1 Contents Economic Annals-Xxi 176(3-4)'2019

ECONOMIC ANNALS-XXI

ISSN 1728-6220 (Print) ISSN 1728-6239 (Online) CONTENTS https://doi.org/10.21003/ea SOCIETY Ishchenko, I., Bashkeieva, O., & Petrov, P. (Ukraine). ECONOMIC ANNALS-XXI Empirical model of congruence of mental space as a tool for the analysis of changes Research Journal in international relations 4 Since 1996 Popova, N., Kataiev, A., Skrynkovskyy, R., & Nevertii, A. (Ukraine). Development of trust marketing in the digital society 13 176(3-4)’2019 www.soskin.info/ea/ MONEY, FINANCE AND CREDIT Shkarlet, S., Dubyna, M., Vovk, V. (Ukraine), & Noga, M. (Poland). Publisher Financial service markets of Eastern Europe: a compositional model 26 Institute of Society Transformation Lentner, Cs., Vasa, L., Kolozsi, P. P., & Zéman, Z. (Hungary). (Kyiv, Ukraine) New dimensions of internal controls in banking after the GFC 38 Head of the Publishing Project Vozniuk, A., & Tytko, A. (Ukraine). Cryptocurrency: present-day challenges and prospects of development 49 Dr. Oleh Soskin Editor-in-Сhief Dr. Nadiya Matviychuk-Soskina ECONOMICS AND MANAGEMENT OF NATIONAL ECONOMY Tleppayev, A. (Kazakhstan). International Editor Digitalisation and energy: world experience and evidence of correlation from Kazakhstan 56 Dmytro Masko Voloshyna, S., Provolotska, O. Lazaryshyna, I., Nieizviestna, O., & Skliar, N. (Ukraine). Analytical assessment of the jewellery market in Ukraine 65 Economic Annals-XXI Journal is included into the List of Professional ECONOMICS AND MANAGEMENT OF ENTERPRISES Editions for Economic Branch of Sciences (Order of the Ministry of Education and Popov, A., Koshkalda, I. Kniaz, O., & Trehub, O. (Ukraine). Science of Ukraine No. 528 from 12.05.2015) Land fragmentation of agricultural enterprises in the context of administration of land 80 Berková, K., Krpálek, P., & Krpálková Krelová, K. (Czech Republic). Future economic professionals: development of practical skills and competencies in higher education Publication ethics from the point of view of international employers 91 The materials submitted for the publication Derenska, Ya. (Ukraine). in the journal pass external blind review and Approaches to project portfolio formation by pharmaceutical products producers 99 reviewing of the members of the Editorial Board of the Economic Annals-XXI Journal. Slaba, M. (Czech Republic). Factors influencing customer loyalty towards mobile phones brands - evidence from the Czech market 109 The ideas and offers, stated in articles, not necessarily coincide with the point of view of the Editorial Board. ACCOUNTING ANALYSIS AND AUDIT Grosu, V., Anisie, L. (Romania), Hrubliak, O., & Ratsa, A. (Ukraine). The responsibility for reliability of Managerial accounting solutions: Lean Six Sigma application in the woodworking industry. the information in articles, accuracy of the A Practical aspect 118 titles, names and citations is carried by the authors.

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The Editorial Board of the Journal consists of Scientists who represent different affluent Research centres in Ukraine and other countries (Slovakia, Poland, Latvia, USA, Hungary) Editorial Board of the Economic Annals-XXI Associate Member of the NAS of Ukraine, D.Sc. (Economics), Professor, First Deputy Director, Bersheda Yevhen Institute of Legislation of the Verkhovna Rada of Ukraine, Kyiv, Ukraine Academician of the National Academy of Sciences of Ukraine, D.Sc. (Economics), Professor, Bilorus Oleg Head of Department of Global and Civilization Processes, Institute of the World History of the NAS of Ukraine, Kyiv, Ukraine D.Sc. (Economics), Professor at the Economic Theory Department, University of Economy and Law «Krok», Chernyak Volodymyr Kyiv, Ukraine D.Sc. (Economics), Professor at the World Economy and International Economic Relations Department, Filipenko Anton Institute of International Relations, Taras Shevchenko Kyiv National University, Kyiv, Ukraine Galeotti Mark PhD, Clinical Full Professor of Global Affairs at the Center for Global Affairs, New York University, USA (USA) Academician of the National Academy of Sciences of Ukraine, D.Sc. (Engineering), Professor, Horbulin Volodymyr Member of Presidium of the NAS of Ukraine, Director of The National Institute for Strategic Studies under the President of Ukraine, Kyiv, Ukraine D.Sc. (Economics), Professor, Department of Finance, Accounting and Audit, University of Modern Knowledge, Kanygin Yuriy Kyiv, Ukraine D.Sc. (Economics), Professor, Director of the State Institution «Institute of Regional Studies named after Kravtsiv Vasyl M.I. Dolishniy of the NAS of Ukraine», Lviv, Ukraine Academician of the National Academy of Sciences of Ukraine, D.Sc. (Economics), Libanova Ella Professor, Member of the Presidium of the NAS of Ukraine, Director of Ptoukha Institute for Demography and Social Studies of the National Academy of Sciences of Ukraine, Kyiv, Ukraine Matviychuk-Soskina PhD (Economics), Editor-in-Chief of the Economic Annals-XXI, Kyiv, Ukraine Nadiya D.Sc. (Economics), Professor, Senior Research Fellow, Head of Sector for Spatial Development of the Melnyk Mariyana State Institution «Institute of Regional Studies named after M.I. Dolishniy of the NAS of Ukraine», Lviv, Ukraine PhD (Finance), RHB Islamic Endowed Scholar in Finance, UMT Fund Manager, Nor Safwan Mohd University of Malaysia Terengganu, Terengganu, Malaysia; Research Associate, Victoria Institute of Strategic Economic Studies, Victoria University, Melbourne, Australia D.Sc. (Philosophy), Professor, Honoured Worker of Science and Technology of Ukraine, Chief Researcher, Ozhevan Mykola the National Institute for Strategic Studies under the President of Ukraine, Kyiv, Ukraine D.Sc. (Economics), Professor, Kyiv National Economic University named after Vadym Hetman, Radionova Iryna Head of the Economic Theory Department of University of Economy and Law «Krok», Kyiv, Ukraine D.Sc. (Economics), Professor, Director-in-General of the Research Centre for Sustainable Development, Shevchuk Vasyl Kyiv, Ukraine D.Sc. (Economics), Professor, Head of the World Economy and International Economic Relations Department, Shnyrkov Alexander Institute of International Relations, Taras Shevchenko Kyiv National University, Kyiv, Ukraine PhD (Economics), PhD (Theology), Associate Professor, Director of Institute of Society Transformation, Soskin Oleh Professor of the National Academy of Management, Director-Editor & Publisher of the Economic Annals-XXI, Kyiv, Ukraine Stecenko Inna PhD (Economics), Professor, Vice-Rector of the Baltic International Academy, (Latvia) Head of PhD Program «Regional Economy and Economic Policy», Riga, Latvia D.Sc. (Economics), Professor, Head of Regional Financial Policy Department of the State Institution Storonyanska Iryna «Institute of Regional Studies named after M.I. Dolishniy of the NAS of Ukraine», Lviv, Ukraine Táncošová Judita PhD (Economics), Professor in the Department of Economics and Finance, Vice-Rector for Education, (Slovakia) School of Economics and Management in Public Administration in Bratislava, Slovakia Vasa Laszlo PhD (Agricultural Economics), Associate Professor, Institute for Foreign Affairs and Trade, Budapest; (Hungary) Research Professor, Szechenyi Istvan University, Győr, Hungary Wierzbicka Ewa PhD (Economics), Adjunct Professor, Institute of Value Management, Warsaw School of Economics, (Poland) Warsaw, Poland D.Sc. (Politics), Professor, Head of Global and Civilization Processes Department, Zernetska Olga Institute of the World History of the National Academy of Sciences of Ukraine, Kyiv, Ukraine PhD (Economics), Associate Professor, Vice-Director, B. Havrylyshyn Education and Research Institute of Zvarych Roman International Economic Relations, Ternopil National Economic University, Ternopil, Ukraine

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ISSN 1728-6220 (Print) ISSN 1728-6239 (Online) ЗМІСТ https://doi.org/10.21003/ea

EКОНОМIЧНИЙ ЧАСОПИС-XXI СУСПІЛЬСТВО науковий журнал Іщенко І. В., Башкеєва О. М., Петров П. Г. (Україна). Емпірична модель конгруентності ментального простору як інструмент аналізу 176(3-4)’2019 та змін міжнародних відносин 4 Попова Н. В., Катаєв А. В. Скриньковський Р. М., Невертій Г. С. (Україна). Видається з 1996 року Розвиток маркетингу довіри в цифровому суспільстві 13

Передплата через редакцію журналу ГРОШІ, ФІНАНСИ ТА КРЕДИТ Шкарлет С.М., Дубина М.В., Вовк В. Я. (Україна), Нога М. (Польща). Керівник проекту Ринки фінансових послуг країн Східної Європи: композиційна модель функціонування 26 Олег Соскін Головний редактор Лентер Ч., Ваша Л., Коложи П., Земан З. (Угорщина). Нові виміри внутрішнього контролю в банках після глобальної фінансової кризи 38 Надія Матвійчук-Соскіна Міжнародний редактор Вознюк А. А., Титко А. В. (Україна). Криптовалюта: сучасність і перспективи розвитку Дмитро Масько 49

Поштова адреса редакції: ЕКОНОМІКА ТА УПРАВЛІННЯ НАЦІОНАЛЬНИМ ГОСПОДАРСТВОМ а/с 297, Київ, 01030, Україна Тел./факс: Тлеппаєв А. (Казахстан). (096) 521 0508 Цифровізація та енергетика: світовий досвід і казахстанський приклад взаємозв’язку 56 (050) 867 5802 Волошина С. В., Проволоцька О. М., Лазаришина І. Д., Нєізвєстна О. В., Скляр Н. М. (Україна). E-mail: [email protected] Аналітичнa оцінкa ринку ювелірних виробів України 65 WEB: www.soskin.info/ea/

Журнал перереєстровано ЕКОНОМІКА ТА УПРАВЛІННЯ ПІДПРИЄМСТВАМИ Міністерством юстиції України Свідоцтво КВ № 20731-10531ПР Попов А. С., Кошкалда І. В., Князь О. В., Трегуб О. М. (Україна). від 15.05.2014 р. Фрагментація земель сільськогосподарських підприємств у контексті адміністрування земельних ресурсів 80 Науковий журнал Беркова K., Крпалек П., Крпалкова Крелова K. (Чехія). «Економічний часопис-ХХІ» Майбутні фахівці з економіки: розвиток практичних навичок і компетенцій у вищій освіті входить до переліку фахових видань з погляду міжнародних компаній-роботодавців 91 з економічних наук (Наказ Деренська Я. М. (Україна). Міністерства освіти і науки України Підходи до формування проектного портфелю фармацевтичних виробників 99 № 528 від 12.05.2015 р.) Слаба М. (Чехія). Фактори, що впливають на лояльність клієнтів до брендів мобільних телефонів Журнал рекомендовано до друку та (на прикладі чеського ринку) 109 поширення через мережу Інтернет Вченою Радою Державної установи «Інститут регіональних досліджень ОБЛІК, АНАЛІЗ ТА АУДИТ імені М. І. Долішнього Національної академії наук України» Гросу В., Анісіє Л. (Румунія), Грубляк О. М., Раца О. Б. (Україна). (Протокол № 4 від 21 травня 2019 р.) Рішення управлінського обліку: використання технологій Six Sigma в деревообробній промисловості. Підписано до друку 28 липня 2019 р. 118

Видавець: Інститут суспільної трансформації Свідоцтво про внесення до Державного реєстру суб’єктів видавничої справи ДК № 3273 від 03.09.2008 р.

Віддруковано в типографії ТОВ ВКП «СТ-друк» Київ, вул. Львівська, 55 www.st-druk.com.ua Наклад: 500 прим.

Відповідальність за точність наведених даних і цитат покладається на авторів. Передрук — за погодженням із редакцією. Матеріали друкуються англійською, українською, російською та польською мовами. У разі цитування посилання на «Економічний часопис-XXI» обов’язкове.

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ECONOMIC ANNALS-XXI ISSN 1728-6239 (Online) ISSN 1728-6220 (Print) https://doi.org/10.21003/ea http://www.soskin.info/ea/

Volume 176 Issue (3-4)’2019

Citation information: Ishchenko, I., Bashkeieva, O., & Petrov, P. (2019). Empirical model of congruence of mental space as a tool for the analysis of changes in international relations. Economic Annals-XXI, 176(3-4), 4-12. doi: https://doi.org/10.21003/ea.V176-01

UDC 321.01+330.101](100)

Igor Ishchenko Olena Bashkeieva Pavlo Petrov D.Sc. (Political Science), Associate Professor, PhD (Philosophy), PhD (Political Science), Head of the International Relations Department, Associate Professor, Associate Professor, Oles Honchar Dnipro National University Ukrainian State University of Chemical-Technology Oles Honchar Dnipro National University 72 Gagarin Ave., Dnipro, 49010, Ukraine 8 Gagarin Ave., Dnipro, 49005, Ukraine 72 Gagarin Ave., Dnipro, 49010, Ukraine [email protected] [email protected] [email protected] ORCID ID: https://orcid.org/0000-0001-5799-7364 ORCID ID: https://orcid.org/0000-0001-7029-2465 ORCID ID: https://orcid.org/0000-0001-9124-1763

Empirical model of congruence of mental space as a tool for the analysis of changes in international relations

Abstract. Recently, we have observed a lack of modern research on the question of the practical realisation of the mental space concept. This determines the topicality of the authors’ research. The article studies the multiple ways of development of international economic and political relations, based on an empirical model of interaction of mental spaces. The authors of the article have developed an empirical model on the basis of a formula containing (in a codified form) an imbalance of mental constructs of the basic political and institutional structures and the environment. The concepts of «congruent interference» and «non-congruent interference» of mental constructs have been introduced. The mental space consists of a dynamic unity of mental constructs. The present research is based on the following empirical models: the political process (introduced by Donald Morrison and Hugh Stevenson) and the mass instability (developed by Ted Gurr). It has been shown that such an integrated approach makes a new concept topical, being the imbalance of the mental construct. It is calculated as the sum of four elements such as the level of realisation of individual values of the public environment as a result of the implementation of foreign policy, the level of realisation of basic political institutional structure values connected with the social environment, the emotional factor of the basic political institutional structures interacting with the social environment, and compensatory resources. The authors have presented prospective methods of influencing the mental space, given the current trends in the development of information and social networks, where the black swan effect is crucial in the information field. In terms of modern conditions, this effect is associated with the emergence of unforeseen actors capable of changing the public opinion. These are the public opinion leaders. The manipulation of social networks has been emphasised among the methods of influence. A method based on creating groups, public pages and channels for interpreting the events has been shown. It is also noted that the successful interaction of states is possible thanks to the congruent interference of their mental spaces. The reason for the deterioration of relations between them is the imbalance of mental constructs and spaces in general, resulting in the political instability. The given model can be successfully used for analysing and forecasting not only the development of international relations and making alterations to the foreign policy. It is obvious that the scope of its application can include as well the renewed trust to the candidates seeking elections, the managers at any level and the like. In fact, the quality of the social relations between the two subjects can be shown in accordance with the abovementioned model. Keywords: Mental Space; Mental Construct; Interaction; Environment; Congruent Interference; Influence; Distrust; Black Swan; Network; Public Opinion; President JEL Classification: F29 Acknowledgements and Funding: The authors received no direct funding for this research. Contribution: The authors contributed equally to this work. DOI: https://doi.org/10.21003/ea.V176-01

Ishchenko, I., Bashkeieva, O., & Petrov, P. / Economic Annals-XXI (2019), 176(3-4), 4-12 © Institute of Society Transformation, 2019

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Іщенко І. В. доктор політичних наук, доцент, завідувач кафедри міжнародних відносин, Дніпровський національний університет імені Олеся Гончара, Дніпро, Україна Башкеєва О. М. кандидат філософських наук, доцент, кафедра філософії, Український державний хіміко-технологічний університет, Дніпро, Україна Петров П. Г. кандидат політичних наук, доцент, кафедрa міжнародних відносин, Дніпровський національний університет імені Олеся Гончара, Дніпро, Україна Емпірична модель конгруентності ментального простору як інструмент аналізу та змін міжнародних відносин Анотація. Авторами досліджено поліваріативність результатів розвитку міжнародних економічних і політичних відносин на основі емпіричної моделі. Вона відображає рівень дисбалансу ментального простору взаємодіючих суб’єктів. Дана модель побудована з урахуванням сучасних умов інформаційного суспільства. В якості базових були використані емпіричні моделі: політичного процесу (Д. Моррісона і Х. Стівенсона) та масової нестабільності (Т. Гарра). Аксіологічний компонент було обрано в якості базисного для концептуалізації конгруентної і неконгруентної інтерференції ментальних просторів політико- інституційних структур і середовища. Показано, що такий інтегрований підхід актуалізує нове поняття − розбалансування ментального конструкту. Він обчислюється як сума рівня реалізації цінностей індивідів суспільного середовища в результаті певної зовнішньої політики, рівня реалізації цінностей базисних політико-інституційних структур по відношенню до суспільного середовища, емоційної складової взаємодії політико-інституційних структур і середовища, а також компенсаційних ресурсів. В роботі проілюстровано практичне значення зазначеної емпіричної моделі на прикладі міжнародних відносин України та ЄС. Показано перспективні методи впливу на ментальний простір, де вирішальне значення має ефект «чорного лебедя» в інформаційному полі. Цей ефект у сучасних умовах пов’язаний із появою непередбачених акторів, здатних вплинути на зміну громадської думки. Доведено, що реалізація емпіричної моделі допоможе країнам змінювати ментальний простір, орієнтований на співпрацю. Представлена модель може бути успішно використана для аналізу та прогнозування не тільки розвитку міжнародних відносин і внесення коректив у зовнішню політику. Очевидно, сфера її застосування може бути поширена на відновлення довіри до кандидатів на виборні посади, менеджерів будь-якого рівня тощо. Якість соціальних відносин між двома суб’єктами можливо показати у відповідності з вищенаведеною моделлю. Ключові слова: ментальний простір; ментальний конструкт; взаємодія; середовище; конгруентна інтерференція; вплив; недовіра; чорний лебідь; мережа; суспільна думка; президент. Ищенко И. В. доктор политических наук, доцент, заведующий кафедрой международных отношений, Днепровский национальный университет имени Олеся Гончара, Днепр, Украина Башкеева Е. Н. кандидат философских наук, доцент, кафедра философии, Украинский государственный химико-технологический университет, Днепр, Украина Петров П. Г. кандидат политических наук, доцент, кафедра международных отношений, Днепровский национальный университет имени Олеся Гончара, Днепр, Украина Эмпирическая модель конгруэнтности ментального пространства как инструмент анализа и изменений международных отношений Аннотация. Авторами исследована поливариативность результатов развития международных экономических и политических отношений на основе эмпирической модели. Она отражает уровень дисбаланса ментального пространства взаимодействующих субъектов. Данная модель построена с учетом современных условий информационного общества. В качестве базовых были использованы эмпирические модели: политического процесса (Д. Моррисона и Х. Стивенсона) и массовой нестабильности (Т. Гарра). Аксиологический компонент выбран в качестве базисного для концептуализации конгруэнтной и неконгруэнтной интерференции ментальных пространств политико- институциональных структур и среды. Показано, что такой интегрированный подход актуализирует новое понятие − разбалансировка ментального конструкта. Он вычисляется как сумма уровня реализации ценностей индивидов общественной среды в результате определенной внешней политики, уровня реализации ценностей базисных политико-институциональных структур по отношению к общественной среде, эмоциональной составляющей взаимодействия политико-институциональных структур и среды, а также компенсационных ресурсов. В работе проиллюстрировано практическое значение указанной эмпирической модели на примере международных отношений Украины и ЕС. Показаны перспективные методы воздействия на ментальное пространство, где решающее значение имеет эффект «черного лебедя» в информационном поле. Этот эффект в современных условиях связан с появлением непредвиденных актеров, способных повлиять на изменение общественного мнения. Доказано, что реализация эмпирической модели поможет странам менять ментальное пространство, ориентированное на сотрудничество.

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Представленная модель может быть успешно использована для анализа и прогнозирования не только развития международных отношений и внесения корректив во внешнюю политику. Очевидно, сфера ее применения может быть распространена на восстановление доверия к кандидатам на выборные должности, менеджерам любого уровня и тому подобное. Качество социальных отношений между двумя субъектами можно показать в соответствии с вышеприведенной моделью. Kлючевые слова: ментальное пространство; ментальный конструкт; взаимодействие; среда, конгруэнтная интерференция; влияние; недоверие; черный лебедь; сеть; общественное мнение; президент.

1. Introduction Nowadays, uncertainty and shocking consequences are peculiar features of global events. Po liticians, having considerable resources at their disposal, do not get the desired results, and there appear new actors, whose appearance has hardly been predicted. For example, Donald Trump winning the president elections, or Volodymyr Zelenskyi becoming the President of Ukraine. The Eur opean Parliament electoral campaign witnessed 90 German famous YouTube celebrities calling to vote for those who pay close attention to the environmental problems. As a result, the Green party won. There- fore, we face a problem of how to formalise the consequences of the systemic influence of a certain extraordinary event, existing trends and the consistency of relations between the politicians at the international level. Understanding the international relations as a system of economic, political, social, cultural, military, legal and other ties between the states and nations leads to considering links which can shed light on the causes of positive and negative relations between certain political and regional entities in the context of these elements. The perspective of the assessment of the international relations, the impact of unforeseen events, motivates justifies the creation of a model including the mental characteristics of the interacting entities, as well as an explanation of its empirical use. Sorting out this problem will be useful for economists and political scientists involved in strategic planning and international relations forecasting which stipulates the topicality of the given article.

2. Brief Literature Review The problem of the mental space of interacting subjects has been considered by modern researchers [1-2]. The most general approaches to understanding the mental space have been deve loped by G. Fauconnier (1987) [3] and G. Lakoff (1987) [4]. Yu. Harari (2015) wrote about the role of mental components in the global interaction of economic and political systems in his work «Sapiens: A Brief History of Humankind» [5]. Olena Bashkeieva (2015) explores the «mental revolutions» taking place under the influence of global social changes, including the economic and political ones [6]. The model of mental constructs and their interaction in the context of political instability was introduced by I. Ishchenko (2015) [7]. A separate aspect of the mental construct was explored by A. Evans and J. Krueger (2009) [8]. J. Shelton (2017) [9] explores the influence of mentality on the inefficient go vernance in Greece and the crisis phenomena in its economy. A. Bohigues (2018) [10] considers the axiological component of mental constructs in political process. O. Drozdov (2014) [11] has contri buted greatly to the development of subject matter of mental maps of the world. N. Taleb offers his own concept for changing mental space, based on the current trends in the philosophy of chance and uncertainty (2010) [12]. O. Zernetska (2010) [13] investigates the functioning of the mass media in terms of a certain socio-political situation and the possibility of consolidation of the population. The empirical model of the political process having the axiological component, the gap between the elite and the environment, was created by D. Morrison and H. Stevenson [14]. Ted Gurr (1968) is the author of an empirical model of mass instability, in which the main element is the relative deprivation, being the difference between the desires and capabilities of the political participants [15]. De- spite the sufficient number of theoretical studies, insufficient attention is paid to their practical implementation. This article is dedicated to filling this gap.

3. Purpose Basing on the existing multiple ways of international economic and political relations development, the article is aimed at introducing a formal model of interaction of mental spaces of states and perspective methods of influencing their change.

4. Results New actors, which have appeared on the world stage, have succeeded in creating their poles of influence. For example, the People’s Republic of China has created a motivation for interaction in

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Latin America meeting the interests of both parties. As a result, there has appeared a space created to expand, predominantly, economic cooperation [16]. In this regard, a question is raised as to how it is possible to grasp this motivational mechanism that promotes the binary interaction of states, which, on the one hand, claims to expand the country’s influence, being on the other hand, subject to it, responding in a certain way [17]. This interaction induces certain mental frames. For example, such a mental frame as «national capitalism» has become increasingly popular in Ukraine, and it is explicit in the economic model of Austria [18]. Let us turn to such concepts as mental space and mental construct. G. Fauconnier and G. La- koff considered the mental space as the medium for conceptualisation and thinking [3, 54; 4, 315]. Domestic researchers Yu. Kupchyshyna and Yu. Davydyuk emphasise that any set of operations or actions taking place in reality creates a projected hypothetical mental space comprising the gene rated knowledge in our thoughts [1, 165]. In other words, the mental space extends to the territory of the interacting states. However, each state has its own mental space being filled with the mental constructs of political institutions and the environment. In its turn, «a mental construct», being a scientific phenomenon laid down in terms of the inductive method and modelling, is defined as a system which syncretically includes such components as knowledge, worldview, ideology, sensitivity, myths, beliefs, values, cultural stereotypes, customs and etiquette, fantasies, hopes and pho- bia and semi-obsessive manifestations [7, 56]. As we can see, this scientific phenomenon also includes relatively stable elements difficult to be changed all at once, as well as those changing ones depending on the political, economic situation and other factors, including natural disasters, political conflicts, socio-demographic and migration processes, etc. The most stable elements of the mental construct include values, constantly changing under the influence of social revolutions, resulting in radical changes in the political system. These changes start to produce new value benchmarks immediately through mass media, non-institutional entities and representatives of social networks. It is necessary to introduce such concepts as congruent interference and noncongruent interference of the mental constructs (or spaces as an integral system of mental constructs) to assess the overall influence of institutional and non-institutional entities on the political system. One of the scientific interference values is the cross-linguistic interaction as a result of using different languages. In fact, according to Gilles Fauconnier and Mark Turner (1994, 1998), it is the blended space. We give this term a value and use the interference to explain the level of cross-linguistic interaction of two interacting (political and economic) systems, as well as their environment. Hence, we consider their both positive and negative mutual perception. If we turn to the congruent interference of these elements with regard to the political and economic elites and the environment, we may observe a synergy effect. In such a case, the mental constructs of binarily interacting states contain such a component as «trust», which can be grasped through monitoring the legitimacy taken from sociological surveys [8]. Moreover, the congruent interference of these mental constructs demonstrates the possibility to realise their va lues through interaction with political and institutional structures. If the values of the political elite and the leaders, when interfering with the social environment, turn out to be noncongruent, then one should expect social instability [10, 60]. These considerations are also true for international relations. And now, we illustrate the above mentioned in a symbolic form. As a basis we chose the empirical models of instability and integration developed by Morrison and Stevenson, as well as the model of mass instability introduced by Gurr (1968) [14-15]. They take into account the diver- gence of values of the elite and of the environment, along with the relative deprivation as the difference between desires and opportunities. However, the scholars do not pay considerable attention to the emotional state of social groups and their mutual perception, given the unexpected short-term events in the information field peculiar to the present. Considering the mental space of a state, we have decided to focus on the interaction of mental constructs of basic political institutions and the political system. The estimate of the level of their imbalance in relation to the other state, in our opinion, can be illustrated by formula 1:

D = Vs.e. + Vb.p.s. + Cr , (1)

where: D stands for the imbalance of mental constructs of basic political institutional structures and the environment. Its result is the interference (if congruent, then «+»; if noncongruent, then «-») of the interaction of the political and economic system, and the environment.

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Other symbols of the given dependence have the following meanings:

Vs.e. is the level of realisation of public environment individual values as a result of a certain fo reign policy. In our opinion, this indicator can be calculated on the grounds of two variables. The first is self-assessment(S s.е.) regarding the issue of how the representatives of the social environment realise their own system of values as to the attitude towards another state which could be presented in points, for example, ranging from -10 to + 10. The second is how these individuals assess

(Gb.p.s.) the basic political institutional structures in view of producing the system of values meeting their requirements as to another state. It can be measured at the same intervals. The empirical confirmation whether the latter indicator is true can be found in the ratings of political leaders support relating to foreign policy towards this country. Then, Vs.e. = Ss.е. + Gb.p.s.. In our case, it will fluctuate in the range - 20 ÷ + 20 points.

Vb.p.s. is the level of realization of basic political institutional structure values connected with the social environment. The measurement is identical to Vs.e. calculations. That is, Vb.p.s. include how the political elite (Sb.p.s.) self-assess the degree of realisation of their own value system in relation to another country in the course of its activity (measured in the range of 10 ÷ + 10 points) and how the political elite assess the degree of realisation of their own values in the social environment in relation to the same country (Gs.e.). The given assessment is ranging 10 ÷ + 10 points. According to this, it is reasonable that Vb.p.s. = Sb.p.s. + Gs.e. . Thus, Vb.p.s. is ranging - 20 ÷ + 20 points. It is logical that the imbalance of mental constructs cannot be measured without considering the emotional component that we add to Formula 1. We believe it is reasonable to use the following formula 2:

Ir = Емpb.p.s. s.e. + Емps.e. b.p.s. , (2)

where: Ir stands for an emotional component of the interaction of political and institutional structures and the environment. This element includes the possibility of changing the mental space due to the emergence of unexpected factors affecting the emotions, which we characterise as a black swan effect, which will be discussed further;

Емpb.p.s. s.e. is an emotional factor determining how the basic political institutional structures perceive the social environment, depending on its relation to another state (if it is positive perception, there is «+»; if it is negative perception, there is «-»). Range is - 10 ÷ + 10 points;

Емps.e. b.p.s. is an emotional factor showing how the social environment perceive basic political institutional structures, given their foreign policy towards another state (if it is positive perception, there is «+»; if it is negative perception, there is «-»). Range is - 10 ÷ + 10 points.

Cr in Formula 1 stands for the size of compensatory resources (money, information resources, power resources, etc.) required to achieve a balance of mental constructs of the basic political and economic structures and the environment. Consequently, finally we have the following formula 3:

D = Vs.e. + Vb.p.s. + Ir + Cr . (3)

From the given correlation, it is understood that the congruent interferencemental constructs results in D > 0, where D has the positive value and no compensatory resources are needed.

Thus, Cr = 0. In other words, we have a situation when the majority of state residents provide their support for the president, the parliament and the government in the context of foreign policy aimed at interacting with another state. If there is a misbalance of mental constructs or, as we say noncongruent interference (D < 0), additional compensatory resources, including new political decisions and actions contributing to political stabilisation, are needed to maintain political and economic stability and security. Besides, while assessing the imbalance of the mental constructs which are peculiar to the basic political structures and the political system environment, it is mandatory, in our opinion, to take into account the psychological characteristics of generations. After all, each of the four currently living generations has its predominant system of values, interests, beliefs and stereotypes of behaviour [19]. However, speaking about the differences of generations, there is one value that is common to all generations being a romantic consumption [5, 144]. All these and other elements of the mental constitution affect the attitude towards another state,

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its people and political leaders. Thus, Formula 3 should apply to each of the four generations. In addition, the international relations are also influenced by regional features, which also are to be taken into account in calculations [11]. Let us consider a particular example while using our model. The survey «Perception of problems and reforms» conducted from November 1 to December 4, 2018 showed that the list of top urgent problems in modern Ukraine does not include the European integration. Only 10% of respondents believe that the development in this direction is our first priority [21]. 54% of the Ukrainians polled are more concerned about the economic situation that needs to be improved immediately [21]. 8% of the polled consider that joining NATO is the most pressing issue, whereas one half of the respon dents expressed their desire for the quickest corruption combat [21]. During another poll (2019), 57% of the Ukrainian respondents supported the European integration [22]. However, in addition to the political component, the economic component is equally important, based on the experience of Bulgaria and Romania, the European integration processes of the poorest EU countries. Mor eover, according to the experts, the Ukrainian economy will not be able to export the goods to Europe, given the same time for negotiating the EU technical standards [23]. For our products to enter the European market freely it is necessary to get the foreign direct investment in the economy to mod- ernise it. Yet, according to the statistics, the investments in 2018 decreased by 7.7% compared with 2017 [24]. Thus, we can estimate the percentage of those people who are upset by economic policy, while the former President of Ukraine Petro Poroshenko and the Government of Volodymyr Groysman considered the European integration and NATO membership to be a priority. This is evi- denced by the decision of the Verkhovna Rada to introduce the Constitution amendments to fit into the European integration and NATO membership.

