans, for filling of reserves of operating material assets.

The financial market or the security market is the mechanism of exchange of financial assets after gathering of security sellers and buyers in one place. Such approach may be called the functional- technical approach which does not reflect the entire essence of the financial market. Unification of the financial market and security market sets aside other cash flows thus preventing the comprehensive objective analysis of economical processes. The subject-matter of the financial market is rather well determined by the following idea: financial markets are the mechanism which connects money seekers and money owners for making contracts. For the full determination of the essence of financial market we shall touch on the financial market structure which contains two components: the security market (or stock exchange) and debt capital (credit money resources) market. The essence of securities may be reflected better by mutual coordination of its investment and fund-raising parts. The investment and fund-raising are two sides of one process. At that the investment component is brought to the forefront because the demand determines the supply. The demand for investment determines the offer of idle cash funds. In addition it is known that the source of investment activity may be not only the borrowed funds but own and state funds. When discussing the fund-raising, we first of all imply the use of idle funds that is only a part of the cash resources of the investment process. It may be stated that the process of movement of cash funds begins with the fund-raising and ends with investing though, it may be also said that this process begins with the investing and ends with fund-raising.

This process may be considered as exemplified in security market players. A bank which invests the funds in equity instruments makes investments while the issuer of the given liabilities makes the fund- raising. It may be stated that the fund-raising and investing process run concurrently though, from the standpoints of various financial market players those processes look differently. In the process of movement between two polar points of the financial market, the cash funds undergo certain changes. The cash funds in the borrower‟s hands after the fund-raising pass the stage of distribution (allocation) through the cash movement where they lose their connection with the own “source” as well as they lose their personal properties. At the same time, the funds raised through financial institutions transform into 221 the cash flows and passing the investment market are channelled to those industries and regions where the investment will be the most effective.

As it is known, the goal of cash flow in the stock market is the investments. One of the objectives of the investment process is the placement of cash in the real spheres. The investors pay great attention to the short-term profitable projects, or speculations.

Under the market economy conditions, both financial and direct investments are implemented on the fundamental principles.

Herewith, implementation of investments is allowed when the capital value C0 of investments under the conditions of the estimated rate of interest at the initial stage of its realization is not negative:

C0=Σ (bt – at) / (1+ i) ≥ 0 where t is the time of effect, b – accruals, a – taxes.

This principle evidences that under the conditions of the estimated rate of interest the investments are admissible when the annual average revenues exceed the relevant expenses.

Consequently, in case of availability of alternative variants of implementation of investments the priority shall be given to that variant when by the certain moment under the conditions of the given estimated rate of interest the capital value is minimal. In this case it is acceptable that the investor under the given conditions of estimated rate of interest can invest and return any funds as the expenses and revenues can be compared by the capital value assessment method or annuity.

The application of these principles is reasonable for selection of the best variant among the investment alternatives. When speaking about the investment decisions, the issue of analysis of risk factors becomes urgent. Within the assessment of anticipated outcomes of investments are used: - The method of net present value (NPV) which determines the present value of revenues expected in future; - The interest rate of return when the expenses spent for the project are established according to the effect to be received after project implementation; - The method of return on investments when the return of expenses spent on investment is determined.

The main risk factors the investor faces before implementation of investments may be determined as follows: - Economic risk – which may result from the significant changes expected in the national economic structure and the probability of how those changes will effect on the expected return of the investment; - Transfer risk – the possibility of taking capital abroad; - Inflation risk – the current and forecast inflation rates determine the availability of effective demand and operation of target markets; - Location risk - the integrity of those negative outcomes which may occur in the region; - Sovereign risk – is mainly connected with the service of foreign debts and the threat that the government will not be able to pay the national debts; 222

- Political risk – is connected with the civil instability expected inside the country.

After description of the economic essence of investments it is very important to determine the stages which are passed by the investors after making decision on placing of their funds: the first stage is aimed at the rapid growth of the capital, that is connected with the fact that at the initial stage of implementation of investments the investors, as a rule, have limited amounts of funds, so they are seeking to return the funds as soon as possible ; the second stage where the quality of growth of capital and receipt of the revenue from the investment becomes important; the third stage implies sustainability of capital and receipt of stable and high revenue. Under the market economy conditions classification of main stages of investments enables to determine the trends of state regulation of this process. Noteworthy is that at the current and estimated stages the planning of macroeconomic parameters is based on two main factors where one is the growth of foreign direct investment (FDI). This process shall be reinforced with the relevant changes of the fiscal policy, structural and institutional reforms in order to ensure on the basis of temporary revival of the economy the long-term growth with participation of the financial and banking system.