Formula Vs.e. = Ss.e. + Gb.p.s. acquires a real content, where: Gb.p.s. = - 54 + 10 = - 44%. This is the percentage of those people who categorically oppose the European integration as the main problem that political institutional structures should deal with. This indicator will affect the consonance of noncongruent interference of the mental space in terms of foreign policy. Another criterion is how the social environment representatives realise their own system of va lues (Ss.e.) as to another state is migration. After all, a person has to afford to have rest abroad. But such a romantic consumption cannot be borne by 69% of the country’s inhabitants due to the financial problems [25]. Here we find the difference between those who can afford to have rest in Europe (31%) and those unable to do it (38%). Finally, we get Ss.e. = - 38%. To convert the percents into points (their interval + 10 points - 10 points for both Gb.p.s. and for Ss.e.), we set a ratio when 10% equal to 1 point. Then Vs.e. = - 3.8 - 4.4 = - 8.2 (points). Consequent- ly, the Ukrainians are dissatisfied not with the European integration course, but with the prio rity of putting this problem on the agenda. Moreover, more and more people go abroad, seeing no prospects in Ukraine for having salaries, commensurable to the communal and other social tariffs. The next step is to assess the level of realisation of basic political institutional structure values connected with the social environment (Vb.p.s.). The self-assessments relating to how the political elite (Sb.p.s.) realise their own system of values in relation to the European Union in the course of their activities are as follows. The analysis of the speeches pronounced by Petro Poroshenko, the former President of Ukraine, Volodymyr Groysman, the Head of the Government, the decisions made by the Verkhovna Rada of Ukraine allows stating the complete absence of their self-critical publicity. Taking into account the signed association with the EU and obtaining a visa-free regime, it is worth considering the above-mentioned self-esteem Sb.p.s. = + 10 points. Another indicator Gs.e. stands for the political elite assessing the degree of the realisation their va lues in the social environment in relation to the EU. The fact is that the dissatisfaction with the actual situation in the country concerning the fo reign relations with the European Union on the grounds of an ill-attempted domestic policy, its economic and humanitarian component, resulted in a high level of distrust to the senior state officials and the political structures. Thus, in March 2019, the level of distrust to the President was 69%, to the Government 74%, to the Verkhovna Rada of Ukraine 82%. It turned out that 66% of the citizens believe that our judicial system is unreliable [27]. Thus, the average rate of distrust is 78% - 7.8 (points), and therefore Gs.e. = - 7.8 points. In other words, the particular result of work is the criterion for realising one’s own values in the social environment, and it is expressed in the rating of trust / distrust of the society to the political leader. Here we have

Vb.p.s. = Sb.p.s. + Gs.e. = 10 - 7.8 = + 2.2 points.

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Finally, it is necessary to consider the emotional component in Formula 2.

Емpb.p.s. s.e. is how the President, the Government, the Verkhovna Rada emotionally perceive the chance of our citizens crossing the EU borders, which causes the most positive emotions. Let’s count Емpb.p.s. s.e. = +10 points. However, we cannot claim that the social environment has the same attitude towards the main political institutional structures. The inability to use the EU visa-free regime due to financial reasons, together with distrust to political leaders, creates a negative synergy of the political and institutional structures emotional perception of the political environment. Since we have already established the difference between the percentage of people who can afford a trip to the EU and those who cannot (38%), they create increasing social entropy possible to blow out. Usually, the individuals do not want to undertake the responsibility for their failure of realising something, so they blame others, in this case, the state structures [9, 28]. Such individuals can implement their emotions in elections, referendums and polls, as well as in various forms of non-conventional behaviour (demonstrations, pickets, rallies, mass riots, etc.). The ratings of politicians have the emotions of the public environment materialised. According to our methodology, the average level of distrust towards the basic political institutional structures accounts for 78%. Consequently, it is not 38% of citizens who are more likely to negatively evaluate the politicians, their percentage equals to 38 × 0.78 = 30% (- 3 points). After definingЕмp s.e. b.p.s. being equal to 3 points, we can calculate Ir (formula 2):

Ir = Емpb.p.s. s.e. + Емps.e. b.p.s. = + 10 - 3 = + 7.0 points.

Then D stands for the misbalance of the mental constructs of the basic political institutio nal structures and the environment in relation to the relationship between Ukraine and the EU. D = - 8.2 + 2.2 + 7.0 + Cr = + 1.0 + Cr. Since D > 0, then the compensatory resources are not required for the Ukrainians to achieve a positive attitude towards the European Union. However, given the maximum possible positive attitude towards Ukraine’s foreign policy to the EU, which accor ding to our methodology is 60 points, we can only state that it is only the initial stage of developing positive relations. We anticipate they will be developed as soon as the EU and Ukraine deepen cooperation on modernising our economy, making it more competitive. Determining the current level of international relations, it is required to make the same calculations from the point of the second state in relation to the first one. Then we will have the opportunity to assess the mental space of the second state in the context of foreign policy and its focus on building a friendly, neutral or hostile relationship with the first mentioned state. Finally, to make a conclusion on the prospects of international economic and political relations between the two states, it is necessary to take into account the main points of their foreign policy, comparing the mental spaces and answering such questions. Is the foreign policy of each country aimed at developing friendly relations with the opposite side (congruent interference)? Is it neutral (relatively congruent interference)? Or is the relationship between states hostile (non-congruent interference)? We have decided to keep on investigating into this matter. Moreover, mental space management, which is increasingly popular in the world, can have a decisive influence and change a certain mental construct of the population. As we can see, theCr in Formula 3 performs the task of compensating for the imbalance of mental constructs. Furthermore, it is practically impossible to live in an isolated mental space. So we pose a question whether it is possible to control the mental space, regardless of the type of political regime, with the social networks and uncontrollable government. It should be noted that global changes in the mental space throughout the state are possible only when there is a powerful political force telling such a myth that everyone believes in. In addition, it is to be more appealing than the previous one [5, 148]. For example, one of the technologies offered by Nassim Taleb (2017) [12] is built on the black swan concept. The fact is that postmodern sees the information space demonopolised from the media. It is formed not only by mass media, but also by the public opinion of leaders and ordinary social network users. Accordingly, the agenda can be determined by the information field entities, which is difficult and often impossible, to be applied with the classical methods of mental space management [13, 30]. There are a number of reasons, including the existence of a significant number of entities, the ability to remain anonymous, dependence on political opponents, and so on. Such conditions give a rise to volatility as one of the features of the mental space. It becomes much easier to create disturbance in it. Having developed information technologies, this can be

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done by anyone. Accordingly, the role of uncertainty, providing the basis for Taleb’s black swan concept, is growing. The author of the concept claims that it is impossible to predict the unexpected, so it is necessary to make bids. In particular, he offers to spend 15% of investments on such black swans. Most of them will be lost, because they will not become such swans. Howe ver, if you can «bet» on the black swan and win, the dividends (including political and economic ones) will be disproportionately advantageous and will cover those loses for the indicated 15%. In accordance with this concept, it is worth spending this percentage on such projects, which can be conventionally called informational, economic, informational and political. These are the projects having the potential for development, to have a significant impact on the mental space in future. First of all it concerns the public opinion leaders. The emergence of a new public opi nion leader may become the Black Swan. Hypothetically, it can be called an information political and economic start-up. As the information system is non-linear, the appearance of a black swan can be identified with an attractor that taking a control over the reality [28, 109]. The other factor which should be considered is the type of attractor in the informative field, whether it is a simple one or an odd. It is the odd attractor that is able to cause perturbation, to change the public opi nion. For example, in the run of the election campaign Volodymyr Zelenskyi, the sitting President of Ukraine, was active in the social networks communicating with the audience, so, along with the other reasons, it became decisive and created a huge gap between him and his opponent, Petro Poroshenko who used by mostly traditional methods. Undoubtedly, each opinion leader has a certain audience, to which he transmits his own interpretations of events or trends. The management of mental space is possible thanks to a network of such leaders who are somehow engaged and who interpret the information in a context favourable to a particular economic and political entity. Another method is based on the principle which is similar to the previous one and in many ways intersects it. It is the creation of groups, public pages and channels for the interpretation of events. In fact, it is the same process, but the interpretation of events can often be impersonal. It should be noted that usually such impersonal groups do not form the opinions in general, but support them showing that to their own audience, having a more local impact. Therefore, such groups are created to interpret the information in the same way. It is important to create a signi ficant number of such groups, as it is connected with such a phenomenon, which was called an «information bubble» [20].

5. Conclusions By suggesting an empirical model of congruence of the state mental spaces, we arrive at the following conclusions: 1. The mental space of a state as a dynamic unity of the mental constructs of political and economic entities determines the level of motivation to interact with other states. The application of the model allows adjusting the foreign policy priorities and improving the interaction with other countries. 2. Mutually beneficial cooperation between the states on the basis of mutual motivation is achieved by the congruent interference of their mental spaces. Such a situation is observed when the va lues associated with the assessment of the state experience, the ideas about the ideal political regime, the attitude towards the economic policy and the prospects for states development and international cooperation between them have similar content. 3. The empirical part of the study showed that a nation-wide support of Ukraine’s European course will grow primarily due to deepening the EU cooperation on modernising the Ukrainian economy. The current cooperation is disappointing. After all, the level of congruence of the mental space of the political institutional structures and the foreign policy public environment towards the EU is low (not exceeding 2% of the potentially possible), mainly failing to get direct foreign investments to modernize the Ukrainian economy. Purposeful changes in the mental space of international economic and political relations are characterised by the methods mostly oriented to the black swan, leading as a rule, to the emergence of new leaders on the world stage. Today, interactive communication a tool for bifurcation, which, along with the traditional methods of influence through the mass media, increases the role of public opinion leaders in the social networks, those who able to unite a wide audience. Further investigations into this topic are to be focused on a political examination of the prospects for the interaction of states in a globalised world.

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Received 20.03.2019 Received in revised form 20.04.2019 Accepted 24.04.2019 Available online 20.08.2019

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ECONOMIC ANNALS-XXI ISSN 1728-6239 (Online) ISSN 1728-6220 (Print) https://doi.org/10.21003/ea http://www.soskin.info/ea/

Volume 176 Issue (3-4)’2019

Citation information: Popova, N., Kataiev, A., Skrynkovskyy, R., & Nevertii, A. (2019). Development of trust marketing in the digital society. Economic Annals-XXI, 176(3-4), 13-25. doi: https://doi.org/10.21003/ea.V176-02

UDC 339.138 Nadezhda Popova D.Sc. (Economics), Associate Professor, Kharkiv Institute of Trade and Economics of Kyiv National University of Trade and Economics 8 Otakar Yarosh lane, Kharkiv, 61045, Ukraine [email protected] ORCID ID: https://orcid.org/0000-0003-2797-6989

Andrei Kataiev PhD (Economics), Associate Professor, Kharkiv Institute of Trade and Economics of Kyiv National University of Trade and Economics 8 Otakar Yarosh Lane, Kharkiv, 61045, Ukraine [email protected] ORCID ID: https://orcid.org/0000-0001-8714-4063 Ruslan Skrynkovskyy PhD (Economics), Associate Professor, Lviv University of Business and Law 99 Kulparkіvska Str., Lviv, 79021, Ukraine [email protected] ORCID ID: https://orcid.org/0000-0002-2180-8055

Anna Nevertii PhD (Economics), Associate Professor, Kharkiv Institute of Trade and Economics of Kyiv National University of Trade and Economics 8 Otakar Yarosh Lane, Kharkiv, 61045, Ukraine [email protected] ORCID: https://orcid.org/0000-0002-3802-1398

Development of trust marketing in the digital society

Abstract. The development of a digital society, rapid access to information sources changes the consumers’ behaviour in terms of goods and services purchased online. In these conditions, the key to business development is trust: trust in web sites, information and brands represented on the Internet. Trust promotes consumers’ decision-making with regard to interaction and changes the approaches to marketing activities of business entities. The study identifies the factors that contribute to the development of trust and focuses on the importance of communication and consumer values, including the digital culture. The stages of trust marketing development, which are based on the principles of the theory of trust and consumer behaviour in a digital environment, are specified. The research was conducted with the involvement of online users through an on-line survey in April-July 2018 and included 2,038 respondents. Research questions were formed on the basis of focus groups, which included active Internet users. The research concerned Russian-speaking and Ukrainian-speaking Internet users. It reflects a certain socio-cultural environment of the Internet and gives impetus to continue the research focused on the multicultural comparison. This research gives an idea of consumers’ confidence in the digital environment and defines the conceptual aspects of developing trust marketing in relation to interaction, communication, consumer values and development stages. As the results of the study revealed, changes in consumer behaviour in the Internet environment, lack of direct contact with staff members enhance the value of trust in the company or brand. Therefore, trust marketing becomes the most demanded concept of modern marketing. According to this concept, marketing tools of enterprises in a digital society should be configured to establish trust relationships with consumers. This generates changes in the behaviour of enterprises themselves. The practical aspects of this research are to provide business stakeholders with guidance on developing trust marketing in a digital society based on consumer behaviour understanding. The social consequences of trust marketing development are the digital citizens’ satisfaction with their livelihoods by increasing confidence in business and the state, minimizing the risks in the digital environment. Keywords: Trust Marketing; Digital Society; Digital Culture; Consumer Values; Consumer Behaviour JEL Classіfіcatіon: M30; M31; M39; D11; D21 Acknowledgements and Funding: The authors received no direct funding for this research. Contribution: The authors contributed equally to this work. DOI: https://doi.org/10.21003/ea.V176-02

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Попова Н. В. доктор економічних наук, доцент, завідувач кафедри маркетингу та торговельного підприємництва, Харківський торговельно-економічний інститут Київського національного торговельно-економічного університету, Харків, Україна Катаєв А. В. кандидат економічних наук, доцент кафедри маркетингу та торговельного підприємництва, Харківський торговельно-економічний інститут Київського національного торговельно-економічного університету, Харків, Україна Скриньковський Р. М. кандидат економічних наук, доцент кафедри економіки підприємств та інформаційних технологій, Львівський університет бізнесу та права, Львів, Україна Невертій Г. С. кандидат економічних наук, доцент кафедри маркетингу та торговельного підприємництва, Харківський торговельно-економічний інститут Київського національного торговельно-економічного університету, Харків, Україна Розвиток маркетингу довіри в цифровому суспільстві Анотація. У статті розглядаються зміни в поведінці споживачів у цифровому суспільстві, які ґрунтуються на широкому доступі до інформації та зростанні ролі довіри, що потребує цілеспрямованих змін у маркетинговій діяльності підприємств. Проведено дослідження щодо факторів, які впливають на рівень довіри споживачів і стимулюють прийняти рішення щодо купівлі товарів і послуг через Інтернет. Запропоновано концептуальну модель взаємодії споживачів і суб’єктів бізнесу в цифровому середовищі, яка сприяє формуванню довіри. Визначено етапи формування маркетингу довіри в цифровому суспільстві та кроки, що сприятимуть формуванню атмосфери довіри. Ключові слова: маркетинг довіри; цифрове суспільство; цифрова культура; цінності споживачів; поведінка споживачів.

Попова Н. В. доктор экономических наук, доцент, заведующая кафедрой маркетинга и торгового предпринимательства, Харьковский торгово-экономический институт Киевского национального торгово-экономического университета, Харьков, Украина Катаев А. В. кандидат экономических наук, доцент кафедры маркетинга и торгового предпринимательства, Харьковский торгово-экономический институт Киевского национального торгово-экономического университета, Харьков, Украина Скрыньковский Р. Н. кандидат экономических наук, доцент кафедры экономики предприятий и информационных технологий, Львовский университет экономики и права, Львов, Украина Невертий А. С. кандидат экономических наук, доцент кафедры маркетинга и торгового предпринимательства, Харьковский торгово-экономический институт Киевского национального торгово-экономического университета, Харьков, Украина Развитие маркетинга доверия в цифровом обществе Аннотация. В статье рассматриваются изменения в поведении потребителей в цифровом обществе, основанные на широком доступе к информации и возрастании роли доверия, что требует целенаправленных изменений в маркетинговой деятельности предприятий. Проведено исследование факторов, влияющих на уровень доверия потребителей в цифровой среде и стимулирующих принятие решения о покупке товаров и услуг через Интернет. Предложена концептуальная модель взаимодействия потребителей и субъектов бизнеса в цифровой среде, которая способствует формированию доверия. Определены этапы формирования маркетинга доверия в цифровом обществе и шаги, способствующие формированию атмосферы доверия. Ключевые слова: маркетинг доверия; цифровое общество; цифровая культура; ценности потребителей; поведение потребителей.

1. Introduction Digital society is characterised by significant changes in virtually all spheres of human life at the expense of new opportunities provided by digital technologies, digital infrastructure, mobile and cloud technologies, Big Data, digital codification of information, significant growth of computing power, -in tegration of information technologies with communication systems, digital automation and robotics. All this accelerates the development of society, stimulates the growth of the economy, enhances the quality of state administration and business management in all spheres of economic activity, and improves the living conditions. In these conditions, the key to business development is trust, namely

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trust between partners, trust between the seller and the consumer, trust between the company and stakeholders. It provides new opportunities in relationships and cooperation through obtaining certain preferences and the credit of trust. Therefore, companies’ actions should be aimed at building confidence, including through the use of marketing tools, which the relevance of this study confirms. The problem of trust building as a basis for targeted marketing actions in the digital society requires changes in the conceptual framework of marketing. This is due to a change in consumer behaviour, an increase in the number of active Internet users, the use of modern mobile devices, new features that provide access to a variety of information. As a result, there is a growing need for trust marketing implementation, taking into account the behaviour of today’s modern consumers in the digital society.

2. Brief Literature Review The concept of trust is dealt with in various spheres of human life: philosophy, sociology, politics, and economics. The scientific work by F.Fukuyama (1995) [1] relates to significant research in the field of trust, in which trust is defined as a moral system that is not always subject to explicit consideration. F. Fukuyama argues that economic life is permeated by culture and depends on social trust. Yet, trust varies to some extent from country to country, and only high-confidence socie- ties will be able to establish vibrant, successful business organisations. D. S. Kennedy and M. Zagula (2012) [2] emphasised the important role of trust in business and marketing. In their research, they review the key strategies needed to strengthen trust and confidence in an unreliable world that would contribute to generating business profits. S. M. R. Covey (2006) [3] investigates the principal reasons for the relevance of trust. He believes the credibility to be the new currency of the modern world. R. M. Morgan and S. D. Hunt (1994) [4] determine that successful relationship marketing requires relationship commitment and trust. G. Urban (2005) [5] covers the entire «pyramid» of customer advocacy: starting with TQM and customer satisfaction ini tiatives, relationship marketing and new advocacy techniques built on trust. The study of various aspects of trust in a digital society is based on the works of scientists who deal with the issues relating to: • the impact of strategies on trust in online shops (Lim et al., 2006) [6]; • trust and confidentiality of information in a digital society (Bansal et al., 2016) [7]; • the impact of national cultural aspects on the propensity to trust in the on-line environment (Hallikainen and Laukkanen, 2018) [8]; • modelling and testing of consumer confidence in e-commerce (Oliveira et al., 2017) [9]; • the impact of website design on the trust towards little-known online retailers (Pengnate and Sarathy, 2017) [10]. T. C. Melewar et al. (2017) [11] view the impact of integration of identity, strategy and communications on organisational stakeholders’ trust, loyalty and commitment. T. Keszey (2018) [12] focu ses on the differential information processing consequences of trust in both inter-and intra-organisational information source. V. Gligor and J. M. Wing (2011) [13] argue that a general theory of trust in networks of humans and computers must be built on both a theory of behavioural trust and a theory of computational trust. C. Castelfranchi and R. Falcone (2010) [14] explain the concepts of trust, and describe a prin- cipled, general theory of trust based on cognitive, cultural, institutional, technical and normative solutions. Y. Kim and R. A. Peterson (2017) [15] consider the role of online trust in business-to-consumer e-commerce. K. Kalaignanam et al. (2018) [16] prove that web personalisation enables firms with high online trust to charge premium prices. J. Kollat and F. Farache (2017) [17] investigate how consumers react to different corporate social responsibility communications approaches on social media. Collaborative values, which reflect upon the brand credibility and confidence in staff and consumer behaviour, are built on trust (S. T. K. Luk et al., 2018) [18]. The distinction between trust and distrust is connected to approach and avoidance-motivated behaviours (Zeeland-van der Holst and Henseler, 2018) [19]. However, despite a large number of scientific papers in the field of trust, the issues related to the formation of theoretical and methodological foundations of trust marketing, taking into account the peculiarities of consumer behaviour in a digital society and the specifics of digital culture, require more attention. This is due to the fact that trust marketing plays an important role in a digital so ciety: it, with the help of marketing tools, technologies and actions, forms the trust of consumers in goods and services of companies, as well as their brands.

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3. The purpose of the article is to identify the peculiarities of consumer behaviour in the digital environment in terms of confidence to web sites, brands and related aspects of trust marketing development in a digital society.

4. Results To ensure an effective implementation of trust marketing, one must understand the behaviour of consumers in a digital society. Therefore, it is necessary to identify the factors that affect the formation of consumer confidence in the web sites of enterprises, their products and services and sti mulate the decision to purchase them through the Internet. For this purpose, in April-July 2018, surveys reflecting a certain socio-cultural environment of consumers were conducted among the Inter- net users in both the Russian-speaking and Ukrainian-speaking environment. The research was conducted using Google Forms. A set of research questions and respon ses was formulated based on the results of three focus groups, which included active Internet users. To develop the forms, the following methods were used: posting on profile and regional forums kharkovforum.com, dedicated forums of buyers shu.com.ua; publishing to Instagram and Facebook personal accounts; posting ads through BoardMasterPro. The goal of the given placement of advertising was to ensure the representativeness of the sample in each age group among Internet users. The respondents’ replies were compiled by providing guests access in a single account for data collection. Microsoft Excel™ was used for the aggregated analysis of the data. The study involved 2,038 respondents between the ages of: • 16-21 y.o. - 17%; • 22-29 y.o. - 31%; • 30-36 y.o. - 25%; • 37-44 y.o. - 15%; • 45 and more y.o. - 12%. Most of the consumers who participated in the survey are active Internet users (93%). They are making use of the opportunities to communicate in social networks (64.38%), to search for the ne cessary information (60.16%), to read news (55.79%), to watch films (47.01%), to visit web sites serving networks of interest (43.87%), to do online shopping (43.47%), to search and listen to mu- sic (37.59%), to play online games (26.54%), as well as to visit web sites for purchasing goods or ordering services (24.48%). The respondents submitted answers to the questions raised as for the trust in the digital environment and the factors affecting it. During the study, the following was determined: • the factors that most affect the trust of consumers in web sites; • the nature of the information sought by consumers on the web sites when selecting goods and services; • factors influencing the level of consumer confidence in a company or brand represented on the Internet; • factors that influence the decision to purchase a product or service through the Internet. Analysing the results of the study (Figure 1), it can be noted that the greatest Internet users’ trust in web sites is prompted by responses (43.96%). This confirms the fact that in a digital society, the availability of information and the speed at which one can access it promotes trust or distrust of the web sites and information posted on them. Therefore, from the point of view of trust marketing, full transparency is needed in communicating with consumers. It is important to create blogs, review pages on web sites, as well as social net- working sites that affect the degree of trust in web sites. When selecting goods or services through the Internet, consumers are concerned about the design of web sites (42.15%), convenient navigation (35.87%), the access speed of the site (34.69%) and the functional features (33.51%). The above characteristics raise the consumers’ sense of professionalism, convenience, pleasure, which contributes to enhancing the level of trust in the web site. From the perspective of trust marketing, it is important to use the design, convenient navigation, functionality and operational speed to attract consumers to visit web sites, to create a sense of trust, to encourage the Internet users to take certain actions and to create a positive emotional connection. In the course of the study, 33.61% of the respondents pointed out that their trust in the web site was influenced by the posted content. This means that from the standpoint of trust marketing, to

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Figure 1: Factors affecting the level of trust in web-sites Source: Compiled by the authors attract the modern consumer to visit the web site, it is necessary to create high-quality content focused on the target audience, based on the appeal to the consumers’ values, the corresponding linguistic constructions and creativity, as well as providing original information. The content should trigger emotional feedback among the web site visitors. To create a representative and user-friendly web site page, one needs to be responsive to the consumers’ individual needs. The reliability of the link (https://) (29.69%) is also essential for building the web site credibility. This is due to the site’s security, its value for the user to click through to the web site. Today, this factor is the underestimated and insufficiently studied growth lever required for generating large vo lumes of traffic. Therefore, marketers need to take into account the fact that the reliability of the link is significant at all stages of marketing activity, especially when working with «cold traffic», as well as in the process of attracting users. The trust in web sites is also affected by the availability of feedback (28.85%), contact information (28.75%), and the image of the site’s creators (16.19%). This is due to the possibility of interactive real time communication among the Internet users, open dialogue through various means of communication based on contact information. Interactive communication makes it possible to accelerate the process of interaction with the consumer, creates an emotional feedback and promotes the emergence of an atmosphere of trust. This allows cooperation between a business entity and the consumer over a long period of time. The image of site creators is important in the event that the creators are known for their positive reputation and prompt confidence in users. The availability of a web site page in social networks (21.64%) is also an important factor for users who have the ability to obtain the required information. By developing marketing confidence in a digital society, one must take into account the rapid variability of the social network environment, and the fact that the success of marketing depends on properly sequenced priority with respect to the consumers’ values. 19.92% of the respondents noted that the mobile web site version is the very factor triggering trust and confidence in web sites. This is due to the fact that mobile traffic is rapidly developing. It possesses such advantages as efficiency, convenience and simplicity. Mobile traffic is becoming an essential tool in the development of trust marketing due to the wide reach of the audience, good opportunities for the transmission of information and access to the Internet in different conditions. Therefore, the mobile environment is becoming very attractive for marketers. As the results of the survey showed, searching for information online, the modern Internet users prefer more detailed, substantiated information (40.48%), as well as information provided with illus- trative material (39.6%). The users are no longer satisfied with short notes (27.33%), since a wide

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range of goods and services, as well as competition between brands, vendors and service provi ders, requires decision-making based on a comparison of characteristics the consumer is highly interested in. Unlike the previous few years, when the volume of a 300-word post was deemed to be long, today they are better at searching 1200- and 1500-word posts. Such volumes of information are more appealing to consumers than short notes; they enjoy far higher ratings in SEO. Google is proposing to break down such a long-term content form into subtitles, to embed an image to make it easy to read and perceive. Visualization of information provides an opportunity for the consumer to obtain more information, generates interest, enables to keep the attention and promotes the formation of trust. Research has shown that the level of trust in a company or brand represented on the Internet is shaped by the factors presented in Figure 2. These are, above all, the quality of goods and services one can get information about from consumer reports, blogs or the experience of directly purcha sing them; reliability of supply, which is based on the adequacy of commitments and real capacity; the level of service, which helps to establish long-term relations with consumers. The factors such as the qualifications of the staff, its friendliness, a brand or enterprise image, its position in ratings and reviews, availability of certificates for goods and services, offered service and product visualization or portfolio availability are also important for implementing trust. However, less emphasis was placed on the factors of past experience of consumer communication and the image of a company or a brand. This suggests that for most consumers awareness about the quality of products is therefore of crucial importance, rather than the continuity of work with a particular supplier. They can alter their preferences by focusing on other factors. A situation, in which the consumer has all the required information about the product or service, is awareness of the quality, price and other characteristics and requires a decision on the choice of supplier. The research has shown that this decision is affected in varying degrees by the factors presented in Figure 3. This is, above all, the price (65.65%) and the quality of goods (64.47%). Their ratio affects the consumer’s motivation, which is based on a certain level of trust in the company. The price also involves a variety of promotions that enhance the value of goods in the eyes of the consumer (43.42%), as well as the convenience of payment and delivery (36.70%). An important factor that attracted the attention of 33.61% of consumers is brand credibility. If the consumer is satisfied with the brand and has confidence in it, this trust becomes a long-term -re lationship and contributes to enhanced credibility with other consumers through the dissemination of positive information. Thus, trust generates trust and, in particular, brand credibility. Brand credibility is defined as consumers’ trust regarding the quality of goods and services, conformity with expectations of the realities. Brand trust is also related to the reliability of the supplier company, of which

Figure 2: Factors affecting the level of consumer trust in the company or brand, represented on the Internet Source: Compiled by the authors

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Figure 3: Factors affecting the decision to purchase goods or services via the Internet Source: Compiled by the authors

30.57% of respondents stressed the core values and the importance of the brand. In addition, the decision to purchase goods or services via the Internet is affected by the breadth of product range presented (31.21%), the possibility of return and exchange of goods (27.67%), conve nience of making a purchase (25.02%), service support (19.23%) that in consumers’ understan ding is connected with the reliability of the company, which, in turn, is associated with the trust in the company or firm represented in the Internet environment. The low percentage (15.11%) of trust in personnel is due to the fact that contacts with personnel in the Internet environment are limited. The obtained conclusions made it possible to broaden the understanding of the theoretical foundations of trust marketing development in a digital society and the influence of consumer behaviour on managerial decisions of enterprises. Trust marketing is a concept that builds trust building between business and consumers, as well as other stakeholders through marketing tools, technologies, actions to build long-term sustainable relationships and gain added value. As the results of the study revealed, changes in consumer behaviour in the Internet environment, lack of direct contact with staff members enhance the value of trust in the company or brand. Therefore, trust marketing becomes the most demanded concept of modern marketing. According to this concept, marketing tools of enterprises in a digital society should be configured to establish trust relationships with consumers. This generates changes in the behaviour of enterprises themselves. So, in a digital society, support for enterprise competitiveness requires the transition to modern business technology, digital communications, changes in customer service, flexible response to their needs and personalisation of offers. Thus, the development of trust marketing requires consideration of the specifics of interaction of the subject of business (enterprise) with consumers in a digital environment, based on effective communications, reliable transparent information, value- based approach, as well as the definition of trust marketing implementation stages and efforts by the industry with regard to their introduction into the digital society. The digital society is based on extensive information and digital technologies used to receive, process and promote information. The work by A. Toffler (1970, 1984) [20] and D. Bell (1973, 1976) [21] deal with the problems of society conducive to a qualitatively new level of development and integration into the information space. Therefore, D. Bell (1973) [21] identified knowledge and information as agents of the information society transformation and its strategic resource. They are transmitted through specific human-to-human digital technologies. A digital society is an integral social system inclined to self-organisation in the information environment. In conformity with the principle of equivalent causality, all subjects of such a system bring themselves in line with the existing information flow. Each subject of this system is part of several systems (social, cultural, professional and family), so it can occupy several «information niches» and play the role of information «carrier», being inside them. It can also duplicat e

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information itself, expand its boundaries and thus adapt to the digital environment. Consequent- ly, it can manage the «information wave». The digital society poses challenges relevant to data sharing and privacy, survival of quality content, algorithmic operation and control (Queens- land Government, 2018) [22]. Digital innovation affects society, economy and politics at a pace that is inherent in the VUCA word. Mobile and cloud technologies, Big Data and Internet of Things offer new opportunities for businesses, stimulate their growth. Introduction of digital innovations improves the management process and helps to make effective management decisions. They improve the citizens’ quality of life in many areas, including the access to information, consumption, cultural diversity, freedom of expression and human rights. E. Isin and E. Ruppert (2015) [23] «suggest that if we constitute our- selves as digital citizens, we have become subjects of power in the cyberspace». As a rule, enterprises develop their own information systems and programs with emphasis on specific business goals, attractive features and technological capabilities of hardware or software tools. However, if competitiveness in a digital society is concerned, enterprises should, in the first place, focus on the needs of consumers and their values when designing their information systems. «User-centered design is a framework of processes in which the needs, and limitations of end users of a process, service or product are given extensive attention» (LIBRe Foun- dation, 2018) [24]. With all the diversity of digital technologies given the competition between them, the consumer will give priority to those enabling them to adapt to the digital environment. These technologies should be environmentally friendly, as well as simplify the interaction and transfer of information from one information niche to another. In these conditions, communication between consumers and businesses should be built on the basis of trust and value concepts. This involves building a chain of communication messages that promote the information from the product to a problem, the solution of which has a certain value for the consumer. Solving a problem through communication messages adds emotional colouring, resulting in consumer satisfaction. The more acute the competition is in a digital environment between business structures for consumers’ attention, the grea ter effect will be obtained by those focused on values and trust. According to K. Wertime and Ia. Fenwick (2012). [25], digital communication channels create new ways and enhance the rate of consumer attraction. They are the address channels that allow a permanent two-way person-to-person dialogue with each consumer, increase their involvement in communications, which refers to interest and emotional deepening that inspires the consumer’s action to respond and maintain contact. In the light of the integration of values and digital marketing communications, one should take into account the system of their interaction, aimed at the end result, namely consumer satisfaction. Figure 4 presents a conceptual model of interaction between consumers and business entities in the digital environment. Addressing the consumer with a proposal to solve problems or meet the needs through certain goods or services, business entities must be guided by the consumers’ value system, the importance of which is emphasised in this particular connection, which is likely to affect the behaviour of the latter. The consumer’s decision to purchase a product or service is influenced by values that can be represented in the form of balloons, the core of which is the values obtained in the process of edu- cating a person in certain cultural conditions. The next layer is the set of values formed by the person in the habitat. The environment, society or groups which a person constantly deals with imprint such values. Values can vary throughout life. Every age, social class, status, living conditions, cultural environment can be inherent in their values. Therefore, the last layer presents the values related to the factors of human existence, the current living situation, which the individual finds himself in at any given time. Each layer of values has its own protective barriers. They can be overcome in the course of a real integration of the communication message and value orientations. A barrier may be the degree of inconsistency of the scale of consumer values and the benefits that the proposed product or service offers. In addition, the barrier may be a psychological factor in the communication interaction of the parties, the lack of perception or the lack of interest in certain communication tools, as well as the distrust of information, the enterprise-supplier, the product or brand. Also the culture of a digital society is an important factor in the effectiveness of communications between consumers and businesses. It reflects the diffusion of the differences between

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Figure 4: Conceptual model of consumers’ interaction with business entities in the digital environment Source: Compiled by the authors the reality and virtuality between individuals, machines and nature, turning from a deficit to a sufficient amount of information. Today, these symptoms determine the specifics of the digital society cultur e and make it possible to predict the main trends of digital culture in relation to the spiritual, social and technological spheres. They are formed with the help of: social media, which is a new way of shaping public consciousness; Personal Identity Online, which is a new way of personalisation and Data Intensive Science, which is a new methodological science paradigm (Levin, 2014) [26]. Digital culture manifests itself on the part of a business enterprise in providing transparent information, customer centricity and respect for consumer values, flexibility and responsiveness to their needs, staff members’ adaptability to innovation and cooperation in cross-functional teams to meet the needs of consumers, as well as in focusing on security of the network interaction. The consumer side of digital culture is reflected in the understanding of modern digital technologies, their functional and competent use, and compliance with the rules of polite communication in the online environment. Thus, communications based on reliable information, as well as targeting consumers’ values with due account of digital culture, are the basis for developing trust marketing in a digital society. The trust marketing development in a digital society is based on methods that make it possible to obtain information on consumer behaviour, condition of external environment and the adoption of certain managerial decisions. Thus, trust marketing is rooted in the following methods: market research to identify the challenges and opportunities in generating confidence between businesses and consumers in the digital environment, the situation analysis and ways of building trust, forecasting consumers’ behaviour in the implementation of marketing actions aimed at building trust and their consequences and personnel training regarding the orientation towards the consumers’ needs, their values and service quality. Trust marketing development requires focused actions based on the theory of trust (Castelf- ranchi and Falcone, 2010) [14]. It views trust as a dynamic process that changes in time and space. The development of confidence covers the following phases: trust expectation, trust perceptions, trust communications and trust cooperation, including building trust communities on the Internet. Let us consider them from the standpoint of marketing approach (Figure 5). The first phase of trust development is expectation. It consists in the prognostic consu mer expectation of business structure representatives’ appropriate behaviour (enterprises) when

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Figure 5: Stages of Trust Marketing Development Source: Compiled by the authors communicating online. Trustworthy interaction, which is understood as the fact of an attempt to gain trust is at the core of trust expectations. In this phase, enterprises, through marketing communications, establish a dialogue with potential consumers. The consumer, having certain needs, is seeking to scoop relevant information in various sources, acquaints with the company’s web site, reviews on the Internet, open source information, as well as appeals to the enterprise employees. The phase of trust expectations is transformed into the second phase - the phase of trust perception. Central to that is such perception property as selectivity. Trust perception includes four procedural components: the assessment of the first impression of the subject of trust, identification, reflection and empathy.

Estimation of the first impression about the subject of trust Developing trust between a company and consumers in the digital environment has its own complexities related to the remote valuation of goods. For a consumer, high uncertainty in the quali ty of goods or services is associated with a certain risk. In order to lower the risk, the consumer seeks to assess what is available at the time of the decision point. This is the reputation or image of both the company and brand, the availability of recommendations, consumers’ reviews on the network, staff conduct, its competence combined with professionalism in remote interaction, the quali ty of advertising, trust in the site proper and its content. Identification, which refers to the process of matching, comparing one object with another based on any sign or property, resulting in the establishment of their similarity or disparity. Through the process of identification, the recognition of the company’s quality, the product, the brand and its competitors, their comparison, as well as the potential consumer’s determination of certain characteristics capable of creating the trust or distrust of the company, products, brands and their competitors takes place. Reflection, which is understood as a mechanism of reflection of personal meanings and principles of action through establishing linkages between a particular situation and values, is chosen as the basis of self-control and self-regulation of personality in communication and in performing va rious activities. Basing on the comprehension of the information received and comparisons, reflection helps the consumer to determine the relation to the company or brand and to compare the proposed benefits with their personal values. Empathy is supposed to be an ability to understand and penetrate the world of another person, passing on this understanding. Interaction involves mutual understanding; therefore a sense

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of mutual understanding should arise in the process of the company’s personnel communication with the potential consumer. Empathy includes: motivation (the ability to perceive interlocutors’ arguments, the motives for making decisions), perception (the ability to perceive verbal and non- verbal information), emotions (the ability to understand the interlocutor’s feelings) and instruction (the ability to make sense while communicating). With this in view, the company should teach the personnel to correctly formulate arguments, as well as to take into account the motives of potential consumers’ behaviour. The phases of trust expectations and trust perception serve as a trust generator. If they appear to be successful, then building the third phase - trustful communications - is needed to maintain and develop trust relationships. To achieve effective trustful communication, it is necessary to form a flexible paradigm of thinking capable of penetrating the consumer’s needs and values and com- prehending the point of view of the latter. Effective interaction involves partnership of subjects and objects of trust, which, in turn, requires the establishment of the fourth phase of dynamics, namely trust cooperation. It is rooted in mutual respect, employees’ professionalism, reliability and integrity, which have an impact on the enterprise’s positive image formation. The final, fifth phase of the dynamics consists in the formation of trust communities, which dif- fer in scale and the lifetime but in essence represent some kind of network communities based on conventional regulation. For businesses, this implies the creation of loyal consumer groups in the network, where the relationship is based on mutual trust. To build trust relationships, a company should target all marketing strategies to the generation and development of trust, as opposed to traditional marketing strategies that target product promotion or interaction marketing strategies aimed at building CRM systems and developing customer relationships based on the joint creation of values. Trust emerges gradually, evolving over time; therefore, actions that are beneficial to the consumer are to be taken to foster trust and credibility. If the previous cooperation has resulted in the consumer ’s satisfaction, then the latter, if necessary, is likely to request services from the company. Trust also possesses such effects as gradual distribution. This is related to the fact that the company’s customers having trust in the latter, positively assess its activities on the network among other potential consumers, thus promoting their attraction. Therefore, the company should clearly understand that achieving a high level of consumer confidence will yield results, including the economic ones. Based on this, the key steps that are likely to foster an atmosphere of trust between the business and consumers in the digital environment can be as follows: • Demonstration of the company’s reality. To achieve this, a visual contact that can be created re- motely by placing the company’s and the employees’ photos on the web site is required. It contributes to creating an emotional connection with the consumer. • Demonstration of the company’s achievements by posting certificates, commendations, and awards on the web site. • Attraction of consumers’ interest through blogs, posting useful information and customer testi- monials on the company’s web site. • Prompt response to the consumers’ requests both through the web site and communications technologies. • Setting up communications to create an atmosphere of trust between businesses and the consumer, which requires the ability to attract the attention of decision makers, reasonably prove the required information, and bring about positive emotions and trust. • Demonstration of competencies as one of the easiest ways to gain credibility and trust among consumers and partners. • Demonstration of experience based on professionalism, since a long-term business enterprise is more trustworthy than the one recently created. • Reliability in the agreement implementation, discipline in honouring the deadlines or guarantees. • Implementing a digital culture and the provision of information security conditions on the In- ternet.

5. Conclusions In a digital society, businesses need to expend much greater effort on gaining the trust of potential consumers, since consumers tend to purchase goods or order services from a company in their

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confidence. Therefore, the implementation of trust marketing and its tools application should be ac- corded due attention of enterprises in all spheres of activity. In this study, features of trust marketing development in a digital society were dealt with. That was done by carrying out an on-line Internet user survey on trust in the digital environment. It made it possible to reveal the factors influencing consumers’ confidence and their decision to purchase goods or services online. This study also led to theoretical achievements. The findings made it possible to review the issues relating to the importance of marketing communications and their peculiarities in a digital society, where the rate of dissemination and amounts of information are of great importance. The emphasis is on the integration of digital and communication technologies, data sharing and privacy, survival of quality content, algorithmic operation and control. It was determined that in a digital society the consumer behaviour tends to alteration, which is a reaction to communication messages. This is due to the fact that access to a large amount of information enables the consumer to have a wide choice of suppliers of goods and servi ces. The value approach in the interaction of the subject of business, namely the consumer, as well as the emotional colouring of this process, taking the form of consumer satisfaction is of a great importance in this regard. This is reflected in the conceptual model of interaction bet ween consumers and the subjects of business in a digital society. In our view, marketing tools in a digital society should adapt fairly quickly to consumers’ needs, new technologies, society, and digital culture change. Effective communication, consumer value orientations and digital culture serve as the basis for developing trust marketing in a digital society. Based on the theory of trust, the authors have identified the phases of trust marketing development. They focus on the phases of confidence development in relation to marketing activities. They are expectation, trust perception, trustful communication, trustful cooperation and creation of trust communities on the Internet. The authors evaluated the first impression of the subject of trust, identification, reflection and empathy as procedures for implementing trust marketing. Thus, the identified theoretical aspects of developing trust marketing in a digital society enable businesses to adjust their actions towards the development of a relationship of trust with consumers. From the perspective management, the studies enable marketers and the management personnel to focus on important communication factors, value orientations, communication messages, web-site design and service provision. In the study, we have identified the key steps to be taken by marketers and management personnel to contribute to creating an atmosphere of trust between the enterprise, brand and consumers. The result of such actions will be consumer satisfaction and increased competitiveness of business entities and brands. Further development of the theoretical and methodological aspects of trust marketing in a digital society requires the creation of conceptual models related to consumer behaviour and marketing activities of businesses for building confidence. Taking a look at how trust changes over time and what these shifts are due to is another important aspect of further research. Is trust a factor affec ting the long-term relationship between the consumer and the business entity in a competitive environment and in the context of rapid change? There is also a significant interest associated with conducting a global study on trust in the digital environment among representatives of different cultures and countries and their comparison, as well as in finding answer to the question in what cultures and countries, trust in the digital environment is more important, either developed or developing ones. The way cross-cultural management affects the development of trust in the global world. The issues relating to the peculiarities of using marketing tools in trust marketing, the way they affect both the motivation and decision-making by consumers, what role they play in the emotional perception of information and brands, depending on the socio-cultural environment are equally important. Research on the relationship between trust marketing, neuromarketing and digital marketing will help to identify new areas for the development of business entities marketing activities and help to better understand the consumer behaviour as well as the impact of the effectiveness of interaction. In our view, the development of digital culture both in relation to business entities and consu mers requires further research in the rapidly changing world of today. We believe that these research areas will enhance the understanding of consumer behaviour in a digital society and determine the impact marketing tools on trust between consumers and business entities.

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Singapore and Hoboken, N.J.: John Wiley & Songs (Asia). doi: https://doi.org/10.1002/9781119207726 26. Levin, I. (2014, May). Cultural trends in a digital society. In Tools and Methods of Competitive Engineering (TMCE): proceedings of the 10th International Symposium, May 19-23, 2014 (pp. 13-21). Budapest, Hungary, 2015. Retrieved from https://www.academia.edu/21805897/Cultural_Trends_in_a_Digital_Society Received 14.02.2019 Received in revised form 20.03.2019 Accepted 25.04.2019 Available online 20.08.2019

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ECONOMIC ANNALS-XXI ISSN 1728-6239 (Online) ISSN 1728-6220 (Print) https://doi.org/10.21003/ea http://www.soskin.info/ea/

Volume 176 Issue (3-4)’2019

Citation information: Shkarlet, S., Dubyna, M., Vovk, V., & Noga, M. (2019). Financial service markets of Eastern Europe: a compositional model. Economic Annals-XXI, 176(3-4), 26-37. doi: https://doi.org/10.21003/ea.V176-03

UDC 519.711[336.76(4-11) Serhiy Shkarlet D.Sc. (Economics), Professor, Honored Scientist of Ukraine, Chernihiv National University of Technology 95 Shevchenka Str., 14035 Chernihiv, Ukraine [email protected] ORCID ID: https://orcid.org/0000-0003-2062-3662

Maksym Dubyna D.Sc. (Economics), Associate Professor, Chernihiv National University of Technology, Ministry of Education and Science of Ukraine 95 Shevchenka Str., 14035 Chernihiv, Ukraine [email protected] ORCID ID: https://orcid.org/0000-0002-5305-7815 Viktoriia Vovk D.Sc. (Economics), Professor, Honored Economist of Ukraine, Simon Kuznets Kharkiv National University of Economics, Ministry of Education and Science of Ukraine 9-a Nauky Ave., Kharkiv, 61166, Ukraine [email protected] ORCID ID: http://orcid.org/0000-0001-5680-2967 Marian Noga PhD (Economics), Professor, Business Cooperation Institute, Wroclaw School of Banking 29-31 Fabryczna Str., Wrocław, 53-609, Poland [email protected] ORCID ID: https://orcid.org/0000-0002-2442-5391

Financial service markets of Eastern Europe: a compositional model

Abstract The article deals with the models of functioning of financial service markets in the countries of Eastern Europe. The authors have conducted an analysis of the development of financial institutions within separate segments of relevant markets, such as deposit, credit, insurance and investment. The analysis shows that banking institutions play a significant role in the economic development of the countries of the selected group and makes it possible to determine the peculiarities of the development of their financial service markets. In view of the similarity between such countries, the obtained research results can be taken into account when considering other states that have chosen a similar path of their own economic development. The results allow us to partially predict future transformations in the financial service market of Ukraine by taking into account virtually identical starting conditions for the development of Eastern European countries in the early 1990s. This assumption is also confirmed by the changes that have already taken place in Ukraine in view of the functioning of the country’s banking system, which has led to a decrease in the number of banks and an increase in their financial stability. This is consistent with the development of banking systems in other Eastern European countries. This allows us to assert that there is gradual convergence of the functioning of the banking systems of both Eastern European countries and Ukraine. A detailed analysis of the transformations in the banking system gives reason to state that in the future the same changes are expected in other segments of the financial service market. In Ukraine, the markets of insurance services, services of non-state pension funds and investment companies remain poorly developed. The transformation of the relevant segments of the financial services market is a prerequisite for its further development. Keywords: Financial Service Market; Compositional Model; Banking Institutions; Insurance Companies; Bank-centred Model JEL Classіfіcatіon: G1 Acknowledgements and Funding: The authors received no direct funding for this research. Contribution: The authors contributed equally to this work. DOI: https://doi.org/10.21003/ea.V176-03

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Шкарлет С. М. доктор економічних наук, професор, заслужений діяч науки і техніки України, ректор, Чернігівський національний технологічний університет, Чернігів, Україна Дубина М. В. доктор економічних наук, доцент, кафедра фінансів, банківської справи та страхування, Чернігівський національний технологічний університет, Чернігів, Україна Вовк В. Я. доктор економічних наук, професор, кафедра банківської справи, Харківський національний економічний університет імені Семена Кузнеця, Харків, Україна Нога М. кандидат економічних наук, професор, Інститут ділового співробітництва, Вроцлавська школа банківської справи, Вроцлав, Польща Ринки фінансових послуг країн Східної Європи: композиційна модель функціонування Анотація У статті розглянуто моделі функціонування ринку фінансових послуг у країнах Східної Європи. Проводиться аналіз розвитку фінансових установ в окремих його сегментах: депозитному, кредитному, страховому та інвестиційному. Аналіз дозволив дійти висновку щодо вагомої ролі банківських установ в економічному розвитку країн даної групи та визначити особливості розвитку їхніх ринків фінансових послуг. Отримані результати, враховуючи їх схожіть між країнами, дають змогу здійснювати їх екстраполяцію і на інші держави, які обрали подібний шлях власного економічного розвитку. Результати дослідження дозволяють частково передбачити майбутні трансформації на ринку фінансових послуг України, враховуючи фактично однакові стартові умови розбудови держав Східної Європи на початку 90-х років ХХ ст. Подібне припущення також підтверджується вже реалізованими в Україні змінами у функціонуванні банківської системи, наслідком яких стало зменшення кількості банків та підвищення їх фінансової стійкості, що відповідає практиці побудови банківських систем інших країн Східної Європи. Детальний аналіз трансформацій у банківській системі дає підстави стверджувати, що у майбутньому такі ж зміни відбудуться в інших сегментах ринку фінансових послуг. В Україні слабо розвиненим залишається ринок страхових послуг, послуг недержавних пенсійних фондів та інвестиційних компаній. Саме трансформація таких сегментів ринку фінансових послуг є необхідною умовою його розвитку. Ключові слова: ринок фінансових послуг; композиційна модель; банківські установи; страхові компанії; банкоцентрична модель. Шкарлет С. М. доктор экономических наук, профессор, заслуженный деятель науки и техники Украины, ректор Черниговского национального технологического университета, Чернигов, Украина Дубина М. В. доктор економічних наук, доцент, кафедра финансов, банковского дела и страхования, Черниговский национальный технологический университет, Чернигов, Украина Вовк В. Я. доктор экономических наук, профессор, кафедра банковского дела, Харьковский национальный экономический университет, Харьков, Украина Нога М. кандидат экономических наук, профессор, Институт делового сотрудничества, Вроцлавская школа банковского дела, Вроцлав, Польша Рынки финансовых услуг стран Восточной Европы: композиционная модель функционирования Аннотация В статье рассмотрены модели функционирования рынка финансовых услуг в странах Восточной Европы. Проведен анализ развития финансовых учреждений в пределах его отдельных сегментов: депозитном, кредитном, страховом и инвестиционном. Такой анализ позволил сделать вывод о весомой роли банковских учреждений в экономическом развитии стран данной группы и определить особенности развития их рынков финансовых услуг. Полученные результаты, учитывая их подобность между странами, позволяют осуществлять их экстраполяцию на другие государства, которые выбрали подобный путь собственного экономического развития. Результаты исследования позволяют частично предсказать будущие трансформации и на рынке финансовых услуг Украины, учитывая фактически одинаковые стартовые условия развития государств Восточной Европы в начале 90-х годов ХХ века. Подобное предположение также подтверждается уже реализованными в Украине изменениями в функционировании банковской системы, которые привели к уменьшению количества банков и повышению их финансовой устойчивости, что соответствует практике построения банковских системы других стран Восточной Европы. Детальный анализ трансформаций в банковской системе дает основания утверждать, что в будущем такие же изменения ждут и другие сегменты рынка финансовых услуг. В Украине слабо развитыми остаются рынки страховых услуг, услуги негосударственных пенсионных фондов и инвестиционных компаний. Именно трансформация таких сегментов рынка финансовых услуг является необходимым условием его дальнейшего развития. Ключевые слова: рынок финансовых услуг; композиционная модель; банковские учреждения; страховые компании, банкоцентрическая модель.

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1. Introduction The financial service market is an integral part of the national economy. As the consequences of the financial and economic crisis of 2008-2009 show, stability of the activities of economic actors depends on the sustainability of functioning of such a market, which may have either positive or negative impact on the development of economic relations in the state. This determines the importance of ensuring stable conditions for its operation for financial intermediaries, who are the main participants of such a market. In many countries, financial service markets have undergone a difficult period of evolutionary development and each national economy has its own specific features determining its development. However, when analysing the historical aspects of the functioning of the identified markets in different countries, one can distinguish common features relating to activities of financial institutions. For countries of Eastern Europe, reforming of their national economies after the collapse of the So- viet Union is characterised by some peculiar features. Similar processes took place in the financial service markets. It is possible to highlight the main common aspects of building such markets. Among them, one can distinguish the prevailing role of banking institutions in the development of national economies and a high proportion of foreign capital in the banking system of each country. Ukraine has its own specific way of reforming the financial service market. Unlike Eastern Euro- pean countries, the national market develops in turbulent conditions of economic functioning, which can be explained by the permanent economic and financial crises. However, today, we can observe processes similar to those in Eastern Europe, taking place in the financial service sector. Neverthe- less, they are very slow. Until 2014, the compositional model of the financial service market in Ukraine was significantly different from that of Eastern European countries. First of all, it should be noted that there was a significant number of financial institutions with low capitalisation.tarting S from 2014, under the pressure of a complicated macroeconomic situation and requirements of the International Mone- tary Fund, the National Bank of Ukraine began to pursue a policy of increasing the resilience of the Ukrainian banking system and that led to a significant decrease in the number of banks in Ukraine. Thus, there was a slight approximation of the functioning model of the Ukrainian banking system to similar models in other Eastern European countries, within which there is also a small number of commercial banks. This refers to the development of the banking sector in Ukraine. The remaining segments of the financial service market remain underdeveloped, financially unstable and play a minor role in the functioning of the national economy. Such a situation cannot be tolerated, taking into consideration an increase in the level of interaction between Ukraine and the European Union, the lack of domestic investment for the development of the national economy and high dependence on external borrowing. Im- proving the level of the development and sustainability of the non-banking sector of the economy is possible only through its reformation in accordance with the transformational processes taking place in the banking system. Taking into consideration regularities of the development of financial service markets of Eastern European countries will allow predicting further transformational processes in the financial service market of Ukraine.

2. Brief Literature Review The development of the financial service market as an important component of the functioning of the national economy. It is considered in scientific works by both foreign and domestic scientists, in which attention is paid to the issues of reforming the Ukrainian financial service market and increasing the efficiency of its operation by taking into consideration the experience of Eastern European countries in this area. The importance of reforming the financial sector in the state is justified in the work by R. J. Her- ring and A. M. Santomero (1996), who note that for the development of the financial services market within the national financial system, it is important to increase the level of trust among all parti cipants in such a market. The emphasis in the work is also on creating conditions for the formation of an effective financial system in the state, which promotes the optimal allocation of resources, ex- pands the capabilities of each citizen and provides funds for both business entities and the state. E. Thalassinos (2008), analysing directions of the development of the European financial sector, researches the trends in the convergence of financial service markets between already existing participants of the European financial sector and its new participants, including Eastern European countries. The author emphasises the important role of the processes of merging, consolidating

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and creating of new enterprises by different types of financial intermediaries in countries of Eastern Europe, which leads to an increase in the level of foreign capital within national financial systems in order to increase the volume of credit and investment resources that began to be produced by such institutions. In general, such processes have contributed to the formation and rapid development of capital markets in relevant countries. N. K. Cevik, S. Dibooglu and A. M. Kutan (2016) have studied the peculiarities of the functioning of the financial sector in Central and Eastern Europe and concluded that the activities of foreign banking institutions in the countries of this group are more effective if compared to the activities of domestic commercial banks. This only confirms the importance of attracting foreign capital to the financial sector of Ukraine. A. Yu. Semenog and О. М. Pakhnenko (2017) consider the structure of the financial service market of the European Union, including a group of Eastern European countries, and note that the financial service market in the European Union is mainly formed through the activities of banking institutions, loans of which are the dominant source of financial resources both for business entities and for households. In addition, the authors state that financial companies within the EU are active participants in the financial service markets of the Eastern European countries (BNP Paribas S. A., ING, AXA, etc.). O. A. Gural, and I. A. Lomachinskaya (2017) observes that the banking system, as a dominant component of the national financial system of the Visegrad Group countries, has a significant -im pact on their socio-economic well-being. The financial sector has become an important driver of the economic development by mobilising foreign direct investment and targeting the most productive enterprises and types of economic activity. P. Wiesiołek and D. Tymoczko (2015) outline the peculiarities of the evolution of the banking sector in Central and Eastern European countries and consider Poland’s experience in detail. The scholars state that the peculiarities of the functioning of the financial service markets in selected countries are the existence of imbalances in lending to citizens and the real sector of the economy. In particular, the prevalence of lending to the population restrains, as the authors point out, the development of industrial production and does not contribute to raising the level of GDP in these countries. The researchers emphasise the importance of changing this situation using appropriate instruments of state regulation. The outline is also important for Ukraine, in which banks actively offer loans to the population, but provide loans to enterprises with sufficient restraint. The review of scientific literature makes it possible to draw conclusions about the exis tence of a significant set of similar features of the development of financial service markets in Eastern Eur ope (see the works by Berglof & Bolton (2002), Thimann (2002), Altomonte & Guagliano (2003), Bonin & Wachtel (2003), Bakker & Gross (2004), Barisitz (2008), Iorgova & Ong (2008), Patrice et al. (2012), Barjaktarović, Paunović & Ječmenica (2013), Lagoa (2014), Radulescu (2016), Bayar (2017)). Some of them are already characteristic of the financial service market in Ukraine (Dubyna, 2016). Thus, given the important role of such a market in the development of the national economy, the issue of analysing the current trends in this market functioning in the countries of Eastern Europe is relevant.

3. The purpose of the article is to explore models of the financial services market in countries of Eastern Europe and define the peculiarities of their possible functioning in the Ukrainian financial service market.

4. Methodology General scientific methods of research are used within the article, in particular comparison, measu rement and observation. The outlined market is considered through the systematic approach, which allows studying such a market as a holistic object of knowledge with the identification of its individual segments (markets of credit, insurance and investment services). This made it possible, using statistical approaches, to determine the aggregated quantitative indicators of the functioning of these segments of the financial service markets in the selected countries of Eastern Europe, including Ukraine.

5. Results To substantiate the direction of the financial services market transformation in Ukraine, let us consider the peculiarities of functioning of the models of such a market in the selected countries of Eas tern Europe. To do this, we will analyse the current situation relating to financial intermediaries in those countries.

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Figure 1 provides information on the development of the banking service market in the countries of Eastern Europe. Figure 1 shows that there is a small number of banks in Eastern European countries. The only exception is the Russian Federation. However, the number of citizens in this country is larger than in other states. In this regard, structural subdivisions of banks and branches of foreign banking institutions operating within individual countries were not considered. It should be noted that the largest number of banks, after the Russian Federation (499 units), is registered in Ukraine (82 units). We’d like to note that for Eastern European countries, the existence of a small number of classical banking institutions within national economies is inherent. It is advisable to note that in Figure 1, the number of cooperative financial institutions, savings banks is not reflected. The number of such institutions several times exceeds the number of banks, yet it should be consider ed that their activities are local. Figure 2 reflects data on the development of the insurance market and the functioning ofnon-stat e pension funds (NSPFs) in the mentioned countries. It should be noted that they develop insurance markets, in which a small number of companies operates. The only exceptions are Russia, Slovakia and Ukraine, in which the number of insurers is abnormally high. The NSPF service market is more homogeneous in the countries, if we analyse the number of relating institutions only. In Ukraine, there were 64 NSPFs at the end of 2017, which corresponds to the average number of such intermediaries in the Eastern European countries. For example, in Poland, where the population is close to the population of Ukraine, the number of NSPFs is 74 units.

Figure 1: The number of banking institutions in the countries of Eastern Europe at the end of 2017 (excluding structural subdivisions and foreign affiliates) Source: Made by the authors based on data by The Bank of Russia (2018), The European Banking Federation (2018), The National Bank of Ukraine (2018)

Figure 2: Number of insurance companies and non-state pension funds in the countries of Eastern Europe at the end of 2017 Source: Made by the authors based on data by European Central Bank (2018), The Organisation for Economic Co-operation and Development (2018), The National Commission which Carries Out State Regulation in the Field of Financial Services Markets of Ukraine (2018), The Bank of Russia (2018)

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Figure 3 provides information on the activities of investment funds operating in the countries of Eas tern Europe. At the end of 2017, the largest number of the relevant institutions was established in Rus- sia (1497 units), Poland (887 units) and Ukraine (1660 units). However, information about the assets formed by these institutions shows a different trend. If in Bulgaria, there were 119 investment companies and they formed EUR 6.9454 billion assets, in Slovakia, 87 investment funds formed EUR 10.58 billion. A similar situation is observed in Romania: the number of funds is only 96, but their aggregate assets amount to EUR 9.45 billion. The situation is also logical for Poland and Russia, where a significant number of such institutions causes large volumes of assets created by them. The most obvious situation is in Ukraine, where the number of investment funds does not correlate with the volumes of their assets. Having analysed the statistical data on the number of financial institutions in Eastern Europe, we can determine the role of their separate types in the forming of financial assets in the national eco nomies. It is possible to determine the compositional model of the development of their financial service markets. We propose to do this by using the following equation:

(1)

where: - the compositional model of the functioning of the financial service market in a particular state; - the share of assets of banking institutions in the total volume of assets formed by financial institutions; - the volume of assets of banking institutions; - the share of assets of insurance companies in the total volume of assets formed by financial institutions; - the volume of assets of insurance companies; - the share of assets of non-state pension funds in the total volume of assets formed by financial institutions; - the volume of assets of non-state pension funds; - the share of assets of investment funds in the total volume of assets formed by financial institutions; - the volume of assets of investment funds. Thus, in order to determine the compositional model of the functioning of the financial service market, we will use indicators of the formed assets of each type of financial institution operating in such a market. Using Table 1, we obtain the following types of the indicated model (Figure 4). The information in Table 1 gives grounds for determining the peculiarities of functioning of the financial service markets in the selected Eastern European countries, indicating the leading role of banking institutions in the functioning of the national economies. The conclusions are as follows: 1. The smallest share of banking institutions is in Slovakia (72.71%), and the largest share is in Rus- sia - 87.93%).

Figure 3: Information on the operation of investment funds in Eastern Europe Source: Made by the authors based on data by The Bank of Russia (2018), The National Bank of the Republic of Belarus (2018), European Central Bank (2018), The Ukrainian Association of Investment Business (2018)

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Table 1: Composition of the model of the financial service markets of the Eastern European countries by size of assets formed by various financial institutions

Source: Compiled by the authors

Figure 4: Compositional models of the financial services market of the countries of Eastern Europe Source: Authors’ own calculations

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2. After the banking sector, the insurance service market is one of the most developed in most of the countries, since it plays a prominent role in terms of economic development. The lar gest share of assets by insurers has been formed in Poland (8.04%) and Hungary (6.29%). 3. In the selected countries of Eastern Europe, non-state pension funds play a prominent role in the development of the financial service markets. In many countries, the assets of such institutions prevail in the size of the assets of insurance companies (Bulgaria, Russia, Romania, Poland and Slovakia). Such institutions are most developed in Slovakia, with their share in total assets amounting to 11.2%). 4. The activity of investment funds in most countries of Eastern Europe is low and these institutions do not play an important role in the development of financial service markets. The only exception is Ukraine, where the share of their assets is over 11.98% of their total volume in the country. If compared with data from other countries, the given indicator looks abnormal. The conducted study makes it possible to determine the basic trends in the functioning of the financial services market in the countries of Eastern Europe and predict future transformations of such a market in Ukraine. Let us consider the peculiarities of functioning of the Ukrainian financial services market in more detail. For Ukraine, as well as for most other Eastern European countries, a model of bank-oriented economic development, in which banking institutions play a major role in building a national eco nomy, is inherent. However, in addition to joint investment institutions, the importance of which in the economic system of the country is significantly overestimated, other segments of the financial service market develop very poorly. Also, the banking system periodically undergoes unpredictable complex transformational processes. In 2015, there were 164 banking institutions. However, the financial stability and the capacity of such banks were low. Consequently, in 2015-2017, Ukraine introduced a policy to increase the stability of the banking system, which led to the elimination of a significant number of banks. Being conducted by the National Bank of Ukraine such a policy became a shock to the entire national economy, and the devaluation of the national currency led to destructive consequences. After the reform in the banking sector, the number of banking institutions has gradually begun to approach the average indicator, which is typical for the countries of Eastern Europe. The markets of insurance services and services of NSPF in Ukraine are poorly developed, despite a significant number of major providers of such services. Unlike most Eastern European countries, insu rance companies and NSPFs have not become institutional investors in the financial service market and have no significant impact on its functioning. In particular, at the end of 2017, the assets of all state- owned insurance companies amounted to EUR 1.7 billion, while the NSPF totalled EUR 69.91 million. For a country with a population of 42.0 million, such indicators are too low and do not correspond to the general indicators of development of such markets in all states of the specified region. It should be borne in mind that these data are the result of the gradual clearing of the activities of these institutions from unscrupulous and ineffective organizations. At the end of 2013 (the pre-crisis period), 488 insurance companies and 81 NSPFs were registered in Ukraine. That is, the disproportion in development was even greater. In 2010, there were 538 insurance companies and 101 NSPFs. It can be stated that nowadays we observe a process of gradual consolidation of insurance companies, with an increase in their capitalisation level and reduction in the number of fictitious institutions. According to statistical data, in Ukraine, the most rapidly developing institutions after banks are investment funds. In the financial service market, the number of such institutions today is the largest among all the investigated financial intermediaries (1167 units in 2017). However, their number has been reduced in the last six years: 1222 units in 2012; 1250 units in 2013; 1188 units in 2014; 1147 units in 2015; 1131 units in 2016. At the same time, according to statistical data from http://www.uaib.com.ua/ analituaib.html, the volume of assets of such institutions was increasing over the years: EUR 4.18 billion in 2011, and EUR 7.8 billion in 2017. However, in comparison with similar indicators of the rest of Eas tern Europe, it can be noted that the market of joint investment in Ukraine remains undeveloped. Figure 5 shows, a compositional model of the financial service markets of Eastern European countries. The existing model of such a market in Ukraine is also presented. A fragmentary analysis of the current state of the financial services market in Ukraine makes it possible to highlight the following features of its development: rapid decline in the number of ban king institutions and raising their financial sustainability, reduction of the volumes of granting loans to economic entities by banking institutions, weak development of the insurance service market

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and the NSPF service market, a significant decline in the volume of assets of insurance companies, a decrease in the number of investment funds and an increase in their assets. The chaotic development of the financial service market, which is currently observed in Ukraine, has the following consequences: banking institutions remain most resilient, while other institutions do not play an important role. The question arises as to what should be the composition of the mo del of the financial service market so that it becomes more stable in comparison with the relevant markets of Eastern European countries. The financial service market of Ukraine, as well as the sector of services, requires measures to change the conditions of activities of financial institutions to improve the efficiency of its work. All Eastern European countries have gone through this path when reforming their own financial service markets to create conditions for their stable development. The relevant processes in Ukraine have always been chaotic and inconsistent. Accordingly, the Ukrainian financial services market has become very volatile and vulnerable to emerging crises. This negatively affects both the entire sphere of financial services and the attitude of clients of financial institutions to corresponding activities. This determines the need to find directions for further reforming of this market, taking into consi deration the experience of Eastern European countries. We will conduct a deeper analysis of the functioning of the financial service markets of Eastern European countries. To do this, we will define and analyse the relative performance indicators of financial intermediaries. In addition, we will calculate the number of people in Eastern Europe per one bank institution at the end of 2017, which will allow us to estimate the density of banking institutions. At the end of 2017, the relevant figure in Ukraine amounted to 519.21 thousand people. The average number of people for all countries of Eastern Europe was 422.3 thousand people. Thus, according to this value, the banking service market in Ukraine is showing a pan-European trend. Consequently, the number of banking institutions in Ukraine is sufficient and does not need to be increased. The decrease in the number of banks in Ukraine to the mean value which is inherent in the Eastern European countries during 2014-2017 only confirms the hypothesis that there is an objective need to reform other segments of the market in accordance with the main trends of their functioning in other countries. However, normalisation of the number of banking institutions does not always prove the exis tence of an efficient banking system. Figure 6 gives information on the assets of banks per capita in different countries is provided. These data show that, despite a significant number of banking institutions, the real functioning of banks in Ukraine is worse in comparison with other countries of Eastern Europe. As of the end of 2017, one Ukrainian had EUR 1,314.97 of bank assets. This is the worst indicator among all the countries. In other countries banks are developing more dynamically; they are more financially sustainable and able to form assets, i.e. loans and investments. The gap between these indicators in Ukraine and other Eastern European countries is significant. Figure 7 provides information on individual indicators of the development of the banking systems in the Eastern European countries.