Savings and Investment Stimuli

Local or national resources of investment activity represent the basis for implementation of investment projects. To those resources may be attributed two significant sources of financing of the investment activity: internal and attracted sources.

The internal sources of investment project imply the profit and depreciation charges. The amount of two sources of financing is totally regulated by the state through the tax and accounting policy.

Promotion of investment processes in Georgia shall begin from the change of the policy of depreciation charges in the local entrepreneurial activity.

Deprecation is amortization of capital assets expressed in terms of money as a result of their use in production. The depreciation method simultaneously enables to reflect the cost of obsolete means of production in the commodity produced by them. The instrument of restoration of amortization of capital assets is the depreciation charges in terms of cash. This monetary mass is intended for repair, construction or purchase of new means of production. The amount of depreciation charges in included in the cost of a product, hence it represents a determining factor of the final price of the product.

Depreciation rates are one of the key sources of financing of reproduction and capital assets. Under the conditions of transition of the national economy to the market economy the rates of depreciation charges which are approved by the state are of great importance because by this method enterprises can provide themselves with the means of production at the expense of own investments without governmental allowances as it used to be under the conditions of centralized management of economy and credit institutions.

The depreciation rates established by the state determine the intensity of changing of operating capital assets. However, it should be noted that under the inflation conditions the rates of depreciation charges become pointless because the cost of capital assets expressed in a monetary unit devalues much during

223 the inflation period. Therefore, the capital assets shall be revaluated in order to avoid the devaluation of actual depreciation under the inflation conditions.

Such form of revaluation (adjustment of value) is the accelerated depreciation though, under the conditions of the transitional economy one shall be very cautious when taking such steps because within the period of the commodity deficit and rigidity of production of means of production the accelerated depreciation charges can promote serious inflation processes as the depreciation charges represent the monetary aggregates which suppress as the superfluous load the effective demand in the commodity market. In order to prevent such processes, there shall be implemented the protective program of accelerated development of national production to be coordinated by the national government. Without such measures the surplus funds available in hands of enterprises will promote the increase in inflation. The state shall play a significant role to transform the profit to investments. Only the reasonable state policy can promote the investment activity and distribution of profit for financing of investment projects. In case of duly promotion of investing from the side of the state the cash assets which have been exported from the territory of Georgia and now are maintained on various bank accounts abroad or are involved in the economy of other counties can be returned back to Georgia.

The profit and depreciation are the traditional sources of financing of investment programs aimed at extension of the basic production assets.

Role of Economic and Mathematical Modelling of Company Investment Activity in Its Management

In the modern economy the main basis of the successful operation and development of industrial companies is their effective investment and innovation activity. At the same time, due to the limitation of investment resources, the full realization of the investment-innovation potential is very complicated or impossible. Therefore, many companies face problems of due development and implementation of their investment strategy. An effective direction of the investment activity is fund-raising both inside the company and in the environment and lines of its operation: customers, suppliers, stock and supplies, production, sales system and management in general. In this case very urgent is the optimization of internal investment activity of the company, right strategic choice of investment projects or formation of the maximum effective investment portfolio and making optimal schedule of its implementation that is directly connected with the investment flow management. In connection with this, we will review the problems of enhancement of economic development of the company and ways of their solution, based on the strategy of selection of priority directions of investment and the system of tactic formation models. The top attention shall be paid to such components of the investment activity management mechanism as the objectives, criteria, factors and resources (material and financial) of management; organizational potential, etc.