Figure 5: Compositional averaged model of the financial services market in Eastern Europe and the model of the Ukrainian financial services market Source: Authors’ own calculations

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Consequently, the information presented in Figure 7 gives grounds to state that despite the large number of banks in the financial service market of Ukraine, their quantified indicators lag far behind the functioning of similar institutions in other countries. Indicative data is on the volume of loans and deposits per person. At the end of 2017, these indicators in Ukraine amounted to EUR 393.39 and 618.46 which is one of the lowest rates among the Eastern European countries. The average for these states is EUR 5.86 thousand for loans per person, and EUR 5.98 thousand for deposits. Ukraine lags behind by almost ten times by the volume of the issued loans and almost six times by the volume of the attracted resources. The volume of aggregate assets of insurance companies in Ukraine in comparison with the similar indicator in other Eastern European countries is too insignificant. However, the existence of a large number of insurers leads to the fact that an average of one insurance company accounted for EUR 5.83 million of assets, which is a very low indicator if compared with the other countries of the region: • Bulgaria - EUR 63.46 million, • Hungary - EUR 298.03 million, • Poland - EUR 777 million, • Russia - EUR 112.44 million, • Romania - EUR 102.32 million, • Slovakia - EUR 10 million. Given the abnormal number of insurance companies in Ukraine with low capitalisation of the insu rance market, we can assume that in the future the insurance market will face the process of cleaning from unstable, inactive insurers and, as a result, there will remain a group of the most effective insu rance companies. In other words, the number of these institutions in Ukraine should be reduced. As the experience of Eastern European countries shows, a small number of powerful insurance companies is enough. For example, in Poland, there are 61 insurers (including life-companies and non-life companies). Such institutions accumulated at EUR 47.44 billion of insurance premiums at the end of 2017. A forecast of the number of insurers required by Ukraine to reach the average number of people per one listed institution shows that 130 insurance companies will be enough (there were 294 units

Figure 6: Volume of bank assets in Eastern Europe per capita at the end of 2017, EUR Source: Compiled by the authors

Figure 7: Individual indicators of the development of bank systems in the related Eastern European countries Source: Compiled by the authors

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at the end of 2017). The above data only confirms the thesis that it is necessary to rid from unstable and formally existing participants in the insurance service market and to increase requirements for their financial sustainability. The NSPFs in Ukraine are also in a difficult situation. At the end of 2017, their number was 64 units. However, the volume of assets accumulated by these institutions amounted to EUR 73.61 million, which means that one institution accumulated EUR 1.73 million, which is the lowest index among all the Eastern European countries. It should be noted the system of non-state pension funds that in Ukraine develops very slowly. Accordingly, the impact that such institutional investors have on the development of the country’s economy is virtually imperceptible. At the same time, a significant number of NSPFs leads to a high number of individuals per capita. Their number was 665.63 thousand people at the end of 2017. At the same time, the situation in other Eastern European countries is quite different: • Poland - 1518.8 thousand people; • Russia - 1950 thousand people; • Romania - 2822.86 thousand people. It is noteworthy that in Russia, where live more than 144 million people, there are only 74 NSPFs with EUR 54.53 billion. Whereas, there are 64 NSPF in Ukraine with the total value of UAH 73.61 million (1 EUR = 29 UAH). Using the results of the conducted research and taking into consideration the peculiarities of the functioning of financial service markets in the countries of Eastern Europe, it is possible to identify future transformations of the outlined Ukrainian market that need to be conducted to maintain its successful development. 1. Further increase in the financial stability of banking institutions by boosting the requirements for their capital will reduce the total number of banks in the country, with the most stable financial institutions remaining in the market. This will not affect any service, as large system banks already have a large-scale system of structural units and are able to fully satisfy customers’ demand. 2. Activate the development of the credit service market will facilitate lowering of credit rates, which will allow balancing the volumes of deposits attracted by banks and their issued loans. 3. Complete re-loading of the insurance market with increased requirements for insurers and a gradual decrease in their number will allow the creation of a system of financially sustainable uni- versal insurance companies. 4. Reforming of the system of non-state pension funds, including the reduction of their number by increasing the requirements to the level of their capitalisation is viewed to be an effective way to increase the pace of development of this market is to establish a system for guaranteeing payments under non-state pension insurance contracts. 5. Updated information on the functioning of investment funds in the country will help to analyse their activities and to create up-to-date real statistics on the work of such institutions. This can be achieved by introducing new legislation on the disclosure of information by such institutions in the current legislation.

6. Conclusions Today in Ukraine the issues of reforming the financial service market to improve its functioning and increase its positive impact on the development of the national economy remain open. Trans- formation of such a market should be implemented by taking into account similar process taking place in other countries. In our opinion, the selected countries of Eastern Europe are a clear example for determining the priorities of improving the work of financial institutions in Ukraine. The conducted research of the current trends of the functioning of financial service markets in the countries of Eastern Europe gives a clear idea about the construction of the future model of such a market in Ukraine. Predominantly, it concerns the creation of conditions to improve the quality of institutional investors (banks, insurance companies, NSPFs and investment funds) to increase the volume of credit and investment resources for the development of the real sector of the Ukrainian economy. References 1. Altomonte, C., & Guagliano, C. (2003). Comparative study of FDI in Central and Eastern Europe and the Mediterranean. Economic Systems, 27(2), 223-246. doi: https://doi.org/10.1016/S0939-3625(03)00042-6 2. Bakker, M.-R., & Gross, A. (2004). Development of Non-Bank Financial Institutions and Capital Markets in European Union Accession Countries. World Bank working paper No. 28. Retrieved from https://openknowledge.worldbank.org/ bitstream/handle/10986/15030/284040PAPER0WBWP028.pdf?sequence=1&isAllowed=y

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3. Barjaktarović, L., Paunović, M., & Ječmenica, D. (2013). Development of the Banking Sector in CEE Countries - Comparative Analysis. Journal of Central Banking Theory and Practice, 2, 93-114. Retrieved from ftp://ftp.repec.org/ opt/ReDIF/RePEc/cbk/journl/vol2no2-6.pdf 4. Bayar, Y. (2017). Public Governance and Financial Development in Central And Eastern European Countries. Ekonomske Ideje i Praksa (Economic Ideas and Practices), 24, 53-65. Retrieved from http://www.ekof.bg.ac.rs/wp- content/uploads/2014/10/Bajar.pdf 5. Berglof, Е., & Bolton, Р. (2002). The great divide and beyond: financial architecture in transition. Journal of Economic Perspectives, 16(1), 77-100. doi: https://doi.org/10.1257/0895330027120 6. Bonin, J., & Wachtel, P. (2003). Financial Sector Development in Transition Economies: Lessons from the First Decade. Financial Markets, Institutions & Instruments, 12(1), 1-66. Retrieved from https://papers.ssrn.com/sol3/papers. cfm?abstract_id=388498 7. Cevik, N. K., Dibooglu, S., & Kutan, A. M. (2016). Real and Financial Sector Studies in Central and Eastern Europe: A Review. Czech Journal of Economics and Finance, 66(1), 2-31. Retrieved from http://journal.fsv.cuni.cz/storage/1346_cevik.pdf 8. Dubyna, M. V. (2016). Application of the System Approach to Financial Services Market Research. Problemy Ekonomiky (Problems of Economy), 3, 261-266. Retrieved from http://irbis-nbuv.gov.ua/cgi-bin/irbis_nbuv/cgiirbis_64.exe?I21DBN=LINK& P21DBN=UJRN&Z21ID=&S21REF=10&S21CNR=20&S21STN=1&S21FMT=ASP_meta&C21COM=S&2_S21P03=FILA=&2_ S21STR=Pekon_2016_3_34 9. Gural, O. A., & Lomachinskaya, I. A. (2017). Effect of financial development of the Visegrad Group on social and economic well-being. Ekonomika: Realii Chasu (Economics: Time Realities), 34(6), 37-43. Retrieved from https://economics.opu.ua/ files/archive/2017/No6/37.pdf 10. Herring, R. J., & Santomero, A. M. (1996). The Role of the Financial Sector in Economic Performance. Wharton: Wharton School of the University of Pennsylvania. Retrieved from https://core.ac.uk/download/pdf/6649708.pdf 11. Iorgova, S., & Ong, L. L. (2008). The Capital Markets of Emerging Europe: Institutions, Instruments and Investors. IMF Working Paper, 08(103). Retrieved from https://www.imf.org/external/pubs/ft/wp/2008/wp08103.pdf 12. Lagoa, S. (2014). Financial institutions and supply of financial services in the European microcredit market: a survey of selected countries’ experiences. Fessud. Working Paper Series, 73. Retrieved from http://fessud.eu/wp-content/ uploads/2013/04/Financial-institutions-supply-of-financial-services_European-microcredit-market_WP-73.pdf 13. Patrice, M., Graham, B., Shaan, D., Mark, L., & Rohit, L. (2012). Non-bank financial institutions: Assessment of their impact on the stability of the financial system. Economic Papers, 472. European Commission; Directorate-General for Economic and Financial Affairs. Retrieved from http://ec.europa.eu/economy_finance/publications/economic_ paper/2012/pdf/ecp472_en.pdf 14. Radulescu, M. (2016). Foreign Capital Expansion in Eastern Europe. Annals of the «Constantin Brâncuşi» University of Târgu Jiu, Economy Series, 4, 151-158. Retrieved from http://www.utgjiu.ro/revista/ec/pdf/2016-04/23_Radulescu%202.pdf 15. Semenog, A. Yu., & Pakhnenko, O. M. (2017). The analysis of the state and structure of the european union financial services market.Naukovyi Visnyk Khersonskoho Derzhavnoho Universytetu (Scientific Herald of Kherson State University), 25(2), 145-150. Retrieved from http://www.ej.kherson.ua/journal/economic_25/2/33.pdf (in Ukr.) 16. Thalassinos, E. (2008).Trends and Developments in the European Financial Sector. European Financial and Accounting Journal, 3(3), 44-61. doi: https://doi.org/10.18267/j.efaj.83 17. The Bank of Russia (2018). Annual report of 2016 of the Bank of Russia. 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Received 4.02.2019 Received in revised form 20.03.2019 Accepted 24.03.2019 Available online 20.08.2019

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ECONOMIC ANNALS-XXI ISSN 1728-6239 (Online) ISSN 1728-6220 (Print) https://doi.org/10.21003/ea http://www.soskin.info/ea/

Volume 176 Issue (3-4)’2019

Citation information: Lentner, Cs., Vasa, L., Kolozsi, P. P., & Zéman, Z. (2019). New dimensions of internal controls in banking after the GFC. Economic Annals-XXI, 176(3-4), 38-48. doi: https://doi.org/10.21003/ea.V176-04

Csaba Lentner D.Sc. (Public Finance), Full Professor, Head of Department, Faculty of Political Sciences and Public Administration, Public Finance Research Institute, National University of Public Service; PADS Leader Economist, Central Bank of Hungary 5 Ménesi Str., Budapest, 1118, Hungary [email protected] ORCID ID: http://orcid.org/0000-0003-2241-782X László Vasa D.Sc. (Economics), Research Professor, Széchenyi István University 1 Egyetem Str., Győr, H-9026, Hungary [email protected]; [email protected] ORCID ID: https://orcid.org/0000-0002-3805-0244 Pál P. Kolozsi Associate Professor, PhD (Economics), Corvinus University of Budapest and National University of Public Service 5 Ménesi Str., Budapest, 1118, Hungary [email protected] ORCID ID: https://orcid.org/0000-0001-5713-776X

Zoltán Zéman D.Sc. (Economics), Full Professor, Head of Department, Faculty of Economics and Social Sciences, Business Institute, Szent István University 1 Páter Károly Str., Gödöllő, 2100, Hungary [email protected] ORCID ID: http://orcid.org/0000-0003-2504-028X

New dimensions of internal controls in banking after the GFC

Abstract The weakness of the control function of governments and central banks was the main regulatory cause of the global financial crisis (GFC) broke out in 2007, but the suboptimal regulatory environment «corrupted» the quality of internal control and audit of banks as well. After the crisis, corporate governance issues appeared in the focus of international organizations. In this paper, we present the relevant international recommendations aimed at improvement of the weak corporate governance practices of the banking sector. Based on the comparison of pre- and post-crisis internal control functionalities which are presented as a meta-analysis and a systematic review of the existing empirical researches, the authors conclude that the stricter guidelines could and can have a positive impact on banks’ operations stabilizing through the strengthening of internal control practices. Keywords: Internal Control; Banking Sector; Global Financial Crisis; GFC; Corporate Governance; Corporate Social Responsibility; CSR; CRM; RAR; CRD Directive; EBA; Basel Committee JEL Classification: G21; G34; H12 Acknowledgements: This study is written as a part of support for Prof. Lentner at PADS Foundation - The National Bank of Hungary (Magyar Nemzeti Bank). Authors’ Contribution: Each author contributed equally to the research. DOI: https://doi.org/10.21003/ea.V176-04

Лентер Ч. доктор економічних наук, професор, факультет політології та державного управління, Національний університет державної служби; провідний економіст, Національний банк Угорщини, Будапешт, Угорщина Ваша Л. доктор економічних наук, професор, Університет Іштвана Сечені, Дьйор, Угорщина Коложи П. кандидат економічних наук, доцент, Університет Корвіна; Національний університет державної служби, Будапешт, Угорщина Земан З. доктор економічних наук, професор, факультет економіки та суспільних наук, Інститут бізнесу, Університет Святого Іштвана, Гьодоло, Угорщина

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38 ECONOMIC ANNALS-XXI MONEY, FINANCE AND CREDIT

Нові виміри внутрішнього контролю в банках після глобальної фінансової кризи Анотація. Слабкість контрольної функції урядів і центральних банків була основною регуляторною причиною глобальної фінансової кризи (ГФК – GFC), яка вибухнула в 2007 році, але неоптимальне регуляторне середовище також погіршило якість внутрішнього контролю й аудиту банків. Після кризи питання корпоративного управління опинилися в центрі уваги міжнародних організацій. У цій роботі ми представляємо відповідні міжнародні рекомендації, спрямовані на вдосконалення слабкої практики корпоративного управління банківського сектору. На основі порівняння функцій внутрішнього контролю до та після кризи, які представлені як метааналіз і системний огляд існуючих емпіричних досліджень, автори роблять висновок, що більш жорсткі вказівки могли й можуть мати позитивний вплив на діяльність банків через посилення стабілізуючої практики внутрішнього контролю. Ключові слова: внутрішній контроль; банківський сектор; глобальна фінансова криза; корпоративне управління; корпоративна соціальна відповідальність; КСВ; ЄБА.

Лентнер Ч. доктор экономических наук, профессор, факультет политологии и государственного управления, Национальный университет государственной службы; ведущий экономист, Национальный банк Венгрии, Будапешт, Венгрия Ваша Л. доктор экономических наук, профессор, Университет Иштвана Сечени, Дьёр, Венгрия Коложи П. кандидат экономических наук, доцент, Университет Корвина; Национальный университет государственной службы, Будапешт, Венгрия Земан З. доктор экономических наук, профессор, факультет экономики и общественных наук, Институт бизнеса, Университет Святого Иштвана, Гёдоло, Венгрия Новые измерения внутреннего контроля в банках после глобального финансового кризиса Анотация. Слабость контрольной функции правительств и центральных банков была основной регуляторной причиной глобального финансового кризиса (ГФК – GFC), который разразился в 2007 году, но неоптимальная регуляторная среда также ухудшила качество внутреннего контроля и аудита банков. После кризиса вопросы корпоративного управления оказались в центре внимания международных организаций. В этой работе мы представляем соответствующие международные рекомендации, направленные на совершенствование слабой практики корпоративного управления банковского сектора. На основе сравнения функций внутреннего контроля до и после кризиса, которые представлены как метаанализ и системный обзор существующих эмпирических исследований, авторы делают вывод, что более жесткие указания могли и могут иметь положительное влияние на деятельность банков усиливая стабилизирующие практики внутреннего контроля. Ключевые слова: внутренний контроль; банковский сектор; глобальный финансовый кризис; корпоративное управление; корпоративная социальная ответственность; КСО; ЕБА.

1. Introduction The global financial crisis erupted in 2007-2008 at the Anglo-Saxon mortgage markets, due to the globalised nature of the financial world, escalated into a global level (F. Bruni and D. T. Llewellyn 2009; Financial Crisis Inquiry Commission, 2011). There were a large number of factors underpin- ning the crisis, and consequences were also very complex, the most prominent of which was a decrease in the consumption of households within a general decline in the economy (Acharya & Ri chardson, 2009). Even if the economic downturn of 2007-2009 differed considerably from the former recessions, various key indicators (consumption, output, investment, labour market structure) projected, although not completely clearly, an expectable crisis. The market, however, failed to respond to these signs adequately (Ohanian, 2010; Ocampo, 2009). History demonstrates that capitalist regimes undergo crises regularly but periodically (Uryszek, 2015). The most frequent crisis is the «bubble», and not necessarily its emergence but its «deflation» means the occurrence of a crisis (Kotz, 2009; Carmassi, Gros, & Stefano, 2009). The institutional form of capitalism and the social structure of accumulation promote high pro fits and economic expansion for a while, but eventually the contradictions - as a result of that form of capitalism - undermine its continuing operation, leading to a systemic crisis. The crisis which started in the Anglo-Saxon mortgage markets differs considerably from the crisis of 1929-1933, with which many parallels have been drawn. While the main root cause of the latter crisis was essentially linked to the monetary policy, that of the crisis escalated by 2008 was rather over-lending and over-borrowing, providing mostly insolvent citizens with housing loans. The crisis starting from lending anomalies gives rise to a considerable extent to the responsibility of, in addition to regulatory and supervisory authorities and the households superficially assessing their

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loan repayment abilities, banks, since they failed to act with due diligence in the period prior to len ding and during loan monitoring activities (Zwolankowski, 2011). The operation of internal controlling systems of banks and different monitoring and internal regulatory systems, as well as their operational efficiency and their continuous assessment are extreme- ly important not only for banks but the entire economy. These controlling systems must also focus on measuring disequilibrium in credit and capital markets (Besanko & Kanatas, 2015). This paper is focused on internal controls of banks. The structure of the paper is the following. After a brief literature review we define the purpose of the analysis, and then we present the results of the research, especially concerning the shortcomings of internal controls during the pre-crisis period, the changes in bank controlling methodology after the crisis and the recommendations of international organisations concerning corporate governance. The last chapter concludes and gives perspectives to further research.

2. Brief Literature Review Internal controls of banks represent the effort to achieve a synergy of profitability, growth and risk-taking factors, beside optimal profitability and limited risk-taking (Andersen, 1986). Controlling is a philosophy and a mindset which may extend onto decentralised managerial areas through information management, therefore internal controls may become a management information centre. The deviation of bank controlling from standard controlling methodology is determined by the individual and complex tasks of banks’ value creation processes and their products as well as by the banking transactions (payment transactions, lending, capital investment etc.). It is therefore clear that bank controlling, in view of its nature, performs management tasks for the bank as a whole by integrating two well-defined partial areas, i.e. the controlling tasks of the bank’s internal operation and the services. This integration can only be achieved by connecting controlling subsystems functioning within the bank’s organisation, i.e. cost controlling, profit controlling, financial controlling, planning, plan-fact deviation analysis and information provision functions. Consequently, the orientation of bank controlling is twofold. One comprises all the controlling tasks that guarantee the bank’s internal operational security, and the other consists of customer controlling tasks between the bank and its clientele (Kalmár, Zéman, & Lukács, 2015). Efficiently and properly functioning internal controls are one of the most important means of ensuring compliance with the accounting principle of the bank’s operation. Within the corporations, more and more emphasis is put on internal performance pressure, since market and other opportunities for additional funding have become uncertain amidst the crisis and budgetary bot- tlenecks. In relation to bank controlling, several regulations must be mentioned which affect the operation of internal controls. Since commercial banks operate in the form of profit-oriented firms, they must comply with the changes in various accounting principles. In an internationally exten ded global competition, one of the fundamental key factors of the long-term viability of companies is their competitiveness. According to a theoretical approach, this means the prevalence of the going concern basis of accounting, with which these organisations also contribute to economic expansion, because long-term viability is an initial condition. The continuous development of intra-company controlling mechanisms allows companies to maintain continuous changes in the set of criteria and to adapt to changes (essentially with the appearance of the International Financial Reporting Standards). Credit institutions and banks operate in a stringent regulatory environment. The regulation per- sisting after the economic crisis is largely different from that of a balanced financial and economic era. Since public confidence in financial institutions and markets started to decrease rapidly after 2007, policy-makers had to review their role played in the global economic turmoil. In response to the financial crisis emerging in 2007-2008, extensive legislative initiatives were undertaken in many jurisdictions, most notably in the US and the EU, as well as on international level. This was often accompanied by a revamping of existing institutions, such as the Basel Committee on Banking Su- pervision (BCBS), or the introduction of new organisations, such as the Financial Stability Board (Chatzistavrou, Katsikas, & Tirkides, 2013; Lentner, 2016).

3. Purpose The purpose of the paper is to examine the main pillars of the internal control and audit systems of banks, the evolution of regulatory methods and to present the relevant international recommendations, whose main objective is to correct the weak or, in many cases, superficial corporate

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governance practices of the banking sector. Our paper also presents a meta-analysis and a systematic review of the relevant researches on how internal control practices are realized, executed in banks. Our study is focused on the general framework, the main pillars of the internal control system of banks, which means that we do evaluate essentially the general trends instead of the practice of individual banks.

4. Results

Shortcomings of external and internal controls during the pre-crisis period The task of the banking sector is, in addition to reducing costs and allocating capital, to ma nage economic risks in some way, and ensure the stability of the economy with this risk ma nagement. One of the visible signs of the global economic crisis was the fact that banks sustained enormous losses, which could be regarded as the spill-over of the crisis of the real eco nomy, but ultimately it was about financial enterprises which did not adequately lent the money entrusted to them, that is they failed to complete their risk management tasks properly or assess repayment risks correctly. This kind of profit-oriented mindset contributed to the collapse of the global economy. Excessive lending, countries ending up in the debt trap, corporate indebtedness and over-lending of households exceeding their creditworthiness are interrelated and con- sequential phenomena. Before the crisis, low levels of financial literacy on the consumers’ side, and the increased complexity of financial products on the financial services providers’ side led to many consumers feeling that they had been abused or misled, which was actually the case in many instances. Apart from that, the activity of unregulated or inadequately controlled financial service providers considering short-term economic performance only increased the risk that borrowers became victims of abuse or fraud (OECD, 2011). Indebtedness is a particularly severe socio-economic problem. In addition to a continuous increase of government debt, the shortfall of primary revenues and income not covering the spen ding of local authorities, and households in particular, appears. In order to bridge this gap, intensive bank lending and then, due to missed payments, continuous and permanent indebtedness appears. The direct causes of the global economic crisis were the deficiencies of mortgage regulations and their security procedures and the malfunctions and the deregulation of over-the-counter derivatives transactions and the shadow banking system. Non-interventionism appears on a systemic level in the operation of governments and supervisory authorities pursuing neo-liberal ideas. Regulation before the crisis did not ensure the fundamental principles guaranteeing the security and stability of the financial system which would have been required for avoiding the crisis. Fi- nancial regulation should have been targeted, rule-based, and dynamic. The globalisation of financial markets manifested itself in an increasing degree and a higher level of interconnectedness and similarity of financial institutions. As a result, the implementation of a universally applicable financial regulation became more difficult, and it still is. In the homeland of the global financial crisis, the U.S., the rapid expansion of subprime and Alt-A loans primarily concentrated around the period from 2004 to 2006. This is clearly demonstra ted by the fact that the combined share of subprime and Alt-A loans in newly issued loans increased to 40 per cent in 2006 from 10 per cent in 2003. In this period, due to a continuous rise of real estate prices in the U.S., such borrowers could take out loans that were risky in terms of income or repayment terms and conditions. Both borrowers and lenders were confident that capital gains made by a further increase in real estate prices would ensure repayment. As interest rates had been increasing continuously after the end of 2003, it became increasingly difficult for a group of subprime borrowers to take out loans, therefore lenders gradually started to relax loan terms and conditions. Due to less stringent standards, people obtained more and more loans, with an own contribution of less than 10 per cent, without an appropriate income certificate, and, in the initial phase, within the framework of loan profiles providing a low repayment burden and negative amortisation. This is excellently illustrated by the example that the share of variable-rate mortgage loans, ensuring a low interest rate for two years in general, had reached 50 per cent in the subprime category by 2006 (Nagy & Szabó, 2008). The volume of these high-risk loans should have been curbed by the control functions of financial institutions. This did not happen or just to a very small extent, since the appe- tite for profit and the short-term thinking of these institutions overrode the very high future risks an- ticipated by control functions.

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Changes in bank controlling after the GFC Following the global financial crisis, financial management controls and internal controls have become more valuable, because of the growing non-performing loan portfolios, on the one hand, and the worsening of the general macroeconomic environment, on the other hand. For that reason the previously used control methodology and the importance of system components have changed since the crisis (CIMA, 2016; Lintner & Lincoln, 2016; Malmi & Brown, 2008). An important element of the change was that before the crisis the focus was essentially on short and medium term planning, which was replaced and completed by long term planning and an increasing focus on capital management planning. Concerning financial control, budget planning used to be linked to 12-month period, using traditional budgeting methods with a financial Key Per- formance Indicator (KPI) measure set. New budgeting methodologies (Beyond Budgeting) had been adapted, with 1-3 years budgeting practice, and an increased focus on ROE, liquidity, capital ratios and cost/profit measures. Before the crisis, the main focus was put on governance and organization structure, policies and procedures, while after the GFC, administrative control was extended to comprehensive risk controls, governance and compliance management as well, with improved internal audit proces ses. Concerning the issues of corporate culture, the main function was the identification of fundamental values on which banks operate, but after the crisis that was extended to support embed- ding of values in the organization through hiring practices, social events and mentoring programs for managers and employees. In course of this, the design and control of reward and compensation schemes, especially concerning the remuneration of top-managers causing moral hazard problems in the past, was modified. In information management, the main focus moved from internal repor ting with information collecting functions to internal and external reporting with central information distribution functions, with new tools such as data warehouses and integrated information systems. (CIMA, 2016; Lintner & Lincoln, 2016; Zeman, Kalmar & Lentner, 2018). International bank consolidation is an increasingly complex response given to the global financial crisis. During this consolidation, the micro-procedural and macro-procedural regulation of banks should be highlighted, and the role of various control systems have also acquired a new significance (M. Kowalik, T. Davig, Ch. S. Morris, and K. Regehr (2015) - US banking; The Bank of Spain (2017) - Spanish banking; M. S. Mohanty (2014) - pan-African banking). The development of currently operating control systems lie in mapping and integrating the procedures applied during banking activities. The development of information technology makes it possible to run complex algorithms on extensive databases, which, in addition to a number of other benefits, facilitates more accurate forecasting, income and cost planning as well as more reaso nable cost management. The various risk assessment («scoring») models, which focus on the risks of customers becoming insolvent, are worth highlighting. Although the primary objective of these methods is related to the given banking function, both the methodology and the results may improve the planning and analysis functions of the management controlling system via more accurate forecasting; in addition, they contribute to banks’ more efficient cost management. In that context it is also important to focus on CSR and its changes after bank consolidation processes. CSR means a combination of behaviours and ideas which conveys and asserts environmental, social and human interests and value beyond internal corporate viewpoints in relation to sustainable development (the fundamental principle of a going concern in accounting) and business ethics. It includes the transparency of the given organisation, its compliance with ethical norms, and an as extensive as possible consideration of viewpoints of those seeking information inside or outside the company in connection with it. A bank’s CSR activity may have several focal points. It may focus on internal and external stakeholders, may be directly related to the bank’s activity or it may be independent from both. Providing financial and banking information adjusted to the knowledge level of customers taking out loans is a CSR activity directly related to the banking activity, which may reduce the rate of bad debt, and, at the same time, creates some stability in the customers’ financial management. It matters who is in the focus of the bank’s CSR activity, but it is also important how much weight the given activity has in the life of the bank and the stakeholders. Beyond the classical stakeholder models, the CSR of the banking sector manifests also in a practical form of refraining from causing market disturbances by presenting a fictitious economic situation, so that funds should not be redeployed from public reserves to consolidate financial institutions. The financial crisis requires the definition of a new type of CSR assumed by banking

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companies and financial institutions, in addition to traditional corporate social responsibility. In addition to traditional CSR approaches, the financial institutions’ responsibility for customers, enterprises, families and national budgets is becoming increasingly important. A great emphasis should be placed on morals by financial institutions. From the viewpoint of economics and -fi nance, banks operating without a solid moral foundation, pose a hazard to the economy and society (Sh. C. Dow, 2010). To sum it up, banks as the main institutions ensuring the stability of the national economy and the international financial sector can do their best in terms of corporate social responsibility with calculable operations, the application of crediting techniques to retain their customers in the long term and conveying financial knowledge. Thus, the partial responsibility-taking dimension of the banking sector focussing on sub-parts is replaced by taking complex responsibility for the social, the national economic and even the global economic space simultaneously (Lentner, Szegedi & Tatay, 2015). In respect of risk management and responsibility-taking, the corporate sector is of major importance; in particular, attention should be focussed on changing the practices of lending to small and medium-sized enterprises. Internal controls and scoring systems have changed also in this sector after the global economic crisis (Belás, Dvorsky, Kubálek & Smreka, 2018). The changes in and the alteration of the principles of internal controls were one of the most important and most effective tools during consolidation after the crisis. During the consolidation, -fi nancial institutions changed the approach of their lending business, partly by themselves, partly under external pressure. In the background of this shift, there is a significant transformation in the European and the U.S. banking sector. The development of risk assessment methodologies and tools, and the regulatory systems established in the consolidation period of the crisis, to which va rious structural changes connected, made financial institutions pay growing attention to assessing and managing their credit risks, and the capital adequacy ratio related to these risks. Having taken these developments into consideration, and within the framework of bank consolidation, the Basel Committee on Banking Supervision revised the framework system that constitutes the fundamen- tals of the regulation pertaining to banks’ capital adequacy. Summing up the events of recent years, it can be established that the Basel II regulation placed the emphasis on microprudential issues and enhanced the procyclical nature of banking practices in several aspects. It did not manage effectively system-level macroprudential risks. Another important fact is that Basel II provided banks with a relatively flexible system, in which they could establish on their own the nature and extent of risks they faced, enhancing market risk factors of financial organisations. The Basel Committee on Banking Supervision made its decision on Basel III as a set of regulations pertaining to capital requirements in September 2010. The goal of this new regulation was to strengthen the microprudential level, consequently, to improve banks’ resilience to shocks or stress factors, furthermore, it introduced an anticyclical buffer which can be applied during crises, and also prescribes compliance with a net stable funding ratio and a liquidity coverage ratio and contain macroprudential reforms to manage systemic risks. It will also be decisive how particular countries will adopt and submit to the requirements of Basel III. In the U.S. for example, an implementation of the Dodd-Frank Act, adop ted in 2010, is applied in the operation of financial institutions (EBIC, 2013). Stricter capital requirements, liquidity requirements and additional rules imposed on a systemic level on banks are likely to make the banking system more solid in the long term. It is important to mention the types and changes of different internal credit rating systems, and their directions. Credit rating principles can be classified either on the basis of the principle of rating to standard or on the basis of internal banking operational systems. The former one is a pre-determined weighting scoring system, while the latter is based on banks’ internal operational evaluation. In Europe, financial institutions can use internal methods since 2007. Theoretically, internal methods assess risks more effectively, because, as opposed to a standard method applied by all banks in a uniform manner, it can take many individual specifications into account. In practice, there is am- ple proof that banks’ internal rating systems are not infallible in all cases (Treacy & Carey, 2000). As it has been set out above, over-crediting by financial institutions and serving high-risk customers was one of the causes of the global economic crisis arisen in 2007-2008. Various organisations with banking regulatory rights attempt to avoid this with the help of monitoring systems and rules, so that it should not occur in this form in the future. Banks also have a credit risk management (CRM) function, the aim of which is to minimise risks and to maximise risk-adjusted return (RAR) on the colla teral of credit facilities. The task of CRM is to establish the risk profile with the help of the borrower’s assessment and scorecards (Zahra, 2017) as it is presented in Figure 1.