Investment Activity Management Model of Company. Methodological Guidelines

The development management of a company is reflected in the integrity of those arrangements, methods and funds (material and immaterial) which are placed for attainment of concrete objectives. The general development level of a company is based on the following components: economic development level, corporate development level, technical and technological development, management development level. The economic development level is determined by the growth of following indicators: the proprietor‟s financial performance, earnings, profit, breakeven, personnel income, financial stability factor. At the 224 same time also important are the reduction of the excessive accounts payable and cost per unit. Of course, the ideal variant will be to attain all the above mentioned goals, maximization of all parameters. However, it is clear that it is simply impossible to achieve this ideal: risk minimization, market extension, etc. The growth of current consumption results in the increase of the development fund and rise of the economic level of the company. Such aim is multicriteria and any decision in a concrete period is compromising, or only one criterion or several criteria may be maximize. For majority of Georgian companies the growth of financial performance is related to the growth of circulating assets, production and sales. Finally, majority of decisions (e.g. increase in the business cost or current profit) are made using different variants of distribution of profit. Therefore, the necessary and satisfactory condition of improvement of one of the above-mentioned criteria without deterioration of other ones is the growth of profit. Implementation of any project connected with any direction of the capital investments (material and technical supply, production, trade or management) will effect on the main factors – economic parameters of the product: price, cost, manufactured amount and finally, the profit (Fig. 1). Profit PT is formed from the company earnings (revenue) and expenses and the factors effecting on it are the price, cost and amount of product:

PT = i, T - C i, T )N i, T - l → max, (1)

where Pi,T, Ci,T – are the average values of i-product price and specific cost within the T-time period, (i=1, n), n – quantity of manufactured product, Ni,T the amount of manufactured product, Kl – the investment level in the company l activity direction (l=1, L). The main goal of the investment is to select projects in the portfolio and determine the required amount of funds. Introduction of objective function and procedures of determination of basic model parameters enable to solve the following problem – for security of maximum growth of the objective function the investments shall be implemented at a concrete stage of decision-making.

In this case the best solution will be the two-stage technology of problem of distribution of investment resources. At the first, initial stage will be used the procedure of strategic planning of priority selection of investing. Thereafter, the methods of financial flow management are used, in the dynamics of further specification of projects, by calculation of investment flows, specification of expenses and results by the repeated iteration on a company scale.

At the strategic planning stage are performed: strategic analysis (determination of aims and criteria of a company in consideration of analysis of the internal and external investment environment); specification of main guidelines of the activity; selection of priority lines of the capital investment; planning of strategy implementation, drafting of the company budget and budgets of its units and structural distribution of investments.

225

PROFIT

Revenue Expenses

Price Amount of Cost Amount of sales Cost production

Supply Production Sale

Portfolio of projects

Fig. 1. Structure – “Goals and Resources” Level 1 – ultimate goal; Level II – subgoals; Level III – objectives and problems; Level IV – ways of solution (guidelines); Level V – projects

Conclusions In our opinion, the present state investment policy shall be radically changed subject to the following premises: 1. To determine the conditions and mechanism for market evaluation of assets of enterprises that will enable them to use those assets more effectively; 2. To change the depreciation policy in line of its liberalization, providing the growth of quality of freedom for reorganized enterprises; 3. Consecutive decentralization of the investment process and enhancement of the role of own internal sources of fund-raising of enterprise for financing of their investment projects; 4. The government support to the companies at the expense of centralized investments; 5. Placement of centralized capital assets of limited amount and state financing of investment projects under the strictly targeted programs and competition. 6. Significant extension of the joint state and commercial financing practice for investment projects.

226

References

1. Keynes John M. 1936. The General Theory of Employment, Interest, and Money. London, Palgrave Macmillan. 2. Campbell C. D., Campbell R. G. and Dolan E. G. 1988. Money, Banking, and Monetary Policy. The Dryden Press. 3. Friedman D. 1989. Money & Banking. American Bankers Association. 4. Miller, R. L. and VanHoose D. 2001. Money, Banking & Financial Markets. Cincinnati. 5. Brealey R.A., Mayers S. C. 1988. Principles of Corporate Finance. New York: McGrow Hill. 6. Dzneladze G. 2003. Financial Flow Modelling Mechanism in Georgia. Magazine “Bank”, N 16, (in Georgian language). 7. Dzneladze G. 2007. Analysis of Effect of Macroeconomic Indicators on Living Standard of Population – Basis for Social Policy Implementation. Bulletin of the Centre of Strategic Researches and Development of Georgia, N102, (in Georgian language). 8. Garakanidze Z., Murgulia Sh. 2008. Some Problems of Investment Security in Georgia. Bulletin of the Centre of Strategic Researches and Development of Georgia, N107, (in Georgian language). 9. Dzneladze G. 2009. Socioeconomic Outcomes of Global Crisis in Georgia and Ways of Their Compensation. Bulletin of the Centre of Strategic Researches and Development of Georgia, N114, (in Georgian language).

Malkhaz Bakradze Grigol Robakidze University

COMPANY INVESTMENT ACTIVITY MANAGEMENT MODEL

The company development management is manifested in the integrity of the activities, methods and assets (tangible and intangible) implemented for attainment of the set goals. The overall development level of the company depends on the following key elements: the economic development level, corporate development level, technical and technological development, management level development. The economic development level is determined by the growth of the following indices: the proprietor‟s financial results, earnings, profit, cost-effectiveness, income of employees, financial stability factor. At the same time the decrease in the excess liabilities and rate of consumption is also very important. Of course, the ideal variant will be attainment of all above objectives, maximization of all parameters. However, this ideal is above attainment as risk minimization, market extension and so on result in the growth of expenditures and, hence, the decrease in the income; the ongoing consumption growth results in the decrease in the development fund etc. Therefore, the rise of economic level of a company is the multicriterion problem and any decision made in a concrete period is a compromise as only one criterion or a few criteria can be maximized. For the majority of Georgian companies the increase in the financial results is connected with the growth of circulating capital, turnover, production and sales. Finally, the majority of decisions (e.g. the rise of the value of business or current income) are made using different 227 variants of distribution of profit. Therefore, the necessary and adequate condition for the improvement of at least one criterion without deterioration of other criteria is the growth of profit. Implementation of any project related to any pattern of the capital investments (procurement, production, sales or management) effects on the key factors – the economic parameters of a product: price, cost, volume of output and profit (Fig. 1).

Level I Profit

Level II

Revenue СЩссСС Costs Expenses

Щ Level III

Price Sales Production Manufacturing volume cost Vo volume Level IV

Management

Supplies Production Marketing

Level V

Project Portfolio

Project portfolio

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Profit PT is formed from of the company revenue (income) and expenses and the factors effecting on it are the price, cost and volume of output:

퐧 퐋 PT = 퐢=ퟏ(푷i, T - C i, T )N i, T - 퐢=ퟏ 푲l → max, (1) where Pi,T, Ci,T are the average values of price and unit cost of i-product in T time period (i=1, n), n is the quantity of items of manufactured product, N i, T is the volume of output. Ki is the level of investment in l activity of the company (l=1, L). The main goal of the investment is selection of the projects in the portfolio and determination of the amount of required funds. The introduction of the target function and procedures for determination of the basic model parameters enables to solve the following problem: to provide the maximum growth of the target function the investment shall be implemented at the concrete stage of the decision-making.

In this case it is reasonable to apply the two-stage technology of the problem of distribution of investment resources. At the first, initial stage, the procedure of strategic planning of the priority choice of investment shall be used. Then the financial flows management methods shall be used, with the further specification of projects in dynamics, calculation of investment flows, adjustment of expenses and results with the repeated iteration companywide.

The stage of the strategic planning includes: the strategic analysis (formation of the company targets and criteria in consideration of the analysis of the domestic and outward investment environment); clarification of main patterns of the activity; selection of the priority patterns of the capital investments; planning of the strategy implementation, company budgeting and unit budgeting with the structural distribution of investments.

ퟎ 풏 ퟎ The investment activity provides for the new value of the price 풇풊 →푷풊 , as well as a new cost 푪풊 → 풏 ퟎ 풏 ퟎ 풏 ퟎ 푪풊 and changes the sensitivity of those parameters ∆푷풊 → ∆푷풊 , ∆푪풊 → ∆푪풊 in the conditions 푵풊 → 푵풊 ퟎ of the changed output program and in the interval (푵풊 − 푵풊 (see Fig. 2). The change in range of values of parameters, to the interval of amount change:

흏푷 풊 푵풊 횫푷 풊 ∆푷풊 = │ ퟎ = ; 푵풊 ퟎ 흏푵풊 푵풊 − 푵풊

(2)

흏푪 풊 푵풊 횫푪 풊 ∆푪풊 = │ ퟎ = ; 푵풊 ퟎ 흏푵풊 푵풊 − 푵풊

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Fig. 2. Change of parameters level and sensitivity

Such change of values of parameters Pi, Δfi and Ci , ΔCi is caused by the shares of investments put in the company: Kpi, K Δpi, KCi, K ΔCi.

The effect of the investment on those parameters is determined by special coefficients calculated before investment (index “0”) and after investment (index “n”).