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Figure 1: Credit Risk Assessment Funnel Source: Zahra (2017)

After the global financial crisis the continuous control of banks has become important to make it visible how ready they are for the next recession. Scenario analysis and stress testing are risk ma nagement tools that test the capability of different financial institutions to remain standing in the case of another financial recession. These tests examine and analyse the banks’ capabilities and tools to respond to a financial shock, and their overall efficiency with which they would be able to manage the arising crisis.

Corporate governance recommendations of international organisations In the years following the crisis, corporate governance issues came also in the focus of international organizations. The main purpose was to correct the weak or, in many cases, superficial corporate governance practices of institutions, which the global financial crisis clearly highlighted. Even if we accept that the applicability of these guidelines and recommendations can be proble matic - see the feedback of banks and professional associations on the public consultation of the EBA guidelines in European Banking Authority (2017), we can assume that these new regulations played a significant role in determining the direction in which the internal controls and governance system of banks developed after the GFC. Adequate corporate governance is of crucial importance for the operation of both individual institutions and the banking system as a whole. J. I. Lee (2015) confirmed that the internal control system and the professional experience of the employees contribute to the profitability of investments and the level of returns in the financial sector of Korea. Through the Swedish example, Liff and Wahlstrom (2018) presented banks’ internal control and risk management systems and their impact on bank’s operation, concluding that even if banks developed different systems, these frameworks had a significant impact on the financial performance of individual banks. After the global financial crisis, the rules of corporate governance have become more vigorous, also in the sense that more international organisations have issued stricter directives or recommendations. Without being exhaustive, the following ones can be regarded as the most important.

• CRD Directive Within the CRD Directive 2013/36/EU, effective since 2014, primarily Articles 74 to 96 belong to here, which focus on the issues about interval governance, recovery plans, remuneration policies, risk management requirements, corporate governance systems and the composition of the ma nagement body. Article 74 of the general principles of the directive focusses on the topic of internal governance, as well as recovery and resolution plans. The directive lays down that institutions shall have robust governance arrangements, which include a clear organisational structure with well-defined, transparent and consistent lines of responsibility, effective processes to identify, manage, monitor and report the risks they are or might be exposed to, adequate internal control mechanisms, including sound administration and accounting procedures, and remuneration policies and practices that are consistent with and promote sound and effective risk management. The arrangements, processes and mechanisms shall be comprehensive and proportionate to the nature, scale and complexity of the risks inherent in the business model and the institution’s activities. Article 75 focusses on the

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oversight of remuneration policies. Subsection 2 of the directive regulates the technical criteria concerning the organisation and treatment of risks, and subsection 3 sets out the requirements on go vernance (including governance arrangements, the management body and remuneration policies).

• Recommendations of the Basel Committee The Basel recommendation - called «Corporate governance principles for banks» - sets out that effective corporate governance is critical to the proper functioning of the banking sector and the economy. Banks perform a crucial role in national economies as funds are intermediated from depositors to borrowers in the banking system. The proper functioning of banks is a key to financial stability; if the corporate governance model of banks is wrong, problems occurring at specific banks can be transmitted across the economy as a whole. The primary purpose of corporate governance - which is interpreted by BIS as the allocation of tasks and responsibilities - should be, according to BIS, safeguarding stakeholders’ interest (1) in conformity with public interest and (2) on a sustainable basis. Among stakeholders, BIS highlights, particularly with respect to retail banks, shareholders’ interest would be secondary to depositors’ interest. The Basel Committee sets out 13 principles, which concern the following areas: 1. Board’s overall responsibilities. 2. Board qualifications and composition. 3. Board’s own structure and practices. 4. Senior management. 5. Governance of group structures. 6. Risk management function. 7. Risk identification, monitoring and controlling. 8. Risk communication. 9. Compliance. 10. Internal audit. 11. Compensation. 12. Disclosure and transparency. 13. The role of supervisors.

• EBA recommendations The recommendation of the EBA is in part a further developed version of the Basel Committee’s recommendation. EBA confirms the institutions’ requirements on corporate governance, and in particular call attention to: • the responsibility of management bodies in the quality of governance; • the significance of a robust control and supervisory function, potentially challenging the decision processes of the management; • the importance of adequate risk management strategies and frameworks. According to EBA, corporate governance concerns and includes all standards and principles concerned with setting an institution’s objectives, strategies and risk management framework. It includes how its business is organised; how responsibilities and authority are allocated; how information is conveyed within the company; and how the internal control framework is implemented, including accounting aspects and remuneration policies. EBA’s recommendation has been implemented by several national central banks in their own recommendations. For example, Recommendation No. 5/2016 (VI.06) of the Central Bank of Hun- gary on the establishment of internal lines of defense, their operation, and the management and control functions of financial institutions is such an implementation, which lays down as a general principle that financial institutions shall develop and operate their internal lines of defense and the specific elements forming their parts in compliance with relevant legislation, in line with the nature of the applied business model, and the characteristic features - including characteristics inherent in the organisational form - the extent, the complexity and the risks of the service providing activities pursued by the institution/group. This applies to internal policies, regulations, organisational solutions required by the Recommendation, as well as implemented practices and procedures.

5. Conclusions and Perspectives of Further Research The global financial crisis started in 2007-2008 was a collapse which could have been at least mitigated by an appropriate regulatory environment. The real question is, though, whether the next

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credit crisis, which is threatening the global economy again, can be avoided. Avoidance and prevention are greatly promoted by the improving effectiveness or bank controlling tools and methods, and their continuous development, and consumer protection rules due to external controls. It is important to highlight the changes and a tightening of controlling principles pertaining to the risk classification of borrowers. It is a definitely positive development that on the basis of bank data - although there might be mounting tensions and imbalances both in the balance sheets of individual banks and the global banking system - credit institutions have taken a more balanced and more sustainable course after the crisis. According to the latest global report of McKinsey (2018), the financial system moved «from the brink of chaos to a solid ground with a higher level of safety». In numerical terms, this move means the following: • The global Tier 1 capital ratio increased from 9.8 percent in 2007 to 13.2 percent in 2017. • The ratio of tangible equity to tangible assets has increased from 4.6 percent in 2010 to 6.2 percent in 2017. • Global banking industry market capitalization increased from $5.8 trillion in 2010 to $8.5 trillion in 2017. • The return on equity of the global banking system increased to a level of 15 to 18 per cent in the years preceding the crisis, which posed a serious sustainability hazard. Naturally, the financial crisis caused a significant decrease in this respect, but, at the same time, the fact that the return rate has been steadily in the 8 to 10 per cent zone for years after the crisis ended implies a gro wing stability of processes and banks’ operation, that is, since 2010 either unsustainably high or low values indicating insufficient return are not typical, in which a more robust controlling acti vity could have played a role. Although internal controls are obviously helpful in avoiding a credit crisis, the signs of indebtedness have appeared again in the economy, because economic growth driven by higher consumption has been present in the 10 years since the crisis, but there are limiting factors and sets of rules which produce a more mixed picture. Today, an excessive outflow of credit is already limited and curbed by several regulatory elements. The application of capital requirements of financial institutions as a macroprudential policy measure has been taking on increasing prominence as policy- makers wish to reduce procyclicality and leverage by these means (Yellen, 2010). Several possible regulatory instruments are used effectively in order to limit an excessive outflow of retail loans. International experience demonstrates that a combined application of regulations

Figure 2: Return on equity of the global banking system Source: McKinsey, 2017

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pertaining to the ratios of monthly instalments to monthly income (Payment to Income - PTI) and maximum Loan to Value (LTV) ratios is the most effective. The main reason for this is that these li mits affect all transactions indirectly and in an administrative manner (as opposed to capital buf fers applied as indirect incentives) and affect the entire financial intermediary system, thus cannot be avoided either by cross-border financial services or lending via branch offices (Baracsi, Grosz, & Fáykiss, 2015). Parallel with that regulatory instruments supporting the competition between banks must be nurtured during a boom, but regulations targeted to intensify competition could be potentially relaxed during an economic downturn or financial crisis (A. R. Admati, 2019). Effective auditing and monitoring tools before lending, with the help of which financial institutions become able to avoid over-lending to clients with a high risk profile, are also worth highlighting. It becomes possible to stabilise the operation of banks and financial institutions through the positive effects of credit monitoring and a strictly regulated environment. The fact that several international organisations have adopted recommendations after the crisis to promote an adequate quality of banks’ governance also contributes to a stricter operation of banks. In this respect, the CRD Direc- tive, and the recommendations of the Basel Committee and EBA have been of crucial importance.

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20. Lentner, C., Szegedi, K., & Tatay, T. (2015). Corporate Social Responsibility in the Banking Sector. Public Finance Quarterly, State Audit Office of Hungary, 60(3) 95-103. Retrieved from https://ideas.repec.org/a/pfq/journl/ v60y2015i1p95-103.html 21. Liff, R., & Wahlstrom, G. (2018). Usefulness of Enterprise Risk Management in two Banks.Qualitative Research in Accounting and Management, 15(1), 124-150. doi: https://doi.org/10.1108/QRAM-11-2016-0084 22. Lintner, P., & Lincoln, J. (2016). Bank Resolution and «Bail-in» in the EU: Selected Case Studies pre and post BRRD. Vienna: World Bank Group (Financial Sector Advisory Center). Retrieved from http://documents.worldbank.org/curated/ en/731351485375133455/Bank-resolution-and-bail-in-in-the-EU-selected-case-studies-pre-and-post-BRRD 23. Malmi, T., & Brown, D. A. (2008). Management Control Systems as a Package - Opportunities, Challenges and Research Directions. Management Accounting Research, 19(4), 287-300. doi: https://doi.org/10.1016/j.mar.2008.09.003 24. McKinsey&Company (2017). The Current Status and Future of Banking - Global Banking Annual Report 2017. Presentation, Albania, Tirana 14 November 2017. Retrieved from https://aab.al/wp-content/uploads/2017/09/The-Future- of-Banking_Mr.-Alin-Dumitrescu-Dragan-Project-Manager-McKinsey-Company.pdf 25. McKinsey&Company (2018, November). New Rules for an Old Game: Banks in the Changing World of Financial Intermediation. McKinsey Global Banking Annual Review. Retrieved from https://media.rbcdn.ru/media/reports/Banks- in-the-changing-world-of-financial-intermediation-GBAR.pdf 26. Mohanty, M. S. (Ed.). (2014, February). The role of central banks in macroeconomic and financial stability. BIS Papers No 76. Bank for International Settlements. Retrieved from https://www.bis.org/publ/bppdf/bispap76.pdf 27. Nagy, M., & Szabó, E. V. (2008). The US sub-prime mortgage crisis and its effects on the Hungarian banking system. Magyar Nemzeti Bank Szemle, 3, 34-44. Retrieved from https://www.mnb.hu/letoltes/nagy-marton-szabo-e- viktor.pdf (in Hungarian) 28. Ocampo, J. A. (2009). Latin America and the Global Financial Crisis. Cambridge Journal of Economics, 33(4), 703-724. doi: https://doi.org/10.1093/cje/bep030 29. OECD (2011). G20 High Level Principles on Financial Consumer Protection. Paris: OECD. Retrieved from https://www.oecd.org/daf/fin/financial-markets/48892010.pdf 30. Ohanian, E. L. (2010). The Economic Crisis from a Neoclassical Perspective. Journal of Economic Perspectives, 24(4), 45-66. doi: https://doi.org/10.1257/jep.24.4.45 31. The Bank of Spain (2017, May). Report on the financial and banking crisis in Spain, 2008-2014. Retrieved from https://www.bde.es/f/webbde/Secciones/Publicaciones/OtrasPublicaciones/Fich/InformeCrisis_Completo_web_en.pdf 32. Treacy, F. W., & Carey, M. (2000). Credit Risk Rating Systems at Large US Banks. Journal of Banking & Finance, 24(1-2), 167-201. doi: https://doi.org/10.1016/S0378-4266(99)00056-4 33. Uryszek, T. (2015). Sustainable Public Finance - Illusion or Reality? Evidence from old EU Member States. Journal of International Studie, 8(1), 22-30. doi: https://doi.org/10.14254/2071-8330.2015/8-1/2 34. Yellen, J. L. (2010). Macroprudential Supervision and Monetary Policy in the Post-crisis World. Federal Reserve News Event-At the Annual Meeting of the National Association for Business Economics, Denver, Colorado. Retrieved from https://www.federalreserve.gov/newsevents/speech/yellen20101011a.htm 35. Zahra, A. A. S. (2017). Risk Management in Banks: Conceptual Frame Work And Practical Approach. In A. M. Al Ghassani, A. M. Al Lawati & S. Ananda. (Eds.), Banking sector in Oman - strategic issues, challenges and Future Scenarios (pp. 121-139). Sultanate of Oman: College of Banking and Financial Studies. Retrieved from http://www.cbfs.edu.om/UploadsAll/ Annexure%2013%20Edited%20Book%20on%20Banking%20Sector%20in%20Oman%20-%202017.pdf 36. Zeman, Z., Kalmar, P., & Lentner, C. (2018). Evolution of Post-Crisis Bank Regulations and Controlling Tools: a Systematic Review from a Historical Aspect. Banks and Bank Systems, 13(2), 130-140. doi: https://doi.org/10.21511/ bbs.13(2).2018.11 37. Zwolankowski, M. (2011). The Financial Crisis, Financial System Instability and Monetary Transmission Mechanism. Journal of International Studies, 4(1), 26-32. Retrieved from https://www.jois.eu/files/ZwolanowskiV4N1.pdf

Received 20.10.2018 Received in revised form 20.03.2019 Accepted 25.03.2019 Available online 20.08.2019

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ECONOMIC ANNALS-XXI ISSN 1728-6239 (Online) ISSN 1728-6220 (Print) https://doi.org/10.21003/ea http://www.soskin.info/ea/

Volume 176 Issue (3-4)’2019

Citation information: Vozniuk, A., & Tytko, A. (2019). Cryptocurrency: present-day challenges and prospects of development. Economic Annals-XXI, 176(3-4), 49-55. doi: https://doi.org/10.21003/ea.V176-05

UDC: 336.743 Andrii Vozniuk D.Sc. (Law), Associate Professor, Head of the Research Laboratory, National Academy of Internal Affairs 1 Solomianska Sq., Kyiv, 03035, Ukraine [email protected] ORCID ID: http://orcid.org/0000-0002-3352-5626

Anna Tytko PhD (Law), Leading Research Fellow, National Academy of Internal Affairs 1 Solomianska Sq., Kyiv, 03035, Ukraine [email protected] ORCID ID: https://orcid.org/0000-0002-5669-2208 Cryptocurrency: present-day challenges and prospects of development

Abstract. Due to digitalisation processes in economic, civic and social areas, we observe acceleration in certain processes, in particular the saturation of the financial market with modern digital means, including cryptocurrencies, which has led to the choice of the subject for the present article. This article is aimed at the analysis and systematisation of the notion of cryptocurrency on the basis of selected digital and electronic money characteristics, including the determination of its place in the system of market values along with the classification of approaches to the regulation of cryptocurrency flows in European countries. Also this paper provides an individual interpretation of Burniske’s formula to calculate the cryptocurrency monetary supply at global financial markets. The research stipulates the use of morphological and synthesis, structural and functional, and comparative legal types of analyses, including generalisation. The paper provides an analysis of the category and concept framework of digital currencies, in particular cryptocurrencies from the standpoint of tools used to develop the crypto infrastructure. The electronic currency as a means of value has certain advantages, if compared to the fiat currency, yet a lack of proper legal mechanism leads to collapse in its functioning in the financial market. It is also established that cryptocurrencies have high volatility resulting in the limitation of its functioning in certain states (Ecuador, Iceland, India, China, etc). The authors reveal characteristics and legal content of Burniske’s formula which justifies the proportional relation between the product of currency flow velocity and gross monetary supply and the product of monetary supply price and circulation volume. National legislation must identify cryptocurrency as a financial means - an alternative for the unstable banking system and extension of economic rights of individuals and legal entities. Keywords: Digitalisation; Electronic Currency; Transactions; Digital Currency; Cryptocurrency; Bitcoin JEL Classification: F30; K30; О10 Acknowledgements and Funding: The authors received no direct funding for this research. Contribution: The authors contributed equally to this work. DOI: https://doi.org/10.21003/ea.V176-05

Вознюк А. А. доктор юридичних наук, доцент, завідувач наукової лабораторії, Національна академія внутрішніх справ, Київ, Україна Титко А. В. кандидат юридичних наук, провідний науковий співробітник, Національна академія внутрішніх справ, Київ, Україна Криптовалюта: сучасність і перспективи розвитку Анотація. У статі розглянуто основні підходи до визначення понятійного апарату віртуальної валюти, зокрема виокремлено основні ознаки та властивості криптовалюти. Визначено перспективи обігу криптовалюти на міжнародному фінансово-економічному ринку з точки зору переваг та недоліків у системі трансформаційних змін. Наведено системний аналіз можливих наукових розвідок у напрямку використання криптовалюти у міжнародній грошовій системі.

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49 ECONOMIC ANNALS-XXI MONEY, FINANCE AND CREDIT

Сформовано висновки щодо необхідності врегулювання правового статусу криптовалюти та розмежування ключових ознак криптовалюти, фіатної валюти, цифрових та електронних грошей. На рівні наукового дослідження розкрито значення волатильності криптовалюти для прогнозування загальної грошової маси криптовалюти (формула К. Бурніске). Розглянуто криптовалюту як ефективний фінансовий інструмент Ключові слова: цифровізація; електронна валюта; транзакції; цифрова валюта; криптовалюта; біткоін.

Вознюк А. А. доктор юридических наук, доцент, заведующий научной лаборатории, Национальная академия внутренних дел, Киев, Украина Титко А. В. кандидат юридических наук, ведущий научный сотрудник, Национальная академия внутренних дел, Киев, Украина Криптовалюта: современность и перспективы развития Аннотация. В статье рассмотрены основные подходы к определению понятийного аппарата виртуальной валюты. В частности выделены основные признаки и свойства криптовалюты. Определены перспективы обращения криптовалюты на международном финансово-экономическом рынке с точки зрения преимуществ и недостатков в системе трансформационных изменений. Проведен системный анализ возможных научных исследований в направлении использования криптовалюты в международной денежной системе. Ключевые слова: цифровизация; электронная валюта; транзакции; цифровая валюта; криптовалюта; биткоин.

1. Introduction Cryptocurrencies have become a key vector the development of digital economy. Under the conditions of permanent cryptocurrency flows and its popularisation as a payment method relating to products and services, along with accelerated globalisation, many countries face the challenge of how to protect their economic systems from external intrusion. There is no appropriate legal re gulation mechanism for a cryptocurrency as a type of digital currency, despite the fact that Ukraine is ranked 10th in the list of countries with the most dynamic cryptocurrency flows. Such a situation requires consideration through the prism of other countries’ experience, along with taking into account the procedures relating to digital currency regulation and peculiarities of national economic systems.

2. Brief Literature Review Many Ukrainian and foreign scholars have studied various aspects of functioning of cryptocu rrencies and the relevant legal regulation, with S. Volosovych, S. Verlanov, A. Harkusha, I. Doronin, B. Danylyshyn, V. Mishchenko, A. Protsenko, O. Soslovskyi, V. Stelmakh, W. Buffett, D. Belfort, P. Vigna, M. Casey, D. Matolchey, N. Roubini, A. Hern, T. Lee, M. Taransee, P. Breloff among them. An important contribution in relation to cryptocurrency studies was made by A. Hofman (Hofman, 2014) [1], P. D. DeVries (DeVries, 2016) [2], A. Kaur and A. Kaur (Kaur & Kaur, 2018) [3], S. Joshi, N. Khatiwada and J. Giri (Joshi, Khatiwada & Giri, 2018) [4]. Studies of the use of cryptocurrencies in the context of money laundering were performed by V. Dintu, V. Fetysova, D. Vakhrushev, A. Uvarova, A. Rybin and M. Mitrovanov.

3. The purpose of the article is to reveal the legal essence of cryptocurrency depending on its type (digital currency and electronic money). Due to the method of comparative analysis, a certain parallel is drawn between the electronic cryptocurrency, the cryptocurrency and the digital currency. The authors structure and classify positive and negative aspects of currency flows as alternative to the fiat currency.

4. Results

4.1. Cryptocurrency, digital currency, electronic and fiat money: similarities and differences To reach the goal established in this article, it is necessary to define the content of the concept «cryptocurrency» in the modern economic system, classify different cryptocurrency types accor ding to levels of liquidity and shape the perspective of the cryptocurrency evolution, advantages and challenges of its flows in the international financial system.

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Article 15 of the Law of Ukraine «On Payment Systems and Money Transfer in Ukraine» defines electronic money as a value unit kept on an electronic device and accepted as a means of payment by any person except the emitter and is considered to be a monetary obligation, either in cash or non-cash form [5]. Taking into account provisions of legislative acts regulating electronic money transactions, we can state that electronic money emission may be carried out exclusively by a bank; its emission is carried out by providing the users or commercial agents with such money via exchange for cash or non-cash assets. The bank is entitled to emit electronic money of value which does not exceed the value of the received money. The bank emitting electronic money is obliged to redeem the emitted amount of electronic money upon the user’s request. The procedure regula ting the performance of digital financial operations and the maximum amount of electronic mo ney at user’s disposal on a certain device is regulated by the guidelines on electronic money use in Ukraine [6, 15]. Electronic money is transferred into fiat currency, whereas the digital currency has no fiat equi valent. Fiat money is understood as any payment tool, established and emitted by the central public authority; it is accepted by citizens in exchange for goods and services, provided there exists a certain legislative background and a certain level of trust to this authority [7]. Thus, electronic money is a mechanism for digitalised exchange of the fiat currency - it is used as a special currency transaction format and given a status of a means of legitimate payment. We do not consider the cryptocurrency to be electronic money as it does not have certain typical features - it has no monetary equivalent; the emission of a cryptocurrency is performed by the owner and does not stipulate the replacement of fiat money. In our opinion the cryptocurrency should be considered to be a type of digital currency. The di gital currency may be used as a means of numerical expression, non-fiat currency or electronic mo ney (fiat currency). It is often used as a synonym for virtual currency. In modern conditions, cryptocurrencies have become a necessary electronic means for the performance of international transfers and a means of payment for goods and services. A Crypto currency is an integral part of the functioning of digital economy - its existence is maintained at the dominating level with the use of innovative technology [8, 109]. This hypothesis is backed with Chris Rose’s statements on advantages of cryptocurrencies, which are uniquely adapted to our digital economy. Despite a set of advantages relevant to cryptocurrencies, a high level of liquidity still dominates at the global financial market which, in turn, results in poor state support, if compared to other types of currency [9, 617-621]. Cryptocurrency value spikes in the market are mostly purely speculative. A virtual currency is defined as a means of value which can be subject to trade in a digital format and functions as an exchange tool, a monetary account unit and/or a means of value conservation, however it is not granted the status of a means of legitimate payment, i.e. it is not officially recognised as an applicable and legitimate means of payment in any jurisdiction [10]. It is interesting to note the definition provided by the Ministry of Justice and Human Rights of Argentina, which defines a digital currency as an equivalent of value expressed in a digital form. A virtual currency may be an object of electronic trade and perform functions of an account unit or a means of turnover (accumulation) [11]. Therefore, a digital currency is considered by some scholars, e.g. V. Shaidulina, as a type of electronic currency [12], others still tend to refer cryptocurrency to one of the decentralised virtual currency types [13, 137-142]. A Cryptocurrency has its own unique features - it is a digital currency based on cryptography principles; it combines anonymity and independence from the central authority; it ensures protection from any misuse or double expense. A cryptocurrency is understood as a digital currency type generated by selected calculations of specific functions which are easily checked by depictive mathematical operations (its key schemes are the principal proof of any operation performance) [14]. It should be noted that a similar definition is found in Article 1(1) of the draft Law of Ukraine «On Stimulation of the Cryptocurrency Market» which recognises cryptocurrency as a «decentralised digital measure of value expressed in relevant format, functioning as exchange/value conservation means or account item based on mathematical calculations, presenting its result and possessing the cryptographic account protection» [15].

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Digital money is based on a digital currency or electronic money (fiat currency). A digital currency may be presented in different types depending on whether it is converted into a fiat currency or not. The availability of an equivalent price in a fiat currency and the opportunities for relevant exchange prove convertibility of a digital currency (Bitcoin, e-Gold, LibertyReserve, Second Life Lin- den Dollars and Web Money). According to E. O. Halushka and O. D. Pakon, the functional purpose of the cryptocurrency is similar to the functional purpose of electronic money, however the main features that distin- guishes a cryptocurrency from any other type of money are the principles of full anonymity, lack of control and limited release, and, above all, the fact that this currency is protected from inflation [16, 635]. According to Article 32 of the Law of Ukraine «On the National Bank of Ukraine», emission and circulation of other means of payment and use of monetary substitutes as a means of payment is prohibited within the territory of Ukraine. Therefore, we can state that dissemination of cryptocurrencies is under prohibition [17]. The abovementioned assumption is also justified by the official statement of the National Bank of Ukraine, where Bitcoin is defined as a monetary substitute with no real value supporting it, which is not allowed to be used by individuals and legal entities within the territory of Ukraine as a means payment as it contradicts the provisions of the national legislation [18]. At the same time, we find other opinions concerning the regulation of cryptocurrencies, in particular, at the summit of the Group of Twenty in 2018, it was offered to use a concept crypto assets instead of the definition of cryptocurrency, where it is directly emphasised that crypto assets have no key attributes of sovereign currencies [19]. The virtual currency is not emitted and is not supported by any jurisdiction; these functions are performed only upon mutual consent of the cryptocurrency users’ community. The digital currency is absolutely different from the fiat currency (real money, real currency or national money) which is presented in the form of paper and metal legitimate means of payment. The digital currency is not similar to electronic money which presents a digital form of the fiat currency and used for electronic transfer of the value expressed in the fiat currency. Taking the abovementioned into account, we conclude the following: 1) cryptocurrency is a means of payment exempt from taxation in many states - that is a positive step for mining companies; 2) the use cryptocurrency is organised in the context of adhering to the following principles: an objective analysis of all capacities of the cryptocurrency, comprehensive evaluation of business- models using cryptocurrency and thorough monitoring and analysis of financial market. Under the current conditions of accelerated informatisation and digitalisation of society and global economic environment, capitalisation of cryptocurrency sharply increases due to artificially stimulated high demand and interest of digital currency market players. To prove the presented assumption we should note that different EU member-states established certain functioning procedures for selected cryptocurrencies (Table 1).

Table 4: Cryptocurrency legal regulation in EU states

Source: Compiled by the authors based on [21]

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It is obvious that in many EU member-states cryptocurrency is given a status of an official currency and is generally trusted. Nevertheless some developed countries, for example Ecuador, India, Iceland and China, have prohibited the use this currency, which is reflected in certain le gislative provisions. S. Chaplian spoke about a variety of legal regulations of cryptocurrencies, claiming that the cryptocurrency is recognised by the majority of countries as a means of exchange and payment [21]. This attitude originates from the high crypto volatility level - fluctuations are detected within certain periods. Also, legal regulation of cryptocurrencies is unlikely to reach a high level of alignment due to the peculiarities of national economic systems and the development of financial markets. Countries use both free rules and licenses for crypto flows and special guidelines and procedures for any operations with cryptocurrencies. Based on a comparative analysis, we have drawn a conclusion that certain legal the regulation practices in the USA, the UK, Japan and Switzerland are worth implementing with regard to the national legislation. Any activity and financial services related to cryptocurrencies must be certified by the state with issuance of licenses for certain professional activities. Some experts think that the state must establish a system of registration (licensing) of crypto exchange offices. Still, it is necessary to oblige these exchange offices to collect the clients’ data and ensure proper regulation of activities of companies selling commodities and services for cryptocurrencies (as done by PayPal, Braintree and other payment systems) [22, 69-72]. Cryptocurrencies have become a truly important means of payment which deeply stimulates the digitalisation process and accelerates the globalisation of economic domains in the context of innovative development.

4.2. Model of cryptocurrency value calculation (by Chris Burniske) The cryptocurrency is not recognised today as a reliable digital currency due to high volatility accompanied by sharp fluctuations and exchange rates at stock markets, which leads to the so called symmetry. In order to support this theory, D. G. Baur and T. Dimpfl stress on crypto volatility which depends heavily on positive economic changes instead of negative ones - this is the cause of asymmetry which is not typical for stock markets [25]. Ben Popper also mentioned the high volatility of cryptocurrency due to speculations which impede the general recognition of this currency as a commercial tool [23]. In our study, we used the model offered by Chris Burniske who was the first to design the me chanism of cryptocurrency price formation. He proposed to use the special Formula 1:

M х V = P х Q , (1)

where: M (мonetary base) - gross monetary supply; V (velocity) - the velocity of currency flow within certain period; P (price) - the price of provided digital resource; Q (quantity) - the quantity of provided resources. With the use of Bitcoin as example we can calculate the gross monetary supply (M). The total number of Bitcoin transactions in 2018 was estimated as USD 3.3 billion (the product of P and Q) and, according to Buriske, the flow velocity(V) is approximately 14 [24, 256]. Therefore, the value of any cryptocurrency is calculated with the use of the Formula 2:

M = P х Q / V (USD 3.3 billion / 14 = USD 235.7) . (2)

Formula 2 may be considered to be the best option for the calculation of the digital currency global supply. Burniske’s proportion demonstrates an interdependence between the product of gross monetary supply, the flow velocity and the price of provided financial resources. K. Samani agrees with this opinion, defining the asset flow velocity as the key factor which -im pacts the long-term and non-speculative value of a crypto asset [26].

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These risks lead to low trust of large investors in economic systems and form a negative image of unstable financial market units. Cryptocurrencies are also very vulnerable to cyberattacks and hacking, which is a major risk for owners. Cryptocurrencies are scarcely protected and, due to a high level of anonymity and impossibility to be traced, the owners often use them to finance transnational organised crime, money launde ring, terrorism, etc. Virtual currencies are not just a tool used to commit crimes - criminals offer a variety of programs and tools used to conceal personal identification data, completed transactions, communication channels and information stored at HDDs along with the so called «carousel payments».

5. Conclusion We have identified that cryptocurrencies should be referred to digital currencies. A digital currency may be a means of digital expression or virtual currency (non-fiat money) or electronic money (fiat currency), which is why the synonym «virtual currency» is usually used. One of the key problems for the EU member-states is a lack of legal regulation of crypto flows at financial markets, since low stability and incomplete understanding of the currency functioning mechanism lead to certain tension and refusal to accept this means in certain economically deve loped countries. Nevertheless, cryptocurrencies ensure a higher level of anonymity, if compared to traditional non-cash transfers. Its advantages are as follows: 1. The virtual currency functioning system provides proper financing of different activities, also it ensures payments for commodities and services without direct interaction with clients. 2. The open code of virtual currency algorithm allows everyone to obtain a cryptocurrency. 3. Immunity against inflation generated by the ability of such currencies to «program emission» with fixed indicators allows to establish the level of inflation/deflation in advance. 4. There is no control over transactions and payments in the crypto flow system. 5. Cryptocurrencies have a decentralized format in the form of separate cryptowallets. 6. A special individual cryptographic code protects such a currency from multiple replications. At the same time there are several disadvantages, among which is high volatility which forms a negative image of cryptocurrencies as unstable account units. The absence of efficient mechanisms of technical and legal regulation results in a lack of guarantees for the maintenance of electronic cryptowallets. Burniske’s formula proves the dependence of the cryptocurrency price on volatility, price dynamics, the volume of the currency within the market and gross monetary supply.