풏 ퟎ 풏 ퟎ k(Kpi)= 풇풊 /푷풊 , k(KΔpi)= 휟풇풊 /휟푷풊 , (3) 풏 ퟎ 풏 ퟎ k(KCi)= 푪풊 /푪풊 , k(KΔCi)= 휟푪풊 /휟푪풊 , where k(Kfi) , k(KΔfi) , k(KCi) and k(KΔCi) are the coefficients of effect of the investments on the price and cost levels and sensitivity.

The change of the product price and the unit cost in case of change of the volumes of sales and output 풐 (from value 푵풊 to the value 푵풊) is determined as follows:

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ퟎ ퟎ 푷풊 푵풊 = 푷풊 푵풊 − 횫풑풊 푵풊 − 푵풊 , (4) ퟎ ퟎ 푪풊 푵풊 = 푪풊 푵풊 − 횫푪풊 푵풊 − 푵풊 .

In consideration of formulas (1-4) the target function may be presented as follows: 풏 ퟎ 풏 PT = 풊=ퟏ[풌(Kfi)ფi - k(KΔfi) Δfi (Ni - 푵풊 )] Ni - 풊=ퟏ[풌(KCi)ფi - (5) ퟎ 푳 - k(KΔci) ΔCi (Ni - 푵풊 )] Ni - 풍=ퟏ 푲풍 → max, where there are the balance restrictions: 풏 풊=ퟏ 휶ji Ni ≤ Rj + ΔRj (Kj), (j = ퟏ, 풎) (6) and with the admissible value interval: 풎풂풙 푳 max 0 ≤ Ni ≤ 푵풊 , 0 ≤ 풍=ퟏ 푲풍 ≤ K , (I = ퟏ, 풏), (7) 풎풂풙 max where αij is the expenditure of j type resource for manufacturing of i type product, 푵풊 , K the maximum possible indicators of the output program and investments, ΔRj is j resource increase Kj within the investment, Kl – the investment level in production by the first pattern (see Fig. 1).

The key factors that form the price level and sensitivity coefficients k(Kpi) da k(KΔpi) are the product quality, product strategic development plan and the activities of its market promotion, expenses for the use of product. Each of these factors is formed through implementation of the investment project determined by the relevant pattern.

The product quality and product market promotion coefficients (kQi and kMi accordingly) are calculated by the relevant integral indicators before and after investment activities: 풏 ퟎ 풏 ퟎ kQi = 푸풊 / 푸풊 kMi = 푴풊 / 푴풊 풏 ퟎ 풏 ퟎ where 푸풊 푎푛푑 푸풊 are the integral coefficients of i product quality and 푴풊 and 푴풊 – i product market promotion parameters before and after investment activities, accordingly.

The parameter (kDi) specifying the product development strategic plan is estimated by two components: coefficient k1 which determines the pricing policy (k1 ˂0 – in case of price drop and k1˃0 in case of price rise) and the product service life coefficient k2 (k2 ˃1, in case of intensive rate of growth of or decline in output; k2˃1 in case of slow rate) and is determined as follows: kD(t)=1 + k1 k t2.

The price level change coefficient k(Kpi) is calculated as the product of the above listed indices in consideration of the operating costs that are calculated as the share of the operating costs change in the price structure: kei = 1 + Δxi / Pi , where Δei = ei0- xin is the operating costs change after the investment activities. Accordingly: k(Kpi ) = kDi kQi kMi kei. The coefficient can be determined both on the basis of the factor quantitative values and by the expert method.

The research in the effect on the price sensitivity was carried out in the company: of product quality index kQi, product strategic development plan kDi , product market promotion activities kMi. Subject to the new strategy it is reasonable to determine the price sensitivity change coefficient k(KΔpi ) in direct proportion to coefficients kQi and kMi and inversely to coefficient kDi , that is: k(KΔfi ) = kQi kMi / kDi.

The effect of coefficients on the cost is calculated in the subsystems of supplies, production and distribution. In the units which are associated with the procurement and distribution, the costs per 231 product unit subject to the output volume are of growing character. This is due to the extension of the turnover of material resources followed by the necessity of use of the additional transport and storage facilities and growth of expenses with the search for new customers in the conditions of the limited demand. The production costs will decrease along with the increase of the output since, as a rule, the conditional-fixed costs per product unit decreases and the technology becomes stable. Accordingly, in case of the extension of the output program after the investment activities the cost ΔCi (Ni) = C0i (Ni) – Cni (Ni) may: 1) increase ΔICi ; 2) decrease ΔIICi or 3) remain the same ΔШCi .

The values of cost level change coefficients kCi in each case study are determined from the following expression: Cni (Ni0) = C0i (Ni0) ± ΔCi . (8)

If we divide the left and right sides by C0i (Ni0) for each variant m=1, 2, 3, we will receive: Cni (Ni0) / C0i (Ni0) = 1 ± ΔCi / C0i (Ni0), or kmCi = 1 ± ΔmCi / C0i (Ni0). (9)

The cost sensitivity coefficient is determined in consideration of the possible actual sensitivity changes ΔCi/Ni0, according to the variants ΔCni = ΔC0i ± ΔCi/Ni0. If we divide this expression by ΔC0i we will receive, according to the variants: kIΔci = 1 - ΔICi / ΔC0i Ni0; kIIΔci = 1 + ΔIICi / ΔC0i Ni0; kIIIΔci = 1.

The investment effect on the cost parameters is determined as the product of coefficients of different variants: k(KCi) = kICi kIICi kIIICi , k(KΔCi) = kIΔCi kIIΔCi kIIIΔCi .

These calculations are based in the actual value of the cost change ΔCi according to the investment activities variants.

The solution of problem (5) with the restrictions (6-7) enables us to determine the optimal volume of the production program in consideration of the effect of the selected investment projects.

Development of the Domestic Investment Strategy and Investment Flow Optimization The basic problem of the investment is to select projects and to determine the amount of required funds. The introduction of the target function and the procedure for determination of the basic parameters of the model enable to solve this problem – the implementation of investment is reasonable in line of maximization of the target function at each concrete stage of the decision-making.

The two-stage technology of the problem of distribution of investment resources has been reviewed. At the first, initial stage, the strategic planning of selection of the priority patterns of investment shall be used. At the next stage the financial flow management methods shall be used, with the further specification of projects in dynamics, calculation of investment flows, adjustment of expenses and results with the repeated iteration companywide. The stage of the strategic planning includes the following: the strategic analysis (formation of the company targets and criteria in consideration of the analysis of the domestic and outward investment factors); clarification of main patterns of the company activity and selection of the priority vectors of the investment; planning of the strategy implementation, company budgeting and unit budgeting with the structural distribution of investments [1]. The problem of formation of the domestic investment strategy is reviewed as the complex technology of profit 232 maximization based on the interconsistent solution of the following problems: selecting the budgetary policy, outward credit and domestic investment policies; distinguishing priority patterns in the fixed plan period.

The initial parameters are: list of projects, expenses and desirable performance (target), defined amount of equity, possibility of the use of attracted funds at the given rate of interest (in case of lack of the equity capital), or alternative placement of the own cash funds in outward investments (in case of lack of the effective investment variants and excess capital).

The algorithm of selection of priority patterns of investment is as follows: 1) to determine the number m of variants (projects) in 1 pattern of development; 2) to assess the response of each one pattern, the target function Pim(Kim) of each variant m to the volume involvement of investments Kim in it; 3) to assess the effectiveness Fim or adverse intensity fim of each variant (in different periods of project implementation): 4) Fim = Pim(Kim) / Kim , or fim = Pim(Kim) / Kim Tim . 4) to rank projects according to the decrease of their effectiveness and to assign to the projects new numbers by the project rank: F1 ˃ F2 ˃ . . . ˃ Fi ˃ . . . ˃ Fn , or f1 ˃ f2 ˃ . . . ˃ fi ˃ . . . ˃ fn . 5) to determine the total investments KƩ of the ranked projects (by the incremental sum): 풏 KƩ = 풊=ퟏ 푲풊 ( Fi ). 6) to select the marginal project Z whereupon the total investments will be added to the own investment resources Kccmax of the company: 풛 max 풊=ퟏ 푲풊 ( Fi ) ≤ Kcc . 7) to determine the investment pattern 1 and variants m which will provide for the maximum target function using the given own resources.

In order to develop the investment patterns and to distribute equity among those units which implement investment projects, the ranked projects shall be differentially systematized by each pattern, according to each unit with determination of marginal projects Zi (according to the criterion of less effectiveness FlZi ). The total investments of most effective projects by the incremental sum represent the resources required for the given units, for implementation of the investment activity: i 풁 풍 풍 K Ʃ = 풊=ퟏ 푲풊 ( 푭풊 ) .

Distribution of the company budget based on those totals will enable us to differentiate the resources as well as the activity of units and the company by their effectiveness.