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11. Ministry of Justice and Human Rights of Argentina (2014). Prevention of the washing of assets and the financing of terrorism. Resolution 300/2014. Retrieved from http://servicios.infoleg.gob.ar/infolegInternet/ anexos/230000-234999/231930/norma.htm (in Spanish) 12. Shaidullyna, V. K. (2018). Cryptocurrency as a new economic and legal concept. Vestnik Universiteta (University Bulletin), 2, 137-142. doi: https://doi.org/10.26425/1816-4277-2018-2-137-142 (in Russ.) 13. FATF, OECD (2014). Virtual currencies. Key definitions and potential risks in the field of AML/CFT. Retrieved from https://eurasiangroup.org/files/FATF_docs/Virtualnye_valyuty_FATF_2014.pdf (in Russ.) 14. Prostobank (2019). An overview of digital currencies. Retrieved from http://www.prostobank.ua/internet_banking/ stati/obzor_tsifrovyh_kriptovalyut (in Russ.) 15. The Verkhovna Rada of Ukraine (2017). On stimulating the market of cryptocurrencies and their derivatives in Ukraine (Draft Law) of 10.10.2017 No. 7183-1. Retrieved from http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=62710 (in Ukr.) 16. Halushka, E. O., & Pakon, O. D. (2017). The Essence of Cryptocurrency and its Development Prospects. Molodyi Vchenyi (Young Scientist), 44(4), 634-638. Retrieved from http://molodyvcheny.in.ua/files/journal/2017/4/147.pdf (in Ukr.) 17. The Verkhovna Rada of Ukraine (1999). About the National Bank of Ukraine (Law of Ukraine). Retrieved from https://zakon.rada.gov.ua/laws/show/679-14 (in Ukr.) 18. The National Bank of Ukraine (2014). Clarification on the lawfulness of using «virtual currency/cryptocurrency» Bitcoin in Ukraine. Retrieved from https://www.bank.gov.ua/control/uk/publish/article?art_id=11879608 (in Ukr.) 19. Cvetkova, I. (2018). Cryptocurrencies legal regulation. BRICS Law Journal, 5(2), 128-153. doi: https://doi.org/10.21684/2412-2343-2018-5-2-128-153 20. Finance Ministers & Central Bank Governors of Argentina (2018, March 19-20). Communiqué. Buenos Aires, Argentina, 19-20 March 2018. Retrieved from: https://back-g20.argentina.gob.ar/sites/default/files/media/ communique_g20.pdf (in Spanish) 21. Chaplian, S. (2018). Legal status of cryptocurrency. Zovnishnia Torhivlia: Ekonomika, Finansy, Pravo (Foreign Trade: Economics, Finance, Law), 2, 148-165. Retrieved from http://zt.knteu.kiev.ua/index.php?option=com_ content&view=article&id=2246&catid=240&lang=uk (in Ukr.) 22. Lukianchuk, R., Grebeniuk, M., & Cherniak, A. (2017). Current trends, concerns and peculiarities of the turnover of cryptocurrency. Economic Annals-XXI, 168(11-12), 69-72. doi: https://doi.org/10.21003/ea.V168-14 23. Popper, B. (2013, December 9). Bitcoin is too cheap for its own good. The Verge. Retrieved from http://www.theverge.com/2013/12/9/5192054/bitcoin-boom-bust-bubble-currency-technology 24. Burniske, C., & Tatar, J. (2018). Cryptoassets: The innovative investor’s guide to bitcoin and beyond (1st edition). New York: McGraw-Hill Education. 25. Baur, D. G., & Dimpfl, T. (2018). Asymmetric volatility in cryptocurrencies. Economics Letters, 173, 148-151. doi: https://doi.org/10.1016/j.econlet.2018.10.008 26. Samani, K. (2017, December 8). The Blockchain Token Velocity Problem. Retrieved from http://www.coindesk.com/ blockchain-token-velocity-problem

Received 6.03.2019 Received in revised form 22.03.2019 Accepted 27.03.2019 Available online 20.08.2019

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ECONOMIC ANNALS-XXI ISSN 1728-6239 (Online) ISSN 1728-6220 (Print) https://doi.org/10.21003/ea http://www.soskin.info/ea/

Volume 176 Issue (3-4)’2019

Citation information: Tleppayev, A. (2019). Digitalisation and energy: world experience and evidence of correlation from Kazakhstan. Economic Annals-XXI, 176(3-4), 56-64. doi: https://doi.org/10.21003/ea.V176-06

Arsen Tleppayev PhD (Economics), Associate Professor, Faculty of Economic Sciences, Kazakh-German University 111 Pushkin Str., Almaty, 050010, Kazakhstan [email protected] ORCID ID: https://orcid.org/0000-0001-9754-3383

Digitalisation and energy: world experience and evidence of correlation from Kazakhstan

Abstract. The rapid pace of development of the digital economy is an effect conditioned by technology and innovation that have been developing over several decades and becoming more common. The number of Internet users in Kazakhstan increased from less than 1% in the 1990s to 81% in 2018, which happened due to a sharp decline in the cost of access and a high increase in computing power. The technological revolution has become a source of stimulating economic growth with less energy consumption. Digitalisation is considered to be a factor contributing to energy efficiency in the economy. The relationship between digitalisation, energy consumption and economic growth is a theme which has gained momentum recently. This paper attempts to estimate the effects of technology and economic factors on the energy intensity in Kazakhstan. The paper employs econometric methods: the unit root test, cointegration methods and the Granger causality test. All data were obtained from the World Bank’s database for the period between 1994 and 2018 as well as the Statistics Committee of the Ministry of National Economy of the Republic of Kazakhstanand the Odyssee database by EU. The results demonstrate that Internet usage and trade openness impact energy intensity. The results demonstrate that Internet usage and trade openness has a negative effect on energy consumption in the long run. The liberalisation trade and economy reduces the consumption of energy obtained from fossil fuels and minimises environmental degradation. Digitalisation is supposed to stimulate the efficiency of the energy system by optimising consumption and metering, reducing losses, generating with lowest possible costs and emissions, etc. Economic growth has a positive and statistically significant impact on energy intensity. The article contains certain recommendations for policy makers: the government should attract more investment and provide consistent support for ICT to increase the energy efficiency and to decrease total energy consumption. Keywords: Energy Consumption; Internet Usage; Digitalisation; Economic Growth; GDP; Technological Revolution; Energy Intensity Index; ICT JEL Classifications: O40; Q43; O1 Acknowledgments: This paper presents the results of funding by the Committee of Science of the Ministry of Education and Science of the Republic of Kazakhstan (project AP05131192). Contribution: The author contributed personally to this work. DOI: https://doi.org/10.21003/ea.V176-06

Тлеппаєв А. кандидат економічних наук, доцент, Казахстансько-Німецький Університет, Алмати, Республіка Казахстан Цифровізація та енергетика: світовий досвід і казахстанський приклад взаємозв’язку Анотація Швидкі темпи розвитку цифрової економіки є результатом впровадження технологій та інновацій, які розвивалися протягом декількох десятиліть, і стають усе більш поширеними. Число користувачів мережею Інтернет у Казахстані збільшилося з менш ніж 1% в 1990-х роках до 76% у 2017-му році завдяки різкому зниженню вартості доступу до мережі, а також значному збільшенню обчислювальної потужності. Технологічна революція стала джерелом економічного зростання при меншому споживанні енергії. Цифровізація вважається чинником, що сприяє енергоефективності в економіці.

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Взаємозв’язок між цифровізацією та економічним зростанням є темою, яка останнім часом стає все більш популярною. У статті зроблено спробу оцінити вплив технологічних й економічних факторів на енергоємність Казахстану. В роботі використано економетричні методи: тест на одиничний корінь, коінтеграцію, тест причинності Грейнджера. Результати показують, що зростання числа користувачів мережею Інтернет і відкритість торгівлі знижують споживання енергії в довгостроковій перспективі. Лібералізація торгівлі й економіки знижує споживання енергії, отримуваної з викопного палива, а також зменшує деградацію стану навколишнього середовища. Цифровізація повинна стимулювати ефективність енергосистем за рахунок оптимізації споживання й обліку, скорочення витрат, генерування з найменшим рівнем витрат і викидів тощо. Економічне зростання має позитивний і статистично значимий вплив на енергоємність. У статті містяться рекомендації для уряду: залучати більше інвестицій у галузі ІКТ й надавати послідовну підтримку для підвищення енергоефективності та зниження загального споживання енергії. Ключові слова: енергоспоживання; енергетика; цифровізація; Інтернет; економічне зростання; енергоємність; ВВП.

Тлеппаев А. кандидат экономических наук, доцент, Казахстанско-Немецкий Университет, Алматы, Республика Казахстан Цифровизация и энергетика: мировой опыт и Казахстанский пример взаимосвязи Аннотация Быстрые темпы развития цифровой экономики являются результатом внедрения технологий и инноваций, которые развивались в течение нескольких десятилетий и становятся все более распространенными. Число пользователей сети Интернет в Казахстане увеличилось с менее 1% в 1990-х годах до 76% в 2017-м году благодаря резкому снижению стоимости доступа к сети и значительному увеличению вычислительной мощности. Технологическая революция стала источником стимулирования экономического роста при меньшем потреблении энергии. Цифровизация считается фактором, способствующим повышению энергоэффективности в экономике. Взаимосвязь между цифровизацией, потреблением энергии и экономическим ростом является темой, которая в последнее время набирает обороты. В данной статье предпринята попытка оценить влияние технологий и экономических факторов на энергоемкость Казахстана. В работе используются эконометрические методы: тест на единичный корень, методы коинтеграции, тест причинности Грейнджера. Результаты показывают, что использование сети Интернет и открытость торговли влияют на энергоемкость. Рост числа Интернет-пользователей и открытость торговли снижают потребление энергии в долгосрочной перспективе. Либерализация торговли и экономики снижает потребление энергии, получаемой из ископаемого топлива, и уменьшает деградацию состояния окружающей среды. Цифровизация должна стимулировать эффективность энергосистем за счет оптимизации потребления и учета, сокращения потерь, генерирования с наименьшими затратами и выбросами и т. д. Экономический рост имеет положительное и статистически значимое влияние на энергоемкость. Статья содержит некоторые рекомендации для правительства: привлекать больше инвестиций и предоставлять последовательную поддержку отрасли ИКТ для повышения энергоэффективности и снижения общего потребления энергии. Ключевые слова: энергопотребление; энергетика; цифровизация; Интернет; экономический рост; энергоемкость; ВВП.

1. Introduction Achieving energy saving and energy efficiency is a strategic goal of the state. Improving energy efficiency in all sectors is necessary to maintain economic growth. Nowadays, the energy intensity of Kazakhstan’s GDP is 2-1.5 times higher than in the European Union and OECD countries. The energy intensity index of Kazakhstan’s GDP for 2018, according to the Statis- tics Agency of Kazakhstan, is 1.5 tons of oil equivalent per one thousand USD at 2000 prices. This indicator has remained unchanged since 2014. The industry consumes about 45% of the total final energy consumption, while the housing and utilities sector accounts for about one third of the total amount. The main reasons for the high energy intensity of Kazakhstan’s GDP are as follows. The current structure of the economy with energy-intensive types of industries, including extractive and metallurgical industries. The most energy-intensive industries of Kazakhstan are similar to the world ones: ferrous and non-ferrous metallurgy, chemical industry and oil refining and cement production. The overall technological backwardness of many sectors of the economy and, accordingly, the high energy intensity of production, which in some industries exceeds the European indicator by several times. 1.04 kg of oil equivalent in metallurgy is needed for 1 euro of product in Kazakhstan, while in Germany it is required to have 0.78 kg of oil equivalent.

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Also, this is because of a low cost of energy prices, which does not stimulate energy conservation and deterioration of networks and equipment, associated with this significant loss of energy. The housing and utilities sector has reserves for energy savings. According to the author’s calculations, based on the data of the Statistics Committee of the Ministry of National Economy of the Republic of Kazakhstan and the Odyssee database by EU for 2017-2018, an average of 13.8 kg of oil equivalent is required for heating a square meter in Kazakhstan (162 kWh per m2), while in Germany and France it is 3.24-3.76 kg for apartments (38-43.7 kWh) and 7.2-8.2 kg for individual houses (83.7-95 kWh). The reason, in addition to the climatic conditions, is the dete rioration of the housing stock. Approximately 70% of buildings in Kazakhstan were built between the 1950s and 1980s and do not meet modern requirements for thermal insulation, which cau ses considerable heat loss. Kazakhstan should reduce the energy intensity of GDP compared to the levels of the EU member states to improve the competitiveness of the economy and reduce the burden on the environment. Only a noticeable increase in the productivity of all factors of production (including energy) can be a source of economic growth. The technological revolution is a source of stimulating economic growth with less energy consumption. Digitalisation is considered a factor contributing to energy efficiency in the economy. -Im provements in data collection and analytics, which form the fundamental elements of digitalisation, should have a major impact on energy systems in buildings, industry and transport. The main glo bal trend in the energy sector is the introduction of various smart technologies in order to ensure effective information exchange between all elements and participants of the network, protection and self-recovery from major disruptions. The greatest potential savings in housing and public utilities are heating, cooling and lighting. In industry, digital technologies increase competitiveness by improving the control of production processes, reducing losses, reducing production costs and increasing labour productivity. The digital economy is rapidly developing globally in the world. According to the European Com- mission, the digital economy is estimated at EUR 3.2 trillion in the G20 and accounts for about 8% of GDP. In Kazakhstan, the total ICT expenses in 2018 were USD 885 million, which is 12.8% less than in 2017. 52% of ICT expenses are software and services of IT companies. Kazakhstan’s ICT industry is 3.5% of GDP. The number of Internet users in Kazakhstan is growing - from less than 1% in the 1990s to 81% in 2018 due to a sharp decrease in the cost of access and a significant increase in computing power. In Kazakhstan, according to the Government’s forecasts, the annual growth of productivity will be at 2%-10%, the growth of resource extraction will be 3%, reduction of production costs is estimated 10-20% due to the digitalisation in the sectors of the economy. Intelligent energy management systems and energy-saving technologies have begun to be introduced to improve energy efficiency and reduce energy losses in Kazakhstan. These systems allow for the interaction of consumers with the system to manage electricity consumption, to generate electricity into the network with their own renewable energy sources. The total economic effect of the digitalisation of the ex- tract and energy complex is estimated at USD 415 million, according to the Ministry of Energy Re- public of Kazakhstan. Many obstacles stand in the way of realising the benefits of the wide distribution of digital technologies in buildings. They range from privacy concerns to technical and economic considerations. New business models allow for broader energy efficiency delivery, requiring a minimum energy performance of the building. The emergence of ESCOs or similar business models could also cr eate opportunities for the provision of comprehensive energy packages, such as smart controls and automatic system. Supportive policy frameworks, such as procurement of energy-efficient techno logies and white certificates, can help in this regard by driving down costs of products and ensuring those technologies actually deliver on savings. Policy-making processes can also advantage from more timely and complex collection and publication of energy data, which can facilitate greater access to digital data. The relationship between digitalisation, energy consumption and economic growth is a topic that has been of a particular interest recently. Digitalisation and ICT usages brings up a few interesting questions: How does an increase in the use of digital technologies affect the energy intensity of GDP and economic growth? Is there a correlation between these variables? Our research, based on the case of Kazakhstan, is trying to answer these questions.

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2. Brief Literature Review The role of ICT and digitalisation in providing economic growth has attracted significant attention. Based on aggregate data, early evidences suggested that information technology, particularly computers, have effect on growth or productivity (Gordon, 2000; Jorgenson & Sitroh, 1999; Berndt & Morrison, 1995) [1-3]. Other researchers suggest that there is a positive relationship between ICT and economic growth (Yoo, 2003; Biscourp et al., 2002; Muhammad Shahbaz at al., 2014) [4-6]. The relationship between digitalisation and energy consumption is infrequently examined and most of the work on this subject is carried out basing on data relating to developed economies (Sadorsky, 2012) [7]. J. Romm (2002) examined the energy usage intensity of the ICT sector in Uni ted States. He (2002) further noted that the Internet appears to be propelling efficiencies [8]. K. Takase and Y. Murota (2004) examined the effect of information technology investment on energy consumption and CO2 emissions in the US and Japan. They noted that an increase in the information technology lowers energy intensity [9]. In the case of France, Collard et al. (2005) exa mined the relationship between ICT and energy consumption. Their research suggests that the impact of communication technology is greater than the impact of information technology on ener gy usages [10]. Using a logistic growth model, Cho et al. (2007) examined that ICT investments lead to a higher consumption of electricity in a few manufacturing sectors and in the services sector On the other hand, ICT investments in some specific manufacturing sectors decrease electri city consumption. They noted that electricity prices significantly impact electricity consumption in industry [11]. J. Campo and V. Sarmiento (2013) found a bidirectional causality between energy consumption and GDP for Latin American countries. They noted that the increase in energy consumption and real GDP impact each other with regard to selected countries of Latin America (the increasing of one indicator by 1% increases the other by 0.59%). The results show that energy generates economic growth and policies that promote energy efficiency do not negatively affect GDP [12]. M. Shahbaz et al. (2014) found a relationship between information communication techno logy (ICT), economic growth and electricity consumption by using data for the UAE for the pe riod between 1975 and 2011.They found that ICT adds in electricity demand, but electricity prices lower it [6]. L. Hung-Pin (2014) investigated the causal relationship between renewable energy consumption and economic growth for the OECD countries, namely Denmark, France, Germany, Italy, Japan, Portugal, Spain, the United Kingdom and the United States for the 1982- 2011period. Lin Hung-Pin concluded that the United States, Japan, Germany, Italy and the United Kingdom could promote their investments in the renewable energy infrastructure or regulate renewable energy conservation policies to avoid the possibility of reducing the consumption of renewable energy sources that negatively affect economic growth. He also found that renewable energy conservation policies can have a little impact on economic growth in France, Denmark, Portugal and Spain [13]. M. Salahuddin and K. Alam (2015) studied the short-term and long-term effect of using the In- ternet on the Australian economic growth over the 1985-2012 period. They found that the use of the Internet and economic growth stimulate electricity consumption in Australia. Australia has yet to achieve improved energy efficiency as a result of ICT expansion. The researchers suggest that Aus- tralia should promote its existing carbon capture and storage facilities, significantly increasing its investment in the renewable energy sector, particularly solar energy, and build nuclear power plants to generate electricity to reduce CO2 emissions [14]. K. Saidi et al. (2015) investigated the impact of ICT and economic growth (GDP) on electricity consumption (EC) for a group of 67 countries using a dynamic panel data model. They found a posi tive and statistically significant effect of ICT on electricity consumption [15]. M. Salahuddin and K. Alam (2016) investigated the short- and long-run effects of ICT use and economic growth on electricity consumption for OECD countries. They used panel data for the 1985-2012 period. The results verify that both the use of ICT and economic growth is the cause of electricity consumption and electricity consumption, in its turn, impacts economic growth [16]. M. Rahimi and A. A. Rad (2017) investigated short- and long-run effects of Internet usage and economic growth on electricity consumption for eight developing (D-8) countries, using panel data for the period between 1990 and 2013. They found that the Internet usage effects electricity consumption only in the long-run period. However, economic growth impacts electricity consumption in both the short run and the long run [17].

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From previous researches, the authors concluded the following: • on the one hand, ICT consumes energy; therefore it can increase energy intensity (especially data centres); • on the other hand, ICT reduces the energy intensity of GDP through increasing the efficiency of economic sectors (for example, e-substitutes for physical products). Figure 1 shows the relative lag of the energy efficiency of the economy of Kazakhstan from the leading countries - Germany and Norway. The indicators in Germany and Norway were taken as the benchmark equal to 1 or 100%, according to calculations using the DEA method. As can be seen from the figure, the gap between Kazakhstan’s energy intensity and the energy intensity of the selected countries at the world or European level is significant. This gap is typical not only of energy intensity, but also of many other economic indicators. As follows from the previous studies, economic growth is only possible when we increase the efficiency of all factors of production, including energy. Dynamic economic growth in Kazakhstan is possible only on the basis of a deep modernisation of the existing facilities, as well as the development of new competitive industries. In Kazakhstan, digitalisation can have a positive impact through changes in production proces ses and supply chains, replacement of inefficient equipment, introduction of elements of smart buildings and virtual work and learning. In our research, we will try to determine the interconnection between ICT and the energy intensity of Kazakhstan’s economy.

3. Purpose The purpose of this paper is to determine the effects of Internet usage, trade openness and GDP per capita on energy intensity. The functional form of the model is:

Eintensity = f(GDP, INT, Trade) . (1)

Making the log linear form of the both sides of the Equtaion (1), we obtain the following Equation (2):

lnEintensityit = 0 + 1lnGDPit + 2lnINTit + 3lnTradeit + it , (2)

where: ln denotes the natural logarithm;

1, 2, 3 parameters are the long-run elasticities of energy intensity relative to GDP per capita, individuals using the Internet (% of population) and trade openness; lnEintensityit is a logarithmic meter corresponding to energy intensity; lnGDP is a logarithmic meter corresponding to the GDP per capita;

Figure 1: Graphic interpretation of the energy intensity of GDP of selected countrie Source: Compiled by the authors based on data by the World Bank and the Statistics Committee of the Ministry of National Economy of the Republic of Kazakhstan

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lnINT is a logarithmic meter corresponding to the Internet usage; lnTrade is a logarithmic meter corresponding to trade openness. The energy intensity level of primary energy (MJ / 2011 PPP USD GDP) is the ratio between energy supply and gross domestic product measured at purchasing power parity. Energy intensity shows the amount of energy used to produce one unit of economic output. A lower ratio indicates that less energy is used to manufacture one unit of output. GDP per capita is measured in USD. In this study, the ICT variable includes individuals using the Internet (% of the population). Trade openness is calculated by dividing the aggregate value of imports and exports over a period by the gross domestic product for the same period. An indicator of trade openness is the ratio of trade to GDP. This indicator has increased for most trading states, and is a result of globalisation and trade liberalisation. It is argued that trade openness brings many economic benefits, including increased technology transfer, transfer of skills, increased labour and total factor productivity, as well as economic growth and development. All data were obtained from the World Bank’s database for the 1994-2018 period.

4. Results This research uses Augmented Dickey-Fuller (ADF) unit root tests to check the stationary pro perties (Dickey and Fuller, 1979; 1981). The null hypothesis of the ADF tests is non-stationary distribution. If it is rejected, the time series variable is stationary [18-19]. Otherwise, the variable is non- stationary. To study the causal relationship between the selected variables, the Granger test (1969) was used. The idea of the test is as follows: if changes in Variable A cause changes in Variable B, then changes in Variable A precede changes in Variable B [17-18]. R. Engle and C. Granger (1987) observe that even though economic time series may wander through time, that is, may have the characteristic of nonstationarity in their level, there may exist some linear combination of these variables that converges to a long run relationship over time. If the series individually are nonstationary, then after differencing a linear combination of their le vels is stationary. Therefore the series are said to be cointegrated. According to Granger (1969), there must be an error correction model (ECM) representation if the variables share a co-integration relationship [20-21]. Keeping in mind the basic idea behind cointegration, it is necessary to determine the order of integration of each variable before proceeding to using cointegration techniques. The results in Table 1 point out that the hypothesis that the levels of all variables under study contain a unit root is accepted at the 1% significance level. When these tests are applied on the first differences of those variables, the reported results display that the unit root hypothesis is rejected. The results at the level form show that all variables are non-stationary at the 5% significance le vel (Table 1). The test results indicate that the first difference variables are stationary. This implies that energy consumption, economic growth, CO2 emission, trade openness and urbanisation are integrated in order one. The results of the Granger causality test are presented in Table 2. This shows that there is a one-way causality flowing from the Internet use, GDP per capita and trade openness to energy intensity.

Table 1: Unit root tests

Source: Compiled by the author

Table 2: Granger causality test

Source: Compiled by the author

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The co-integration among the variables is explored by using the Johansen co-integration test. The relevant results are presented in Table 3 [22]. The maximum trace statistics is 78.4, which is greater than the 95% critical value of 54.1. Further, the Max-Eigen test exhibits that statistics is 49.8, which is greater than the 95% critical value of 28.6. This implies that the null hypothesis r = 0 is rejected at the 5% significance level. But the results forr ≤ 1, r ≤ 2, r ≤ 3 and r ≤ 4 demonstrate that the null hypotheses cannot be rejected. As a result, the trace test and the maximum Eigen test detected the existence of a single co-integrating vector. Therefore, the study concludes that there is a long run relationship between energy consumption, economic growth, electricity consumption and internet usage.

Table 3: Co integration rank test

Source: Compiled by the author

As a result, we obtain the following:

lnEintensity = 2.314 + 0.113 lnGDP - 0.206 lnTrade - 0.097 lnINT, R - squared = 0.91, se 0.5 (0.029) (0.079) (0.0099)

The dependent variable is the energy intensity level of primary energy (MJ / 2011 PPP USD GDP) as energy consumption in our model. The positive and negative values of the coefficients show the impact of independent variables on the dependent variable. The coefficient of lnGDP is positive as it is 0.11 and statistically it is significant as its absolute t - value is 3.9. Its coefficient value indicates that the GDP adds to the energy use in long run. Thus, the coefficient of GDP suggests that a 1% increase in per capita GDP will lead to an increase in the energy intensity of 0.11%. In the case of Internet use (lnINT), the coefficient is negative and statistically it is significant as its value is 0.097. It implies that a 1% increase in the number of individual users will decrease the energy use per capita by 0.097% in the long run. In the case of trade openness, we have a negative impact: a 1% increase will lead to a decrease in the energy intensity of 0.21% in long run. It means that the trade and economy liberalisation, along with bringing more investments in technologies, including access to products with high energy efficiency, reduces the consumption of energy from fossil fuels and the environmental degradation. In short run, we have the following equation:

DlnEintensity = - 0.035 + 0.261 DlnGDP - 0.274 DlnTrade (-1) - 0.051 DlnINT (-2) , se 0.0215 (0.0812) (0.116) (0.0197)

The cointegration reveals that there is a long-run relationship between the variables, yet it can distinguish neither the endogeneity nor the exogeneity of the variables. The results reveal that all the variables impact energy intensity.

5. Conclusion Energy is the main factor impacting both the internal and external development strategy and economic security of the state. Worn out facilities and low rates of modernisation will lead to lower competitiveness, lower product quality and preserve the extractive nature of the economy unless energy-saving and energy-efficient technologies are introduced. The most effective solution to reducing natural resources is the practice of energy saving and the introduction of energy efficient technologies. Energy saving and energy efficiency of all sectors of the national economy are currently priority tasks of the Government of the Republic of Kazakhstan, the solution of which will eliminate a complex of energy, environmental, economic and social problems.

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On 13 January 2012, the Law of the Republic of Kazakhstan «On Energy Saving and Improving Energy Efficiency» No. 541-IV ZRK was adopted to solve the problem of improving the energy -effi ciency of the economy. In 2015, amendments were made to the Law and the Rules for the formation and maintenance of an energy efficiency map (the republican list of projects in the field of ener gy saving and energy efficiency) were adopted. The progress of energy saving in the leading countries is ensured by the transition from energy efficiency to a more modern strategy of digitisation and the development of renewable energy. The rapid pace of the development of the digital economy is the result of technology and innovation that has been developed over several decades and is becoming more common. The Government of the Republic of Kazakhstan approved the program «Digital Kazakhstan» on December 12, 2017 to implement the strategy of digitisation and modernisation of the technological base of the economy. The program aims to develop a digital ecosystem to achieve sustainable economic growth, enhance the competitiveness of the economy, and improve the quality of life of the population. The traditional industries in Kazakhstan have a low degree of automation and a low level of digital technologies. Technical re-equipment of industries involves the use of elements of Industry 4.0. Technological improvements include the use of predictive maintenance, machine learning and artifi- cial intelligence, cloud technologies, intelligent planning and control of production, integration of information systems for managing production processes, industrial Internet, transition to intelligent accounting systems and remote control of utility networks. Digitalisation in the construction industry and utilities will provide a qualitative leap: a transition to new radically different approaches to the design, construction and operation of buildings, improving the energy efficiency of new construction, and the reconstruction of the existing housing stock will significantly reduce energy consumption. According to our conclusions, the Government should value the potential of digitalisation to provide sustainable lowering of energy intensity. The Government of the Republic of Kazakhstan has realised some projects in this field. The State Energy Register, an electronic collection of information on energy consumption by monitoring objects (26,573 enterprises in 2019), was created with the support of the World Bank in 2016. The introduction of the relevant tools is aimed at reducing the energy intensity of GDP by 50% by 2050, compared with 2008 (the current indicator is 18% lower by 2008). In this paper, we have studied Internet usage and economic growth as engines of energy consumption. We have applied a model relation between energy intensity, GDP, trade openness and Internet. The results show that Internet usage and trade openness have a negative effect on energy consumption in the long run. Nevertheless, the estimated coefficients show that Internet usage cannot be considered to have more impact on energy consumption than economic factors, such as GDP and trade openness. Economic growth has a positive and statistically significant impact on energy intensity. The contribution of economic growth and trade openness have the opposite trend. Both ICT and trade openness contribute to reducing energy intensity, which is consistent with the previous studies. Trade openness may help the country to import high value inputs, products and technologies that may have a positive impact on the overall capacity of the country’s economy. Investments in ICT have significantly reduced energy consumption in Japan (Ishida, 2015) and the OECD countries (Schulte et al., 2014). We suggest that the advantages of the reduction of energy intensity occur due to its impact on industrial structure and optimisation of the existing networks, including lower operating and maintenance costs. The article contains certain recommendations for policy makers: the government should attract more investment and provide consistent support for ICT to increase the energy efficiency and to decrease total energy consumption. It is important that more ICT products be introduced into the mining and manufacturing industries in order to increase energy efficiency and reduce the overall energy consumption. Further research could be dedicated to the assessment of the effect of other indicators of ICT on energy intensity.

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Received 20.03.2019 Received in revised form 24.04.2019 Accepted 29.04.2019 Available online 20.08.2019

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ECONOMIC ANNALS-XXI ISSN 1728-6239 (Online) ISSN 1728-6220 (Print) https://doi.org/10.21003/ea http://www.soskin.info/ea/

Volume 176 Issue (3-4)’2019

Citation information: Voloshyna, S., Provolotska, O. Lazaryshyna, I., Nieizviestna, O., & Skliar, N. (2019). Analytical assessment of the jewellery market in Ukraine. Economic Annals-XXI, 176(3-4), 65-79. doi: https://doi.org/10.21003/ea.V176-07

UDC 339.332

Svitlana Voloshyna Olena Provolotska Inna Lazaryshyna PhD (Economics), Associate Professor, PhD (Economics), D.Sc. (Economics), Head of the Department of Entrepreneurship Associate Professor, Head of the Department of Statistics and Trade, Department of Economics and Entrepreneurship, and Economic Analysis, Donetsk Mykhailo Tugan-Baranovsky National Kryvyi Rih Economic Institute of Kyiv Vadym National University of Life University of Economics and Trade Hetman National Economic University and Environmental Sciences of Ukraine 16 Tramvayna Str., Krivyi Rih, 50005, Ukraine 64 Poshtovyi Ave., Krivyi Rih, 50000, Ukraine 11 Heroiv Oborony Str., Kyiv, 03041, Ukraine [email protected] [email protected] [email protected] ORCID ID: https://orcid.org/0000-0001-7148-6923 ORCID ID: https://orcid.org/0000-0003-3472-7649 ORCID ID: https://orcid.org/0000-0002-1183-7530

Olena Nieizviestna PhD (Economics), Associate Professor, Acting Director, Educational and Scientific Institute of Economics and Entrepreneurship, Donetsk Mykhailo Tugan-Baranovsky National University of Economics and Trade 16 Tramvayna Str., Krivyi Rih, 50005, Ukraine [email protected] ORCID ID: https://orcid.org/0000-0002-6135-6524

Nadiia Skliar PhD (Economics), Associate Professor, Department of Enterprise and Trade, Donetsk Mykhailo Tuhan-Baranovsky National University of Economics and Trade 16 Tramvayna Str., Krivyi Rih, 50005, Ukraine [email protected] ORCID ID: https://orcid.org/0000-0001-9122-340X

Analytical assessment of the jewellery market in Ukraine

Abstract. The article proposes scientific and practical recommendations aimed at deepening the analysis of the jewellery market in Ukraine and establishing its actual characteristics and tasks for perspective development. It is determined that improvement of life quality in Ukraine, based on satisfying cultural and spiritual needs, demands ways to saturate the Ukrainian consumer market with valuable and highly artistic products. However, the development of effective managerial decisions by all the jewellery market subjects is slowed down due to the lack of knowledge on the cause-effect relationships among its parameters, which results from the existing gaps in the scientific system. It has been established that there are no common approaches to the analysis of the jewellery market in modern scientific literature. Moreover, there is a number of contradictions, such as inconsistency and instability of its implementation timing, limited range of parameters, lack of effectiveness and completeness, which significantly reduce the effectiveness of the analysis. The methods for analysing the jewellery market with the detailed definition of tasks for each stage are upgraded on the basis of the systematic approach to economic analysis. The current stage of the development of the jewellery market is generally characterised by a significant reduction in the number of participants involved in the production and distribution of goods, the existence of negative trends in declining volumes of production by domestic producers and volumes of retail trade turnover, the growth of prices for finished products and raw materials (primarily gold), low volumes of imports and exports, and, hence, the formation of a negative trade surplus. The factor analysis of the main market elements by key parameters enabled us to set the levers for further positive changes. Finally, the key tasks for the development of the Ukrainian jewellery market, which correlate with the systemic problems of its functioning, are approved.

Voloshyna, S., Provolotska, O. Lazaryshyna, I., Nieizviestna, O., & Skliar, N. / Economic Annals-XXI (2019), 176(3-4), 65-79 © Institute of Society Transformation, 2019 65 ECONOMIC ANNALS-XXI ECONOMICS AND MANAGEMENT OF NATIONAL ECONOMY

Keywords: Jewellery Market; Jewellery Production; Jewellery Retail; Gold Price; Jewellery Price; Ukrainian Jewellery Market; Analysis Methods; Key Tasks; Needs; Trends JEL Classification: D40; D41; L19 Acknowledgements and Funding: The authors received no direct funding for this research. Contribution: The authors contributed equally to this work. DOI: https://doi.org/10.21003/ea.V176-07

Волошина С. В. кандидат економічних наук, доцент, завідувач кафедри підприємництва і торгівлі, Донецький національний університет економіки і торгівлі імені Михайла Туган-Барановського, Кривий Ріг, Україна Проволоцька О. М. кандидат економічних наук, доцент, доцент кафедри економіки та підприємництва, Криворізький економічний інститут Київського національного економічного університету імені Вадима Гетьмана, Кривий Ріг, Україна Лазаришина І. Д. доктор економічних наук, професор, завідувач кафедри статистики та економічного аналізу Національного університету біоресурсів і природокористування України, Київ, Україна Нєізвєстна О. В. кандидат економічних наук, доцент, директор навчально-наукового інституту економіки та підприємництва, Донецький національний університет економіки і торгівлі імені Михайла Туган-Барановського, Кривий Ріг, Україна Скляр Н. М. кандидат економічних наук, доцент кафедри підприємництва і торгівлі, Донецький національний університет економіки і торгівлі імені Михайла Туган-Барановського, Кривий Ріг, Україна Аналітична оцінка ринку ювелірних виробів України Анотація. Статтю присвячено розробці науково-практичних рекомендацій по поглибленню аналізу ринку ювелірних виробів України зі встановленням його актуальних характеристик і завдань перспективного розвитку. Визначено, що підвищення якості життя населення України на основі задоволення культурних і духовних потреб потребує активного пошуку шляхів насичення споживчого ринку України коштовними і високохудожніми виробами. Однак розробка ефективних управлінських рішень усіма суб’єктами ринку ювелірних виробів гальмується внаслідок незнання причинно-наслідкових зв’язків між його параметрами, що є наслідком існування системних наукових прогалин. Доведено, що в сучасній науковій літературі відсутні єдині підходи до проведення аналізу ринку ювелірних виробів, має місце низка суперечностей (непослідовність і нестабільність періоду його здійснення, обмежене коло параметрів, відсутність результативності і закінченості аналізу), що знижує дієвість такого аналізу. На основі системного підходу до економічного аналізу загалом удосконалено методику аналізу ринку ювелірних виробів з визначенням детальних завдань кожного етапу. Аналітичне оцінювання сучасного розвитку ринку ювелірних виробів України, яке ґрунтувалося на удосконаленій методиці, показало на сформованість довготривалих негативних тенденцій. Основними з них є скорочення місткості національного ринку, зменшення внутрішньої пропозиції, обсягів роздрібного товарообороту та кількості підприємств-виробників, стрімке зростання цін на золото й вироби з нього, скорочення розмірів зовнішніх операцій, формування від’ємного торговельного сальдо. Наслідки ситуації на ювелірному ринку попри активні інноваційні процеси у виробничій і торгівельній діяльності можна вважати поступовою втратою внутрішнього ринку та зниженням рівня національної економічної безпеки. Факторний аналіз основних елементів ринку за ключовими параметрами дав змогу встановити важелі для подальших змін. Запропоновано ключові завдання розвитку ринку ювелірних виробів України, які корелюють із системними проблемами його функціонування. Ключові слова: ринок ювелірних виробів; потреби; методика аналізу; тренди; ключові завдання.

Волошина С. В. кандидат экономических наук, доцент, заведующая кафедрой предпринимательства и торговли, Донецкий национальный университет экономики и торговли имени Михаила Туган-Барановского, Кривой Рог, Украина Проволоцкая Е. Н. кандидат экономических наук, доцент, доцент кафедры экономики и предпринимательства, Криворожский экономический институт Киевского национального экономического университета имени Вадима Гетьмана, Кривой Рог, Украина Лазаришина И. Д. доктор экономических наук, профессор, заведующая кафедрой статистики и экономического анализа Национального университета биоресурсов и природопользования Украины, Киев, Украина

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Неизвестная Е. В. кандидат экономических наук, доцент, директор учебно-научного института экономики и предпринимательства, Донецкий национальный университет экономики и торговли имени Михаила Туган-Барановского, Кривой Рог, Украина Скляр Н. М. кандидат экономических наук, доцент кафедры предпринимательства и торговли, Донецкий национальный университет экономики и торговли имени Михаила Туган-Барановского, Кривой Рог, Украина Аналитическая оценка рынка ювелирных изделий Украины Аннотация. Статья посвящена разработке научно-практических рекомендаций по углублению анализа рынка ювелирных изделий Украины с установлением его актуальных характеристик и задач перспективного развития. Определено, что повышение качества жизни населения Украины на основе удовлетворения культурных и духовных потребностей требует активного поиска путей насыщения потребительского рынка Украины ценными и высокохудожественными изделиями. Однако разработка эффективных управленческих решений всеми субъектами рынка ювелирных изделий тормозится вследствие незнания причинно-следственных связей между его параметрами, что является результатом существования системных научных пробелов. Доказано, что в современной научной литературе отсутствуют единые подходы к проведению анализа рынка ювелирных изделий, а также имеет место ряд противоречий (непоследовательность и нестабильность периода его проведения, ограниченный круг параметров, отсутствие результативности и законченности анализа), что снижает действенность такого анализа. На основе системного подхода к экономическому анализу в целом усовершенствована методика анализа рынка ювелирных изделий с определением детальных задач каждого этапа. Аналитическое оценивание современного развития рынка ювелирных изделий Украины, которое основывалось на усовершенствованной методике, указало на существование длительных негативных тенденций. Основными из них выступают сокращение емкости национального рынка, уменьшение внутреннего предложения, объемов розничного товарооборота и количества предприятий-производителей, стремительный рост цен на золото и изделия из него, сокращение размеров внешних операций, формирования отрицательного торгового сальдо. Последствия ситуации на ювелирном рынке, несмотря на активные инновационные процессы в производственной и торговой деятельности, можно считать постепенной потерей внутреннего рынка и снижением уровня национальной экономической безопасности. Факторный анализ основных элементов рынка по ключевым параметрам позволил установить рычаги для дальнейших изменений. Предложены ключевые задачи развития рынка ювелирных изделий Украины, которые коррелируют с системными проблемами его функционирования. Ключевые слова: рынок ювелирных изделий; потребности; методика анализа; тренды; ключевые задачи.

1. Introduction The European vector of Ukraine’s development, based on high standards of life quality, requires intensification of the consumer market development, with the jewellery market being its important sector. This market development is aimed at ensuring spiritual and cultural needs of the population, as well as making alternative investments in preserving and increasing the monetary funds in the long run (Achabou & Dekhili, 2013; Nath, 2015) [1; 20]. The jewellery market in Ukraine is characterised by a fairly large capacity with a high level of sa turation and tough competition. Thus, it is one of the most promising among other non-food markets. However, modern socio-economic processes in the country impede its development and meeting a number of consumers’ needs. The relevance of this particular research is determined by urgent necessity of proper analytical study targeted at spotting the range of current problems, their causes and methods of resolution.

2. Literature Review Scientists, such as C. Gomathy and N. Y. Devi (2015) [12], B. Kumar and K. Thiviya (2014) [17], L. Kumara and N. Kumar (2016) [18], T. Artiukh and I. Hryhorenko (2017) [3], G. Ivanyshyna (2017) [15], N. Lutsiv (2012) [19], Yu. Popivnyak (2013) [22], I. Volodko (2014) [29] and others, studied the problems of the functioning of the jewellery market and searched for ways to overcoming them. At the same time, the current state of scientific achievements in this field reflects the existence of- un filled gaps, with regard to the theory and methods of complex analysis of the main market proces ses for the current and future periods, in particular its information support, implementation tools, etc. Estimation of scientific approaches to market analysis, determination of appropriate conditions for the development of the jewellery market, spotting the problems in its functionin, and the

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opportunities of their solution require an in-depth economic analysis. Besides, the study of scienti fic publications in this field has shown a lack of common approaches to its implementation. The results of the systematisation of scientific approaches to the analysis of the jewellery market, carried out by Ukrainian scientists in the current decade, give opportunity to make the follo wing conclusions. 1. There are neither common approaches to the definition of key parameters of the jewellery market analysis no algorithm of its implementation and choice of the analysed period in modern scientific literature. 2. Qualitative approaches to market analysis based on consumers’ behaviour rating are prevalent (Gomathy & Devi, 2015; Kumar & Thiviya, 2014; Kumara & Kumar, 2016) [12; 17-18]. 3. We cannot agree with the authors who, conducting the analysis in the mid-term period, constantly changed its duration (Artiukh & Hryhorenko, 2017; Lutsiv, 2012; Popivnyak, 2013; Volod- ko, 2014) [3; 19; 22; 29]. 4. The toolkit for analysing this market is mainly limited by logical methods of information proces sing (Savytska, 2005) [23]. 5. The parameters for analysing the market coincide in terms of production scales, sales, imports and exports. Prices and market structure are analysed much more rarely. 6. The analysis algorithm has different amounts and completeness of stages, as well as different starting and ending points. It is especially important to emphasize the absence of factor analysis at the last [3] definition of market development reserves [19] and the development of adequate managerial strategies [22; 29].

3. Purpose The purpose of the article is to develop scientific and practical recommendations, to deepen the analysis of the national jewellery market and establish its actual characteristics and tasks for further development.

4. Methods of market analysis Taking into account the revealed problems of analytical assessment of the development of the je weller y market, we improved the traditional method of economic analysis according to Savytska (2005) [23], Bryman and Bell (2011) [5] and Cresswell (2007) [8]. The results are presented in Figure 1. In accordance with the revealed problematic issues, the aim is defined and the analysis objectives are determined at the first stage. The objective of the jewellery market analysis is to obtain the most informative key parameters providing an objective and accurate assessment of consumers’ needs satisfaction and insurance of business entities effectiveness. The analysis tasks are as follows: assessment of the market main elements, factor analysis of the latter, generalisation of shortcomings and obstacles and development of steps for their elimination. At the second stage of the research, a general system of indicators is developed, which will be used to assess the jewellery market development, in particular indicators of market significance for

Figure 1: Improved methods for analysing the national jewellery market Source: Developed by the authors

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the national socio-economic development, estimation of indicators of supply (the number of producers, the number of sellers, the scale of production, exports, imports, wholesale trade, supply influencing factors, etc.), indicators of demand assessment (the market capacity, the retail turnover, demand influence factors, etc.), product prices, etc. At the third stage the collection of the necessary information is ensured; its authenticity and completeness are checked in accordance with the analysis aim. Modern open sources of information for the analysis of the jewellery market after the liquidation of the State Probation Service of Ukraine are too limited. Therefore, it is worth using available sources, in particular the official sites of the State Statistics Service of Ukraine, the National Bank of Ukraine, the State Fiscal Service of Ukraine, the Union of Jewellers of Ukraine and the largest domestic jewellery producers. The main methods of market analysis should be considered as a complex of parameters of different groups. Besides, conducting of factor analysis, which is mainly provided on the basis of correlation analysis, is of paramount importance. At the fourth stage, the calculation of analytical indicators, marked in the second stage, is carried out for several periods of the same duration, studying their dynamics and the reasons for the change. At the fifth stage, factor analysis of supply and demand in the market is carried out and the in fluence of each factor is determined. The sixth stage defines general characteristics of the market, summarises the analysis results at stages 4-5 and conducts a SWOT-analysis. At the seventh stage, the development of recommendations for eliminating identified obstacles for future development of the market is carried out.

4.1. Main trends of the development of the Ukrainian jewellery market Under the current conditions, the transformation of the Ukrainian society according to the world and European life standards where human resources are considered to be the main ones, it is impossible to keep aside the processes taking place in the jewellery market. The jewellery market is part of the aggregate consumer market where objects of sale are «je wellery and household items made of noble metals in combination with precious and semipre- cious gems, as well as artistic products made of non-precious materials, crafted with great skill» (O. Mykytyuk, V. Fediv, & O. Olar, 2016) [10]. The development of this market is directly affected by the quality of life of the population, which is defined by the World Health Organisation as «the perception of people of their position in life, depending on cultural features and value system...» (World Health Organisation, 2017) [31] and is estimated, among other things, by psychological parameters of life (positive emotions, appearance, self-esteem, etc.). The degree of satisfaction of consumers’ cultural and spiritual needs, including jewellery possession and use, determines the mental and social well-being, which is included as a condition of human health and affects the mental state. Consequently, the jewellery market appeals to those types of commodity markets which meet the cultural and spiritual needs of a person, as well as contribute to the preservation of monetary incomes for all market players. The assessment of the current development of the jewellery market in Ukraine is carried out on the basis of the advanced methods of analysis. Stages 1-3 were carried out in the section «Me thodology and research methods». The significance of the jewellery market for socio-economic development of Ukraine within the past year is summarised in Figure 2. The volume of jewellery distribution by wholesale and retail entities in the domestic consumer market is not large, in spite of the importance of this goods group and the conditions of socio-economic development of the country. However, it provides relatively stable revenues to budgets of different levels and creates high levels of added value with a high profitability of the jewellery business and an objectively high level of labour productivity that results in high levels of average wages. The main elements of any type of market, including the jewellery market, are supply, demand and price. The analysis of the jewellery market supply (State Fiscal Service of Ukraine, 2018) [24] shows that large producers and powerful trading companies with significant potential for competition dominate and, as a rule, combine production and trading activities. It causes a decrease in the total number of market participants (Figure 3), which is confirmed by the number of registered brands - special jewellery trademarks that are subject to mandatory annual registration.

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Figure 2: Role of the jewellery market (including watches) in the socio-economic development of Ukraine in 2018 Source: [16; 25]

It is apparent that the number of jewellery manufacturers in Ukraine in 2007-2018 decreased by 47.7%. Moreover, rapid reduction of the indicator falls at the end of the analysed period (2015-2018) due to the annexation of the Crimea and the occupation of the country’s eastern ter- ritories with a number of jewellery factories there, as well as problems with the restoration of the relocated companies. At the same time, the analysis of Figure 3 indicates that the number of jewellery producers increased (11.2% and 2.5%, respectively) in the crisis years of 2008 and 2009, and it was relatively stable in the following years. However, the trend line shows a steady trend towards a reduction in the number of jewellery manufacturers in Ukraine. Market analysts believe that the key issues that restrict the development of jewellery production and selling in Ukraine are as follows: decrease of solvent demand, shortage of own raw materials and prices growth for purchased goods, unfair competition from the part of large companies and excessive state interference in jewellery business [16; 25]. Meanwhile, during the crisis, manufacturers learned to counteract the negative effects of the abovementioned factors through changes in the product range (increasing the proportion of silver products, reducing the weight of products) and increasing the diversity of activities (an increased share of operations with toll processed raw materials and the exchange of precious metals scrap for finished products, working for direct orders, etc.). Trading companies found a much smaller arsenal of instruments for counteracting crisis phenomena and, therefore, the number of companies in this area decreased significantly with the reduction of the volume of trade.

Figure 3: Dynamics of the number of Ukrainian jewellery producing companies with trend lines according to the method of exponential smoothing Source: State Fiscal Service of Ukraine (2018) [24]

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The analysis of the production of Ukrainian jewellery manufacturers in 2007-2018 is carried out according to the information in Figure 4. Apparently, Figure 4 shows the existence of a negative trend in the reduction of the volume of domestic jewellery production, which has been forming since 2013 (the crisis year for the world gold market). Further reduction of production is a consequence of the dollar value growth, since Ukraine is provided with its own gold output for only 0.2-0.5%, while the share of imported raw materials is about 55%; the toll processed raw materials amount to almost 42%, the rest is scrap [3; 29]. Thus, the rise in raw materials prices (primarily gold) caused a dramatic reduction in the domestic jewellery production. The increase in the jewellery production by 3.1 times in 2018 is a consequence of the slow- down in the growth of gold prices at a relatively low dollar value. At the same time, market operators spot the formation of a tendency to increase the demand for gold and golden goods. It indicates the desire of the citizens to protect their savings due to the volatile and difficult situation in the country. The military conflict in Ukraine and the stagnation of the real estate market caused an increase in the role of gold and jewellery as a means of saving. That is why the individual investments in such goods take the third position among other types of investment (Jewellery market of Ukraine review, 2018) [16]. The dynamics of the gold prices growth rate, in comparison with the dynamics of the dollar va lue growth, is shown in Figure 5, which demonstrates common trends, confirmed by virtually similar trend lines. An estimation of changes in the effect of gold prices on the dynamics of the production volume of jewellery products was made according to the corresponding coefficients of elasticity (Figure 6). Figure 6 proves that the production in 2009-2011 and 2016 was hardly responsive to the change in gold prices, as the pace of dollar value growth was increasing slower than gold prices. The high elasticity of production in 2012-2015 and 2017-2018 is a reflection of the high dependence of je wellers on gold prices, which is the main reason for reducing the number of subjects of this business and the extent of their activity. The high elasticity of the production in 2012-2015 and 2017-2018 is a reflection of the high dependence of jewellers on gold prices, which is the main reason for reducing of both the number of this business subjects and the extent of their activity. The situation regarding national foreign operations on jewellery is presented in Figures 7-9, as they are the result of the work of domestic jewellers, on the one hand and, on the other hand, part of the national market capacity meeting the demands of Ukrainian consumers.

Note: Compiled by the authors’ calculations of the market equilibrium on the market capacity (capacity = production - export + import) based upon the average dollar exchange rate.

Figure 4: Dynamics of Ukrainian jewellery production with trend lines according to the method of exponential smoothing, USD million Source: [21; 24-25]

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Figure 5: Comparison of the dynamics of gold prices growth rate and dollar value growth rate with trend lines according to the method of exponential smoothing, % Source: [21; 25]

Figure 6: Coefficients of production elasticity according to the price of gold Source: Developed by the authors

Figure 7 brings to light that the volumes of gold imports to Ukraine in 2008 were the largest in the period of 2007-2018 and amounted to USD 8,731 thousand, which is 12.9 times as high as in 2018. The trend line shows the general trend in the annual accelerated decline in imports due to the fall of the UAH exchange rate. The volume of jewellery imports in 2018 amounted to only 13.2% of the volume of 2007, along with a steady decline in the indicator. At the same time, Ukraine’s jewellery exports (Figure 8) grew in 2009-2011 with a further sharp decline. In total, the exports volume of these goods decreased by 95% in the period between 2007 and 2018. A comparison of the volumes of jewellery imports and exports based on Figure 9 showed a ne gative trade surplus. However, it is worth paying attention to a significant decrease in the level of this indicator at the end of the period, as confirmed by the trend line, which is the result of reducing the volumes of all external operations. The assessment of jewellery demand is based on the analysis of the dynamics of retail trade turnover (Figure 10), the size of which determines the capacity of this market in monetary terms. Thus, in the period from 2007 to 2012 the size of the jewellery market predominantly increased and reached the maximum value in 2012 (USD 137.55 million). However, during the period 2013-2017 there was a sharp decline in demand for jewellery and watches, the turnover of which in 2017 reached the minimum value for the analysed period and amounted to USD 10.02 million. The year 2018 was characterised by a rapid expansion of the market capacity (+203.2%), yet its level amounted to only 25.7% of the initial value.

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Figure 7: Dynamics of jewellery imports with trend lines according to the method of exponential smoothing, USD thousand Source: [25]

Figure 8: Dynamics of jewellery exports, with trend lines according to the method of exponential smoothing, USD thousand Source: [25]

Figure 9: Trading balance for jewellery with trend line by exponential smoothing method, USD thousand Source: [24]

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Figure 10: Dynamics of retail trade turnover in jewellery (including watches), with trend lines according to the method of exponential smoothing, USD million Source: [25]

Figure 11 provides information on the main way for selling jewellery. It is obvious that the distribution of domestic jewellery in 2007-2013 was carried out mainly through a trading chain with a constant decrease in the level of this indicator. After 2013, which was a crisis year and the beginning of notorious military and political events followed by long stagnation for the jewellery industry in Ukraine, the retail trade stopped playing the role of the main channel for the jewellery distribution. By the end of the analysed period the share of the shadow sector had become threatening (over 95%). It was also contributed to the increase in tax pressure, resulting in almost 90% of small jewellery market players using the opportunity to be flat tax payers (Information portal of the Jewel- lers Union of Ukraine, 2018) [14]. The analysis of retail commodity turnover by the main factors (changes in physical volumes and prices for products) will be made according to Figure 12. The presented information testifies to the unstable demand for jewellery on the part of Ukrai nian consumers. The result of adding chain indexes of the physical volume of retail trade turnover makes it possible to conclude that the volume of the jewellery goods market for the analyzed period of 12 years decreased by 74.3%, and therefore jewellery became a commodity that is in low demand. The trend line by the method of exponential smoothing confirms the existence of a negative tendency to reduce the volumes of jewellery retail commodity circulation. Expansion of market capacity in 2018 is not only the evidence of active sales of jewellery products due to their savings function. It gives hopes for restoring the traditional Ukrainian consumption culture, which is directly affected by the quality of life for the population.

Figure 11: Share of jewellery (including watches), produced on the territory of Ukraine, sales by the trading companies chain, % Source: [25]

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Figure 12: Comparison of the index of physical volumes of jewellery retail sales to their price index, with trend lines according to the method of exponential smoothing, % Source: [25]

Under the conditions of significant influence of changes in gold prices on the formation of je wellery products production cost, which, in turn, depend on the dollar rate, it is expedient to expand the analysis to assess the dependence of prices of finished products on the change in prices for raw materials (Figure 13), which makes up approximately 80% from self-cost (Information portal of the Jewellers Union of Ukraine, 2018) [14]. Figure 13 indicates that the trend line for gold prices and jewellery prices is the same, as it can be observed from the identity of the equations. This testifies to the full dependence of the change in the product price on the price change on the main precious metal (gold). The elasticity coefficients were calculated and analysed for the estimation of the effect of price changes for jewellery on the demand change (Figure 14). It is apparent from Figure 14 that the demand for jewellery is mostly elastic (the coefficient is more than 1). Therefore, the increasing demand for the jewellery market depends primarily on the price level which producers and traders should manage flexibly. The factor analysis of the main elements of the jewellery market is carried out by the method of correlation analysis based on the assessment of demand (retail turnover) and internal supply (own production volume).

Figure 13: Comparison of the dynamics of gold prices growth rate and jewellery prices growth rates, along with trend lines by method of exponential smoothing, % Source: Compiled by authors based on information in Fig. 5 and [25]

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Figure 14: Estimation of the influence of jewellery prices change on demand change Source: Compiled by the authors

The influence factors and the results of the factor analysis conducted by the rules of correlation analysis (N. Draper & H. Smith, 2014) [11] are presented in Table 1. The obtained regression equations are adequate, since the coefficients of the multiple correlation make 0.720 and 0.757, and the coefficients of multiple determination are 0.52 and 0.573, respectively. In accordance with the obtained equations, we conclude that: 1) the volume of demand for jewellery increases with a decrease in their prices and with the consumer income growth ( due to significant shadow employment, real incomes are taken at the le vel of average consumer costs); 2) when the price of jewellery is reduced by 1%, the retail turnover increases by USD 1.652 million, while with an increase in the real average consumer income by 1%, this turnover increases by USD 244 thousand; therefore, the influence of the price factor is overwhelming; 3) the volume of jewellery supply to the national market (thevolume of own production) increases with a decrease in gold prices and imports reduction; 4) when the price of gold is reduced by 1%, the production of jewellery in the country increases by USD 86 thousand, while, with a 1% decrease in its own production, the production actually grows by USD 16.639 million. Consequently, the influence of imported jewellery supplies to Ukraine is essential for domestic producers.

Table 1: Factor analysis of the main elements of the jewellery market results

Source: Compiled by the authors based on [25]

4.2. Generalised assessment of the domestic jewellery market To summarise the assessment of the domestic jewellery market, we describe the state of competition in it. The Antimonopoly Committee of Ukraine acknowledges that the jewellery market is highly competitive (Information portal of the Jewellers Union of Ukraine, 2018) [14]. Ho wever, our analysis of the main market players did not allow agreeing with this conclusion and stated the monopolistic nature of the market because of the high pressure from the mentioned companies. An additional analysis of consumers’ preferences for jewellery products shows that relatively well- promoted brands that guarantee high quality and augment the person a sense of luxury and prestige are most trustworthy. For the same reason, the products of famous jewellery brands bring almost 55% more profits than similar non-branded products (Jewellery market review of Ukraine, 2018) [16].

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In recent years, there has been a tendency for jewellery to be traded on the Internet, and the above-mentioned manufacturers have their own online stores. An effective marketing policy is able to retain key customers, even in times of economic crisis. Therefore, one should not underestimate the importance of e-marketing tools, such as direct marketing (for example, customer information, mainly through newsletters for new products, promotions, etc.), and event marketing (holding special cultural events, parties, exhibitions related to brand promotion). Taking into account the results of the above analytical studies, we summarise the characteristics of the jewellery market in Ukraine in Table 2. The continuation of the tasks of the penultimate stage of the advanced algorithm for analysing the jewellery market is to conduct a SWOT analysis (Table 3). Therefore, participants in the jewellery market should pay their attention to the weaknesses and threats, while maximising the strengths and opportunities for further development.

Table 2: General characteristics of the domestic jewellery market

Source: Compiled by the authors

Table 3: SWOT matrix - the jewellery market analysis in Ukraine

Source: [9; 16; 27-28]

4.3. Key tasks of prospective market development According to analytics who represent Euromonitor International, globally, consumers spend around USD 348.5 billion per year on jewellery, which accounts for about 17% of all retail appar- el spending. This can be roughly divided into approximately USD 306.8 billion for lower-valued fa shion jewellery and USD 41.6 billion for luxury jewellery featuring precious metals and gemstones. According to jewellery experts, the value of the fashion jewellery market will grow by 2.6% per year, but only by 2.2% for the luxury jewellery market in 2021 (Common Objective, 2019) [6]. Existing reserves in the functioning of the jewellery market must be overcome by combining the efforts of the state, producers and trade. The main tasks of the long-term development of this market are summarised in Table 4. Existing shortcomings in the jewellery market functioning must be overcome by combining the efforts of the state, producers and trade.

4. Conclusion The jewellery market refers to those types of commodity markets that meet the status consu mers’ needs, which tend to grow with the development of Ukrainian population worldviews, and serve the evidence for a steady desire to provide higher life quality standards. The comparison of scientific views on the market analysis has indicated the absence of uni- fied approaches to its implementation, the presence of contradictory points (inconsistency and instability of its implementation period, limited range of parameters, lack of effectiveness and

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Table 4: Priority tasks for the development of the Ukrainian jewellery market

Source: Compiled by the authors based on [2; 4; 13-16; 26] completeness in the analysis). To overcome the identified issues, a method for analysing the je wellery market with the definition of the each stage tasks has been developed. The practical examination of the suggested method showed that the Ukrainian jewellery market is one of the potentially large markets (due to the size of the country by area and population, high educational level of the latter, the existence of economically active layer of population with high income). The current stage of its development is generally characterised by a significant reduction in the number of participants engaged in the production and sales, the existence of negative trends in the declining volumes of production by domestic producers, the volumes of retail trade turnover, the growth of prices for finished products and raw materials (primarily gold), the volumes of imports and exports and, hence, the formation of a negative trade surplus. Failing to address the si tuation at the jewellery market can bring to grave consequences such as a gradual loss of the domestic market and a decrease in the level of economic security. It has been determined that the peculiarity of the development of the domestic jewellery market lies in the fact that under unstable socio-economic conditions, when the demand structure chan ges in the direction of cheaper goods, its dynamics slows down and in case of a crisis, the market capacity is significantly reduced. The factor analysis of the main elements of the market (demand and supply) has proved that the price factor exerts the most essential influence. In addition, significant conditions for further activation of this market favour an increase in the population purchasing power, reducing the share of imports based on the supply of competitive domestic products, etc. The final stage of the implementation of the advanced methods in analytical research of the jewellery market is the development of recommendations for the elimination of the identified gaps. We consider that the jewellery market will provide sustainable growth only by means of combining the efforts of all market participants through the fulfilment of a series of priority tasks.

References

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Factors for the formation of the world gold market (Doctoral dissertation). Kyiv: National Economic University named after Vadym Hetman (in Ukr.). 27. Sorokina, M. (2014, February 28). Jewellery market: «The one, who cannot act, will leave». Retrieved from https://ksonline.ru/stats/-/id/2854 (in Russ.) 28. Vartanian, V. M, Gavva, V. N., & Turko, D. A. (2008). The research of Ukrainian jewellery market development. Ekonomika ta Upravlinnia Pidpryiemstvamy Mashynobudivnoi Haluzi (Economics and Management of Enterprises in the Machine-Building Industry), 3(3), 108-117. Retrieved from http://www.irbis-nbuv.gov.ua/cgi-bin/irbis_nbuv/ cgiirbis_64.exe?I21DBN=LINK&P21DBN=UJRN&Z21ID=&S21REF=10&S21CNR=20&S21STN=1&S21FMT=ASP_ meta&C21COM=S&2_S21P03=FILA=&2_S21STR=eupmg_2008_3_12 (in Ukr.) 29. Volodko, I. Yu. (2014). Market research of the companies’ sales activity of the Ukrainian jewellery market. 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Received 24.03.2019 Received in revised form 28.04.2019 Accepted 11.05.2019 Available online 20.08.2019

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ECONOMIC ANNALS-XXI ISSN 1728-6239 (Online) ISSN 1728-6220 (Print) https://doi.org/10.21003/ea http://www.soskin.info/ea/

Volume 176 Issue (3-4)’2019

Citation information: Popov, A., Koshkalda, I. Kniaz, O., & Trehub, O. (2019). Land fragmentation of agricultural enterprises in the context of administration of land. Economic Annals-XXI, 176(3-4), 80-90. doi: https://doi.org/10.21003/ea.V176-08

UDC [711.3:332.3]:351 Andriy Popov D.Sc. (Economics), Associate Professor, Professor of the Land Management and Cadastre Department V. V. Dokuchayev Kharkiv National Agrarian University Dokuchayevske 2, Kharkiv district, Kharkiv region, 62483, Ukraine [email protected] ORCID ID: http://orcid.org/0000-0001-7292-8818

Iryna Koshkalda D.Sc. (Economics), Professor, Headof the Land Management and Cadastre Department V. V. Dokuchayev Kharkiv National Agrarian University Dokuchayevske 2, Kharkiv district, Kharkiv region, 62483, Ukraine [email protected] ORCID ID: http://orcid.org/0000-0003-4855-8890 Oleksandr Kniaz PhD (Economics), Associate Professor, Associate Professorof the Land Management and Cadastre Department V. V. Dokuchayev Kharkiv National Agrarian University Dokuchayevske 2, Kharkiv district, Kharkiv region, 62483, Ukraine [email protected] ORCID ID: https://orcid.org/0000-0002-0646-3394

Olena Trehub PhD (Economics), Associate Professor of the Land Management and Cadastre Department V. V. Dokuchayev Kharkiv National Agrarian University Dokuchayevske 2, Kharkiv district, Kharkiv region, 62483, Ukraine [email protected] ORCID ID: http://orcid.org/0000-0002-9446-1638

Land fragmentation of agricultural enterprises in the context of administration of land

Abstract Introduction. Under the conditions of the excessive lease of the agricultural land in Ukraine, leasing is identified as a tool for amalgamation of land parcels into one field. However, the consequences of excessive land lease by the agricultural enterprises are both positive and negative. Often the negative consequences of such leasing lack attention from the part of policy makers and scientists. The purpose of this study is to examine how the land administration system matches the land fragmentation and what problems are faced by agricultural enterprises when concluding lease contracts under the conditions of land fragmentation in Ukraine. Results. The obtained data testify that the land administration system in Ukraine has signs of transparency and efficiency. However, the system of land administration does not meet the requirements of the ownership fragmentation in land use of agricultural enterprises. Thus, the registration of lease rights to hundreds of the land parcels requires considerable costs and time. The long-lasting registration of the lease rights to the land parcels forces the lessees to use them illegally during the registration procedure. It has been determined that the expenditures on the registration of the lease right to the state-owned land parcel are much lower in comparison with the registration of private parcels. Conclusions. One of the ways to reduce the time and cost of the registration of land parcels and rights to them is to increase the size of the land parcel per one landowner, thus reducing the number of the leased parcels in the structure of the agricultural enterprise. It is convenient to introduce a special administrative service aimed at registering lease rights of agricultural enterprises. Keywords: Land Fragmentation; Land Administration; Registration; Lease Right; Land Parcel; Costs JEL Classification: Q15; Q10; R14; C49 Acknowledgements and Funding: The authors received no direct funding for this research. Contribution: The authors contributed equally to this work. DOI: https://doi.org/10.21003/ea.V176-08

Popov, A., Koshkalda, I. Kniaz, O., & Trehub, O. / Economic Annals-XXI (2019), 176(3-4), 80-90 © Institute of Society Transformation, 2019

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Попов А. С. доктор економічних наук, доцент, професор кафедри управління земельними ресурсами та кадастру, Харківський національний аграрний університет ім. В. В. Докучаєва, Харків, Україна Кошкалда І. В. доктор економічних наук, професор, завідувач кафедри управління земельними ресурсами та кадастру, Харківський національний аграрний університет ім. В. В. Докучаєва, Харків, Україна Князь О. В. кандидат економічних наук, доцент, доцент кафедри управління земельними ресурсами та кадастру Харківський національний аграрний університет ім. В. В. Докучаєва, Харків, Україна Трегуб О. М. кандидат економічних наук, доцент, доцент кафедри управління земельними ресурсами та кадастру, Харківський національний аграрний університет ім. В. В. Докучаєва, Харків, Україна Фрагментація земель сільськогосподарських підприємств у контексті адміністрування земельних ресурсів Анотація. В умовах суцільної оренди сільськогосподарських земель в Україні, оренду розглядають як інструмент об’єднання земельних ділянок у цілісні поля. Однак наслідки суцільної оренди земельних ділянок сільськогосподарськими підприємствами мають як позитивні, так і негативні наслідки. Дане дослідження вивчає, як сучасна система адміністрування земельними ресурсами відповідає запитам фрагментації земель та з якими проблемами стикаються сільськогосподарські підприємства при укладанні договорів оренди в умовах фрагментації земель в Україні. Отримані дані свідчать про те, що сучасна система адміністрування земельних ресурсів в Україні має ознаки прозорості та ефективності, проте не відповідає запитам фрагментації власності у землекористуванні сільськогосподарських підприємств (запропонованому новому типу фрагментації). Дослідження показали, що витрати на реєстрацію права оренди земельної ділянки державної форми власності, порівнюючи з приватними ділянками, є значно меншими у розрахунку на одиницю площі. Пропонується запровадити для сільськогосподарських підприємств окрему адміністративну послугу з реєстрації прав оренди, яка б забезпечила одночасне проходження процедури реєстрації усіх земельних ділянок у встановлений законодавством термін. Ключові слова: фрагментація земель; адміністрування земельних ресурсів; реєстрація; право оренди; земельна ділянка; витрати. Попов А. С. доктор экономических наук, доцент, профессор кафедры управления земельными ресурсами и кадастра, Харьковский национальный аграрный университет им. В. В. Докучаева, Харьков, Украина Кошкалда И. В. доктор экономических наук, профессор, заведующий кафедрой управления земельными ресурсами и кадастра, Харьковский национальный аграрный университет им. В. В. Докучаева, Харьков, Украина Князь А. В. кандидат экономических наук, доцент, доцент кафедры управления земельными ресурсами и кадастра, Харьковский национальный аграрный университет им. В. В. Докучаева, Харьков, Украина Трегуб Е. Н. кандидат экономических наук, доцент, доцент кафедры управления земельными ресурсами и кадастра, Харьковский национальный аграрный университет им. В. В. Докучаева, Харьков, Украина Фрагментация земель сельскохозяйственных предприятий в контексте администрирования земельных ресурсов Аннотация. В условиях тотальной аренды сельскохозяйственных земель в Украине, аренду рассматривают как инструмент объединения земельных участков в целостные поля. Однако последствия тотальной аренды земельных участков сельскохозяйственными предприятиями имеют как положительные, так и отрицательные последствия. Данное исследование изучает, как современная система администрирования земельных ресурсов отвечает запросам фрагментации земель и с какими проблемами сталкиваются сельскохозяйственные предприятия при заключении договоров аренды в условиях фрагментации земель в Украине. Полученные данные свидетельствуют о том, что существующая система земельного администрирования земельных ресурсов в Украине имеет признаки прозрачности и эффективности. Однако система земельного администрирования не соответствует запросам фрагментации собственности в землепользовании сельскохозяйственных предприятий (предложенном новом типе фрагментации). Исследования показали, что расходы на регистрацию права аренды земельного участка государственной формы собственности, по сравнению с частными участками, значительно меньше в расчете на единицу площади. Предлагается ввести для сельскохозяйственных предприятий отдельную административную услугу по регистрации прав аренды, которая бы обеспечила одновременное прохождение процедуры регистрации всех земельных участков в установленный законодательством срок. Ключевые слова: фрагментация земель; администрирование земельными ресурсами; регистрация; право аренды; земельный участок; расходы.