In this view the procedure of the budgetary provision balancing is reasonable which is based on two main principles: 1) the funds of the units shall be allocated for more effective projects; 2) the maximum profit of the company is based on the maximum effective activity of all units in consideration of the marginal value of expenses. Two variants of the balancing are admissible. First: the resource unit is withdrawn from that unit which has the minimum loss and added to that one which has the maximum increase in the effect. Second: based on the analysis of the difference of the marginal effectiveness of projects we obtain the average value and determine the minimum required expenses by each unit. If

233 their total is less than the available funds, the excessive funds shall be added to more effective projects; if the total exceeds the available funds, the deficit will be covered from the less effective projects. The balancing criterion is the equity of effectiveness of marginal projects.

Selection of the company investment policy is determined in consideration of the capital adequacy and credit and deposit rates. In principle, the decision-making is quite simple: those projects shall be maintained which effectiveness exceeds the rates of credits and deposits. In case of capital adequacy and excess of capital, it is reasonable to place a part of the funds on the bank deposit instead of their investment in the projects which effectiveness is less than the rate of deposit. At the same time, determination of the equity capital amount is the optimization problem and should be considered along with the company investment activity and the economic results obtained in this pattern.

We gave presented the model of optimization of the investment flow structure which is the two- criterion problem of congruence of interests: ퟏ For the company PT = Ʃ Pt →max (ퟏ+푬)풕 t=1,Tk ; (10) for a creditor QT = Ʃ Qt → max .

The additional condition of problem solution is the system of three interrelated equations which determine, in consideration of the investment activities, the following: the dynamics of the company results Pt+1 = λ Pt + Kt ; (11) the total credit and payment flow Gt+1 = Gt + yt ; (12) the Bank capital change Qt+1 = Qt + ηtGt - yt , (13) where Pt is the current company profit value t at the point of time (t = 1, . . ., Tk) , Tk - the time periods in the reporting period T; E – the discount rate, λ – the coefficient which reflects the current profit value change without the investment activities; Kt – the investment flow generating the profit growth for the company; ηt – the loan interest rate; yt – the credit and payment flow, yt = Kt k - ht. The amount of required credit resources Kt k (the credit flow) is determined on the basis of the cash flow balance, from the company balance equation:

Kt k = ηt Ʃ(Kj k - hj ) + σt + ht + Kt - Ktss , (14) where σt – payments to the budget (taxes); ht – the credit repayment flow; Ktss – the company equity capital.

The total credit flow and taxes by the given period of time t is: Gt = Ʃ (Kjk - ht ). The status of funds placed at the bank is defined by the following ratio: Qt = Q0 + ηGt - yt , where Q0 – the initial amount of funds in the bank.

The problem is solved through the modeling of the controlling action parameters: investment flow Kt, credit and payment flow yt, loan interest rate ηt . The optimal result is determined by 234 the method of successive concessions in consideration of the restrictions of the initial and limited values of parameters.

Company Investment Management The above described methodology that provides for the technology of modeling of the company investment management can be presented as the single system of preparation, making and execution of investment decisions. The main typical problems solution of which ensures the implementation of the investment activity of the company may be classified in 2 groups: 1) the strategic planning of priority investment patterns, and 2) the investment flow management. Namely, the strategic decision-making covers the following problems: the assessment of the productive potential of the company and its units; separation of the priority patterns and projects; selection of the credit, domestic investment and budgetary policies beneficial for the company and distribution of investments among the projects; assessment of the investment project implementation effect on the company final financial results; profit maximization; selection of beneficial proportions of variability (change) of the company limiting (restricting) factors.

The investment flow management subsystem includes the following components: the cash funds estimate and flow forecast; forecast of movement of the congruent material and financial flows; estimation of the minimum amount of benefit of borrowed funds, determination of terms of borrowing and repayment; determination of the investment flow efficiency; selection of the beneficial parameters of reinvestment; calculation of the compromising variant of solution of the set multicriterion problem.

The system of preparation, making and implementation of investment decisions is the basis of the investment management and represents those algorithms, programs and information technologies of solution of problems which should be implemented in kind of the program module. The structure of the subsystem of provision if the investment flow management contains three groups of programs and relevant programming modules: main problems and modules of the financial flow planning and control; information blocks which provide preparation of data for main modules; design modules created by the study of variant selection and the feasibility study basis. The modules of the main group are divided according to the management levels: the project, the unit, the company (see Tables 1, 2).

Table 1 Project Main problems and modules of the investment flow management and control 1. Calculation of cash flow and project feasibility study; 2. Estimation of minimum amounts and terms of attracted investments. 3. Determination of project effectiveness (assessment of the product cost-effectiveness in the certain period of time, assessment of efficiency of the attracted financial funds). 4. Revenue structure analysis (from sales and operations: main, financial, investment); Information problems and modules 1. Grouping of revenue and payment flows at any point of time in wider intervals (week, month, quarter, year); 2. Formation of revenue and payment plan in the conditions of duration of the given schedule cycle of implementation.

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3. Estimation of revenues and payments by financial cycles. 4. Payment plan formation by the following patterns: materials and assemblies; transport and commercial costs; fixed costs; taxes; transfers to units; other expenses. Reporting tasks and modules 1. Calculations in the module at one product level with the following parameters: the cycle duration, number of cycles, reinvestment share, product unit cost-effectiveness. 2. The financial result sensitivity analysis (if applicable at the year-end) in case of change of the variable parameters. 3. Determination of the term for: beginning of revenues; attainment of self-financing; return of investment; attainment of the profit rate planned for the investment; attainment of the 100% profit rate. 4. Assessment of project efficiency in the given period.

The mechanism of implementation of the company investment activities is the procedure which divides the main problem into subproblems and regulates blocks, the solution of which is assigned to the given unit or workplace, provides the reforming of the organizational chart through specification of the functions and official duties in frames of the projects to be implemented.

Table 2 Unit 1. Calculation of the consolidated financial flow of a unit (according to the total projects). 2. Calculation of the consolidated (total) flow in consideration of the direct fixed costs of the unit. 3. Unit performance evaluation. 4. Flow structure analysis and unit profit estimation (marginal – from the main activity, net profit – in consideration of taxes). 5. Estimation of the amounts and terms of attracted funds beneficial for the unit in consideration of the total liquidity factor of the company. 6. Estimation of the term of return to profitability.

Company 1. Consolidation of flows of units. 2. The company total consolidated flow in consideration of the total operating expenses. 3. Assessment of the company breakeven point and the term of return to this point. 4. The flow structure analysis and profit estimation (marginal, gross (before taxes), net (after taxes): from the main, financial and investment activities). 5. Assessment of the amounts and terms of attracted resources beneficial for the company (with the further purposeful channeling to certain units). 6. Management of vertical movement of investment flows (down-up transfers - from the units to the company, up-down investments – from the company to the units).

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Therefore, the company investment management is understood as the single system which provides the attainment of the final results through the implementation of interrelated management processes on the basis of sets of models and information technologies.

Based on the developed methodology the complex of investment activities promoting the quality of the fruit juices and extension of their sales is determined; the optimal program of their manufacturing has been developed; the feasibility study of respective business plans has been provided.

Conclusions: 1. The effective implementation of the investment activity requires solution of the problem of determination of the priority patterns of investment along with the development of the methods for solution of tasks for preparation, making and realization of the investment decisions. 2. The problem of advancement of the company economic development level is the multicriterion problem and any variant of its solution in a concrete planned period is a compromise which results in the maximization of one criterion. However, the necessary and adequate condition for the improvement of one criterion without deterioration of other criteria is the growth of profit. 3. The considerable effect on the profit performance is made by the product price, cost, sensitivity of their values, amounts of output and sales, which in their turn, depend on the company investment patterns and variants. Implementation of every project in any pattern effects directly or indirectly on the main factors. The methodology of assessment of basic model parameters is proposed according to the variants of investment projects, which are based on the factor analysis of their effect quality along with the determination of the company optimal production program. 4. The project implementation requires resources. Determination of the structure of the investment resources is the optimization problem. The work presents the economic- mathematical model of the planning of the credit and respective payment flow in the process of implementation of the investment activities. This is the two-criterion problem of the congruence of interests of the company and creditor. Its solution is made by the successive concession method in consideration of the formal and informal restrictions. 5. The investment management mechanism is the integrity of the management technologies which provide for the interrelation and interaction of the structural models: the management object, target hierarchy and set of measures, interrelation of essential factors, executors, resources, time periods and investment flows. The basis of the management mechanism is the system of investment decision preparation, making and realization, that, in its turn, represents the complex of algorithms, programs and information technologies which is aimed at the solution of problems of the strategic planning and management of the investment flows on the level of projects, company and its dedicated units.

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