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1. Introduction Significant changes in the structure of landholdings and agricultural land tenure in the rural areas have become the results of the land reform in Ukraine. This has led to the emergence of a large number of private land parcels for commercial agricultural production (the so-called land lots (shares)) with an average size of 4 hectares with the fluctuations from 1.1-1.5 hectares in the western regions to 7.0-7.9 hectares in the southern regions of Ukraine (The Cabinet of Ministers of Ukraine, 2019) [15]. Thus, due to various objective and subjective factors in practice, the modern land use of agricultural enterprises consists of a large number of land parcels. In recent years, the average acreage of the agricultural enterprises increased and in 2016 and was about 1,570 ha. The economic activity of agricultural enterprises is carried out through concluding hundreds and even thousands of lease contracts with the owners of small land parcels. The share of the leased land in the overall structure of the agricultural enterprises exceeds 93% (Popov, 2018) [14]. Such leased lands may include land parcels of both private and state ownership. The average size of the state-owned land parcels is 87.9 hectares (Statistical Year- book, 2016) [18]. It is obvious that the use of the leased land parcels requires their special accounting within the agricultural enterprise as well as their state registration. The registration of the land parcels and the rights to them as an integral part of administrating the land is one of the main conditions for guaranteeing the rights to land, ensuring property security and up-to-date information about the land tenure and land transactions for the business activity and the land market. The registration of the land transactions usually bears the costs associated with fees and stamp duty, as well as other transaction costs. It does not matter whether the registration system is obligatory or not, in order for it to be successful, these costs should be low enough to make the registration process viable for the landowners and the land users. Otherwise, there will be alternative or shadow markets, and unofficial transactions will become widespread. Undoubtedly, the existence of a large number (6 million) of landowners makes the agricultural production in Ukraine more expensive as it brings additional costs to the agricultural producers associated with the registration of the leased land parcels. Recognition of the time and costs needed for the registration will help to identify the reasons for delays and the problems associated with it. This article is devoted to land fragmentation (LF) of agricultural enterprises, and the land administration system (LAS) is considered in the context of registration land parcels and lease rights.

2. Brief Literature Review The exploration of scientific literature has shown that today the manner of LF has to be determined in each case. The analysis of literature (Bentley, 1987; Demetriou et al., 2013; Hartvigsen, 2014; King & Burton, 1982; McPherson, 1982; Sabates-Wheeler, 2002; Sklenicka & Salek, 2008; van Dijk, 2003, 2003a) [3; 6; 9; 11-12; 16-17; 21-22] makes it possible to distinguish four main types of LF. They are the fragmentation of land ownership, the fragmentation of land use, the internal fragmentation (within the farm) and the distinction between land ownership and land use. The land fragmentation ownership refers to a situation when the ownership of the agricultural land is divided among many owners in terms of small and often irregular shaped land parcels. The land use fragmentation refers to a number of land users who are not landowners. The internal fragmentation is the fragmentation within the farm, when the farm is divided into many small non-contiguous land parcels that are often located in different places at large distances from the farmstead and between the parcels. The discrepancy between land ownership and land use involves a situation with a small number of landowners who use their lands. The above-mentioned types of LF are not characteristic under the Ukrainian conditions. The main problem in the use of agricultural land in Ukraine is viewed as a discrepancy between ownership and use (Popov, 2017) [13]. Since the excessive lease of agricultural land by large agricultural enterprises (agroholdings) made it possible to form a good structure of the land use (fields); other types of LF have no significant negative consequences. However, in the context of LAS, the new type of LF for Ukrainian conditions is required, namely the ownership fragmentation in the land use. The ownership fragmentation in the land use occurs when a separate agricultural enterprise (farm) consists of a significant number of the adjacent land parcels that are in its use (lease, emphyteusis, etc.), a larger proportion of which does not belong to it by the rights to the ownership. This form of fragmentation represents a problem mainly for the lessee since they have to conclude lease contracts with hundreds and even thousands of the landowners and this bears certain additional expenditures. In this article, we will examine the problem of LF from this position.

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The problem of LF in the context of the registration of lease rights to land parcels directly concerns the cadastre and the land registration in the matters of the land rights security. Thus, the land administration as the state system for the registration and management of the rights to land has a direct bearing on the issues related to LF. The concept of land administration as the basis of good governance in the Ukrainian scientific community has not yet received sufficient support and a single understanding of it. In this context the article considers the definition of LAS as the one which is generally accep ted by the world community (Bennett et al., 2012; Bogaerts & Zevenbergen, 2001; Enemark et. al., 2005; Van der Molen, 2002; Williamson, 2001) [2; 4; 8; 20; 27], namely, it is a set of measu res aimed at recording the tenure rights (e.g., land registration), valuation and taxation and regulated spatial planning. Thus, the system of land administration affects the development of legal security (which is the main requirement for the investors), the access to the credit (the mortgage), spatial planning (to support economic and ecological development) and the efficient and effective land taxation (De Zeeuw & Salzmann, 2011) [5]. A well-organised system of land registration is an important condition for the effective use of land, including agricultural land, which can secure the property rights to land and transaction procedures. Today, there is not a single scientific work by Ukrainian researchers which would compre- hensively cover the consequences of the ownership fragmentation in the land use in the context of LAS, such as registration of land parcels and rights to them. The article deals with some basic concepts and it is necessary to explain these concepts to avoid their misunderstanding and confusion. A land parcel is a part of the earth’s surface with set boundaries, having a specific location and fixed rights to it. An agricultural enterprise is defined as an independent business entity that has legal personal rights and carries out a productive activity in agriculture. Land use is a territory of an agricultural enterprise which is based on the combination of the ownership, lease or emphyteusis, or any one of them. Land-use planning documentation is textual and graphical materials regulating the use and protection of lands of state, communal and private property, approved in accordance with the established procedure.

3. Purpose The empirical research, presented in this paper, is aimed at analysing the correspondence of the modern land administration system with the demands of the land fragmentation and, in the second turn, at revealing the problems, which the agricultural enterprises face while concluding the lease contracts under the conditions of the land fragmentation.

4. Results The Ukrainian legislation (VRU, 1998; VRU, 2004) [23-24] determines that the lessor carries out the transfer of the land parcel to the lessee within the terms and conditions specified in the lease land contract (the lease contract). The validity period of a lease contract cannot exceed 50 years and cannot be less than 7 years. Having come to an agreement as for all the essential terms of the lease contract, the owner of the land parcel and the lessee draw up and sign a written contract. Af- ter that, it is obligatory to carry out the state registration of the lease rights in the State Register of Property Rights to Real Estate (the Real Property Register). Both the lessee and the lessor can apply to the state registration of the lease rights, but the majority of the lessees undertake registration costs without charging the rent payment of the lessor. In the case of lease of the private land parcels the average agricultural enterprise with a total area of 1,570 ha (Popov, 2018) [14] concludes about 365 lease contracts for the area of about 1,460 ha (the difference is 110 hectares of the land belonging to the founders of the enterprise). Regardless of the size of the land parcel, the minimum administration fee for the state registration of the lease rights (within five working days) is 0.05 of the living standard for the able-bo died population - 3.73 USD (VRU, 2004; VRU, 2018) [24; 26]. However, lessees have the right to choose a shorter period of state registration of the lease right and, in this case, an administration fee for one lease contract will be: a) USD 35.82 within two working days; b) USD 71.64 within one working day; c) USD 179.10 in the term of 2 hours (VRU, 2004; VRU, 2018) [24; 26]. Thus, the total value of the state registration of the lease rights to the private land parcels for an

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average agricultural enterprise will be from USD 1,361.45 to USD 65,371.50 per 1,460 ha of the leased lands (Table 1). In the case when the agricultural enterprise leases the state land parcels the costs on the lease rights registration are 22 times less than the corresponding costs of the private parcels registration (Table 2). This is due to the fact that about 22 land parcels of the private ownership (with an ave rage size of 4 hectares) accounts for one state-owned land parcel (average size of 87.9 hectares). 1,457,177 lease rights to the agricultural land parcels were registered in the Real Property Register at the end of 2016 (Statistical Yearbook, 2018) [19] and according to the approximate computation, the administrative fee for the lessees amounted up to about USD 3,992,265. These costs do not give a prospective benefit to any of the participants in the lease relationships, including the lessor, the lessee, and the State because these operating expenses are only for the payment of services for the administration of the leased land and are not aimed at increasing the profitability of the enterprise. Another item of costs is the time for the registration of lease rights. Large and medium-sized agricultural enterprises with an area of 1,000 ha or more often face the problem when the registration of the lease rights to all land parcels in their use takes several months or even years. Thus, an ave rage agricultural enterprise can spend from 3 months to 5 years on such a procedure (Table 3), and it can spend from 65,371.50 USD to 1,361.45 USD (Table 1). Moreover, it is without taking into account the other delays in time that may arise during the state registration due to the lack of the cadastral numbers of the land parcels, documentary non-compliance and the contradictions between the declared and already registered lease rights, etc. In this sense, the leasing of state land by the agricultural enterprise is more profitable because the timeframe for the registration of their lease rights is by 22 times less compared with the time re gistration of private land parcels (Table 4). Our research shows that in the vast majority the lessees of large and medium-sized agricultural enterprises apply to the state registrars and notaries to register their lease rights in the terms not exceeding two working days. Thus, the average fee for the registration of the lease rights to the state land parcel is 0.41 USD/ha, and the registration of the private parcels (land shares) is 8.96 USD/ha for the same area of 87.9 ha. We understand that the data shown in Table 3 cannot be considered representative because the data only reflect the legally established norms. It is obvious that nobody prohibits the lessee to apply for the registration of his/her lease rights to several notaries and other state registrars. In this

Table 1: Administration fee for state registration of lease rights to private land parcels

Source: Compiled by the authors

Table 2: Sizes of administration fee for state registration of lease rights to land parcels of private and state ownership

Source: Compiled by the authors

Table 3: The timeframe for registration of lease rights to land parcels by an agricultural enterprise

Source: Compiled by the authors

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Table 4: The timeframe for registration of lease rights to private and state land parcels

Source: Compiled by the authors regard, one can apply to the state registrars regardless of the land parcel location, but if the lease contract is certified by the notary, then the registration of lease rights can be done only by the notary who carried out that notarial act. In any case, it imposes the additional financial and time costs on the lessee. This is one of the reasons why not all lessors and lessees want to register the lease right or certify this right notarially, and they usually conclude lease contracts in the so-called simple written form (i.e. without registration). In addition, the attention should be paid to the moment of conclusion the lease contract and the moment of registration of the lease rights which arises thereon, because they have fundamentally different legal consequences. Thus, signing a lease contract does not mean that the lessee can already use the land parcel. He/She has the right to use land from the moment of registration of the lease rights. Therefore, according to such a legal norm, the investigated agricultural enterprise does not have the right to use the leased land for at least 3 months (Table 3). Of course, the compliance with such a law in agricultural production is equivalent to a catastrophe, since the basic production processes in agriculture cannot be delayed in time; it has to be performed in clearly fixed terms and in a certain sequence. In practice, due to this reason the lessees begin to use their leased parcels immediately after signing the lease contract without waiting for the registration of these rights. The difference between the dates of signing the lease contract and the registration of the lease rights contributes to the emergence of various problems and speculations. First of all, this is due to the fact that by 2013 the land lease contracts were registered in the State Land Cadastre (SLC) (subordinated to the State Service of Ukraine for Geodesy, Cartography and Cadastre of the Minis- try of Agrarian Policy and Food of Ukraine), and, from the beginning of 2013, the lease rights to the land parcels began to be registered in the Real Property Register (subordinated to the Department of State Registration and Notary of the Ministry of Justice of Ukraine). In practice, there is the si tuation that the lease contracts concluded before 2013 were not included in the new register. At the same time, not all the data concerning the land parcels have been transferred to the electronic database. All these things created the basis for the double registration of the lease rights to the same land parcel. As a result one land parcel may have two lessees who often by force begin to contend for the right to cultivate the land and reap the harvest. Thus, 10-15% of the land is under attacks of the raiders (AgroPolit, 2018) [1]. Also, there are some cases when dishonest lessors are trying to conclude several lease contracts before the registration of the lease rights. Often, after signing the lease contracts (but prior to their registration), the landowners themselves or on the advice of the potential new lessees make the relevant applications to the registrar in order to cancel the contract and with the request not to carry out the registration of the lease contracts. In December 2017, in order to solve the above-mentioned problems, an online service for the registration of agricultural land lease contracts was introduced. During such registration, there will be an online exchange of information between SLC and the Real Property Register, which will make it possible to avoid the registration of the double lease contracts. The timeframe for the online re gistration is 5 working days. The sum of the administration fee is USD 7.09. Online registration of the lease contracts has no chance to accelerate the registration period to 2 hours and rises in price by 1.9 times in comparison with the common registration (direct application by the applicant to the registration office or notary). As we can see, agricultural enterprises (lessees of the land parcels) should keep control over the issue of lease contracts and the registration of lease rights all the time. Due to a large number of such operations, the enterprise should support additional employees who will be responsible for the accounting of the lease contracts, their state registration, and communication with the lessors. Thus, medium-sized and large enterprises are forced to create separate land departments with a diversified system of workers, which requires the additional costs on wages and material supply in the amount of several thousand USD per year (Hrab, 2016) [10].

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It should be noted that the registration of the lease rights to the land parcels is carried out after the state registration of the (physical) land parcel (not the rights) in SLC (VRU, 2004; VRU, 2011) [24; 25]. The survey conducted among lessees indicates that approximately 10% of the leased land parcels (in some areas more than 30%) are not registered in the SLC (Hrab, 2016) [10]. Often, these procedures become the subject of trouble for the lessees since the procedure of the land registration, as well as the registration of land rights, is usually a significant bureaucratic and financial burden for the landowner. It should be noted that most lessees assume these costs without charging the rent payment of the lessor. Assuming the fact that the above described (virtual) agricultural enterprise has only 10% of un- registered land parcel, it would constitute 39 land parcels. Taking into account that the preparation of technical documentation for the land registration costs from USD 55.97 and more per one land parcel, depending on the region, then the corresponding costs for the registration of 39 parcels will be USD 2,175.81. The timeline for these works is from 14 days to 4 months, together with the regis tration in the SLC. The registration of the land parcel in the SLC is carried out by parcel location, so the registration can be made only in the area or the city where the land parcel is geographically located. Then the land parcel must be registered in the Real Property Register (the time limits and costs have already been given in Tables 1 and 3), and only after that it is possible to conclude the lease contracts and to register the lease right. It should be noted that the state-owned land parcel is leased through an auction; it has the ready-made technical documentation and registration and, therefore, does not require additional costs. During the above-mentioned procedures, the additional difficulties might arise due to technical errors in the data of the SLC. A very common problem is the overlapping of the land parcels and the discrepancy between the land parcel boundaries (the shape and size) indicated in the legal document and its actual boundaries (the shape and size) (Figure 1). In accordance with the Ca- dastral Law (VRU, 2011) [25], this is one of the reasons why the land registration is refused, which automatically deprives the owner of the possibility to dispose of his land parcel (for example to

Figure 1: Example of technical errors in the database of State Land Cadastre Source: Public cadastral map of Ukraine

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lease) until the error is corrected. Thus, the presence of the land parcels of an agricultural enterprise with technical errors makes impossible the registration of the lease rights, which leads to their «shadow» using. The current legislation established a mechanism for the correction of errors in the SLC based on drawing up various land-use planning documentation. The correction of even one error may lead to the changes in the neighbouring land parcels. Also, it can change all the parcels within a field (Figure 1). Therefore, to make changes in the characteristics of the land parcels the consent of all landowners and land users who will be involved in it are necessary. As practice shows, the owners of the neighbouring parcels do not always agree to change the boundaries, and therefore the solution of the problem can be only an appeal to the court. Correction of the technical errors in the SLC is a time-consuming and expensive process. In addition to the time and monetary expenditures associated with drafting a new land-use planning do cumentation and providing a new registration of the land parcel in the SLC and in the Real Proper- ty Register; it will also be necessary to pay an administration fee for the correction of the technical error in the SLC. The size of this fee is USD 8.55 (VRU, 2018) [26], and this procedure takes 2 wor king days from the date of registration of the corresponding application. The land registration in the SLC is a one-time procedure and the registration of the lease right takes place at least once every 7 years (the minimum term of the lease). 10% of leased land parcels require other various operations (land registration in the SLC and in the Real Property Register, re- registration of the lease rights, etc.) which are carried out during the lease period. Summarising these facts it is possible to simulate the potential expenditures for the average agricultural enterprise on the registration of the lease rights to the land parcels in its use. The expen ses on correction of the technical errors in SLC concerning the land parcels were not taken into account, as there is no official statistics as for the number of such parcels in the structure of the agricultural enterprises. The costs for the majority of the lessees of the medium-sized and large agricultural enterprises, who apply to the state registrars and notaries for the lease rights registration in a timeframe not exceeding two working days, are given in Table 5. To estimate the costs associated with drafting the land-use planning documentation and the registration in the SLC, we take the mean values. It turns out that the costs on the registration of the lease right (the average size of land parcel is 4 ha) with an appeal to the state registrar or notary for the one land lease contract will cost the lessee USD 44.79, or USD 11.20 if one uses the online service, the expenditures will be USD 16.06 or USD 4.01 per one hectare, respectively. Thus from Table 5, the online registration of the lease rights will cost five times lower in comparison with the common one (an appeal to the state registrar or notary), yet it takes 2.5 more time. So, the heads of the agricultural enterprises are faced with the di- lemma: whether to spend more money and use the leased land parcel according to the legislation or to pay less money and use the land parcels during the registration period without the official (legal) registration (confirmation). Every head takes the final decision himself/herself. Certainly, those costs are the average ones and may be higher for some agricultural enterprises and lower for the others. It depends on the location of the leased land parcels, the rate of the agricultural enterprise development, the activity of expanding its land bank and on the communication with the landowners, as well as on the size of the «shadow» operations with the land. Thus, according to the calculations of the Ukrainian Agribusiness Club, the size of the above-given unofficial payments may exceed 50% of the cost of the lease contract for 1 ha (Hrab, 2016) [10].

Table 5: Costs of average agricultural enterprise on registration of lease right to land parcels

Source: Compiled by the authors

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Based on the results obtained earlier, we can assume that the costs on the registration of the lease rights will be USD 67.19 in the case of the common registration or USD 16.80 per one hectare, and it will cost 24.09 USD or USD 6.02 per one hectare in the case of the online registration. The abovegiven sums of the costs are only those that we can calculate approximately based on the legal fees. However, this is far from the final sum that the agricultural enterprises pay for the existing ownership fragmentation in land use. In practice, there are quite a lot of cases of the unofficial payments for the registration of land parcels and lease rights, which remain invisible to the landowners and the State. As a rule, such payments are due to the time-consuming procedure or even to a deliberate delay in the registration of the land rights or to the provision of certain services that are not prohibited but are not critically necessary and the cost of which is overestimated. As a result, in the registration systems (both land and rights), there is a large number of agents who solved all these difficulties for the additional fee, the size of which is impossible to calculate. It is also impossible to calculate the costs spent on the exchange of the land parcels between the lessees in order to form an integral field (without the inclusion of the land parcels of another landowner or land user). Usually, the fact of such an exchange is not fixed by any legal documents and exists only in the form of verbal agreements, and the landowners remain uninformed about such operations. The motivation payments to the landowners in order to extend the lease contract for a new term are also impossible to calculate. Of course, Ukraine is not the only country facing these problems. It is inherent by each leasing activity in agriculture. Therefore, further studies may be aimed at finding ways to solve the above-mentioned complications based on international experience. Under the existing land policy, the costs of registration of the land parcels and rights to them will yet increase, since the problem of LF is only becoming deeper. 23% of all owners of the private land parcels are of the pensionable age. These lands will be inherited in the near future. Sub- sequently, the heirs will have all the legitimate reasons to physically divide the land parcel bet ween them, and the lessee will have to register two or more lease contracts instead of one (of course in the case when the heirs have agreed to lease land to one lessee). Accordingly, it increa ses the costs per one hectare. Under the conditions of the current moratorium on the sale of agricultural land, there is no possibility to form the private land parcels of a larger size. The present ownership fragmentation in the land use within a single field and the existing mis- takes in the registration create additional opportunities for the raiders. There are numerous ca ses when the raiders redeem the lease rights in the middle of the field that deprives the agricultural producer of the possibility to cultivate it effectively and he is forced to buy back this right at a higher price. The modern LAS with its dualistic system of registration of land parcels and property rights complicates the process of registration for agricultural enterprises (lessees) because of the di fferences in data of the two register systems. And the current ownership fragmentation in the land use makes this process time-consuming and expensive due to a large number of the leased land parcels. Thus, in the international rating of Doing Business, Ukraine took the 63rd place in the ca tegory «Registering Property» when registering the property rights by one physical or legal entity (The World Bank Group, Doing Business, 2019) [7]. It should be understood that when registe ring the hundreds of land parcels by one lessee (as in the case of the lease rights registration), the situation will be much worse. The financial obligations arising from the registration of the land parcel and the lease right to a certain extent deprive agricultural enterprises of the desire to apply for the registration. Accor dingly, it has a negative effect on the size of budget revenues. Therefore, about 10% of the leased rights are not registered. It is obvious that under such conditions agricultural enterprises are interested in signing long-term lease contracts (10 years and more) in order to lessen the abovementioned problems.

6. Conclusions The LAS in Ukraine has indications of transparency and efficiency due to the clear requirements for the registration documents and their listing, time limits, the size of the fees for the registration procedures and the mechanism of electronic service. Along with the positive achievements, the current LAS also has the main disadvantages. They include dualistic and time-consuming system of registration of the land parcels and rights to them; the discrepancy between the data of the SLC

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and the Register of Property Rights; discrepancy between the land parcel boundaries indicated in the legal document and its actual boundaries; land registration according to the parcel location; the procedure for the registration of the land parcels and the rights to them for agricultural enterprise is a long-lasting one. The abovementioned disadvantages of the LAS are reinforced by the existing ownership fragmentation in the land use that complicates land administration by the medium-sized and large agricultural enterprises because: 1. the lease of hundreds, and in some cases thousands, of land parcels, requires large financial (about USD 11.20 per one hectare) and time costs (from 3 months or more) on registration of the lease rights; 2. the availability of the unofficial payments leads to an increase in the registration costs of lease rights by 50%; 3. the time-consuming procedure of registration force the lessees to use the leased land illegally during the registration procedure; 4. the dualistic system of the land and rights registration creates conditions for the occurrence of various errors and uncertainties. All those circumstances create conditions for fraud, corruption and raiding and, accordingly, an increase in the transaction costs. It has been established that the costs on the registration of the lease right to the state-owned land parcel are much lower in comparison with the registration of private parcels in terms of per unit area. This is because the state-owned land parcels have a larger area and there are no additional operations. One of the ways to reduce the cost of registration of land parcels and rights to them is to decrease the level of the land fragmentation by increasing the size of the land parcel per one landowner, thus reducing the number of the leased parcels in the structure of the agricultural enterprise. However, it is impossible to do this in Ukraine because of the existing moratorium on the sale of agricultural land and the lack of the land consolidation procedure. Therefore, it is convenient to introduce a special administrative service for the registration of lease rights for the agricultural enterprises that would ensure the simultaneous registration for all land parcels within the time limits fixed by the legislation (up to 5 working days). It will help to reduce the costs and time consumption. We consider it appropriate to fix the provisions of the Law of Ukraine «On Lease Land» regarding the fact that the lease contract comes into force from the moment of its signing, and not from the moment of state registration of the lease right.

References

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Abbreviations: RCMU - The Resolution of the Cabinet of Ministers of Ukraine VRU - The Verkhovna Rada of Ukraine (The Parliament of Ukraine)

Received 10.03.2019 Received in revised form 29.03.2019 Accepted 5.04.2019 Available online 20.08.2019

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ECONOMIC ANNALS-XXI ISSN 1728-6239 (Online) ISSN 1728-6220 (Print) https://doi.org/10.21003/ea http://www.soskin.info/ea/

Volume 176 Issue (3-4)’2019

Citation information: Berková, K., Krpálek, P., & Krpálková Krelová, K. (2019). Future economic professionals: development of practical skills and competencies in higher education from the point of view of international employers. Economic Annals-XXI, 176(3-4), 91-98. doi: https://doi.org/10.21003/ea.V176-09

Kateřina Berková Pavel Krpálek Katarína Krpálková Krelová PhD (Economic Teaching Methodology), PhD (Economic Teaching Methodology), PhD (Theory of Teaching Subjects of General Assistant Professor, Associate Professor, and Vocational Nature), Assistant Professor, Department of Economic Studies, Vice-Rector for Science and Development, Department of Economic Teaching Methodology, College of Polytechnics Jihlava College of International and Public Relations Prague University of Economics 16 Tolstého Str., Jihlava, 586 01, 17 U Santošky Str., Prague 5, 150 00, 1938/4 W. Churchill Sq., Prague 3, 130 67, Czech Republic Czech Republic Czech Republic [email protected] [email protected] [email protected] ORCID ID: https://orcid.org/0000-0002-6158-0171 ORCID ID: https://orcid.org/0000-0002-7665-5316 ORCID ID: https://orcid.org/0000-0002-8419-4556

Future economic professionals: development of practical skills and competencies in higher education from the point of view of international employers

Abstract. The authors aim to determine the importance of practical preparation of future accountants, auditors and entrepreneurs during the study both from the point of view of the companies with transnational scope of activity that belong to the group of the Czech Republic’s most attractive employers and from the point of view of the students of the University of Economics in Prague (Czech Republic) in the field of accounting and financial management, who very often gain positions in such companies. Another aim is to verify what emphasis the practice in the international context places on providing the students with knowledge of business and market laws in relation to the abovementioned professions. The research was conducted by using a questionnaire survey at the beginning of 2018. The chi-square test of independence was used in view of the categorical variables. Practical preparation is important for both groups of respondents (i.e. 139 students and 24 relevant companies-employers). During the study, it was established that most students are already employed (75% of the bachelor and 95% of the master programmes students), which shows that the students in the accounting and corporate financial management field of study have a very close contact with practice. Although most students at both levels of education are already employed (88%), only 52% of them work in the field which is identical to their educational programme. Satisfaction of companies with students is conditioned by their practical preparation during the studies, which, however, is most often non-existing. The companies’ representatives, as well as students, recommend that practical subjects be incorporated in the course of study. Also, emphasis should be placed on the development of professional competences of auditors and accountants, as well as on entrepreneurships’ training, which should be in the form of simulated professional environment during the classes. Taking into consideration the results of the new research and scientific studies, we consider the recommended procedures to be justified and relevant internationally. Keywords: Professional Competence; Higher Education; Accountant; Auditor; Entrepreneur; Employer; Simulation Methods JEL Classification: E24; J24 Acknowledgements and Funding: This research was supported by the College of Polytechnics Jihlava, Czech Republic, under Grant No. 1170/4/181 «Model of Permeability of Corporate Economy and Financial Accounting in the Quality Improving System of the College of Polytechnics Jihlava» and by the Grant Agency of Academic Alliance (Project No. GA 7/2018). Contribution: The authors contributed equally to this work. DOI: https://doi.org/10.21003/ea.V176-09

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Беркова К. кандидат економічних наук, старший викладач, кафедра економічних наук, Висока політехнічна школа Їглави (Їглавський політехнічний університет), Їглава, Чеська Республіка Крпалек П. кандидат економічних наук, доцент, проректор з питань розвитку науки і технологій, Коледж міжнародних і суспільних відносин у Празі, Прага, Чеська Республіка Крпалкова Крелова К. кандидат педагогічних наук, старший викладач, кафедра методики викладання економічних дисциплін, Празький економічний університет, Прага, Чеська Республіка Майбутні фахівці з економіки: розвиток практичних навичок і компетенцій у вищій освіті з погляду міжнародних компаній-роботодавців Анотація. Статтю присвячено визначенню важливості практичної професійної підготовки бухгалтерів, аудиторів та підприємців з погляду транснаціональних компаній, які, на думку студентів Празького економічного університету, що спеціалізуються на вивченні бухгалтерського обліку та фінансового менеджменту й часто отримують пропозиції працевлаштування від названих вище компаній, належать до групи найпривабливіших для роботи компаній у Чеській Республіці. Авторами статті було досліджено вплив міжнародної практики на набуття студентами знань про застосування відповідної законодавчої бази та розвиток практичних навичок ведення бізнесу. В основу статті було покладено анкетне дослідження, проведене на початку 2018 року. Під час проведення дослідження його авторами було використано критерій хі-квадрат незалежності й встановлено, що практична підготовка є важливою для обох груп респондентів, а саме: 139-ти студентів та 24-х компаній-працедавців. Було виявлено, що більшість студентів (73% студентів-бакалаврів і 95% студентів магістерських програмах навчання) вже працевлаштовані. Це вказує на той факт, що студенти, які вивчають бухгалтерський облік і корпоративне фінансове управління, мають значний практичний досвід. Разом із тим, попри той факт, що більшість студентів обох напрямів підготовки вже працевлаштовані (88%), тільки 52% від їхньої кількості працевлаштовані за напрямом діяльності, передбаченим їхньою навчальною програмою. Задоволення компаній співпрацею зі студентами обумовлено належним рівнем практичної підготовки самих студентів. На думку як представників компаній, так і студентів, увага під час навчання повинна приділятися практичному вивченню дисциплін. Акцент повинен бути зроблений на розвитку професійних компетенцій аудиторів, бухгалтерів і майбутніх підприємців. Саме ж навчання повинно проводитися шляхом моделювання та симулювання професійного середовища. Ключові слова: професійна компетентність; вища освіта; бухгалтер; аудитор; підприємець; роботодавець; методи симулювання. Беркова К. кандидат экономических наук, старший преподаватель, кафедра экономических наук, Высокая политехническая школа Иглавы (Иглавский политехнический университет), Иглава, Чешская Республика Крпалек П. кандидат экономических наук, доцент, проректор по вопросам развития науки и технологий, Колледж международных и общественных отношений в Праге, Прага, Чешская Республика Крпалкова Крелова К. кандидат педагогических наук, старший преподаватель, кафедра методики преподавания экономических дисциплин, Пражский экономический университет, Прага, Чешская Республика Будущие специалисты в области экономики: развитие практических навыков и компетенций в высшем образовании с точки зрения международных компаний-работодателей Аннотация. Статья посвящена важности практической профессиональной подготовки бухгалтеров, аудиторов и предпринимателей с точки зрения транснациональных компаний, которые, по мнению студентов Пражского экономического университета, специализирующихся на изучении бухгалтерского учета и финансового менеджмента и часто получающих предложения касательно трудоустройства от названных выше компаний, принадлежат к группе самых привлекательных компаний в Чешской Республике. Авторами статьи было исследовано влияние международной практики на приобретение студентами знаний о применении соответствующей законодательной базы и развитие практических навыков ведения бизнеса. В основу статьи был положен анкетный опрос, проведенный в начале 2018 года. В ходе проведения исследования его авторами был использован критерий хи-квадрат независимости, а также было установлено, что практическая подготовка важна для обеих групп респондентов, а именно: 139-ти студентов и 24-х компаний-работодателей. Было обнаружено, что большинство студентов (73% студентов-бакалавров и 95% студентов, участвующих в магистерских программах обучения) уже трудоустроены. Это указывает на тот факт, что студенты, изучающие бухгалтерский учет и корпоративное финансовое управление, имеют значительный практический опыт. Вместе с тем, несмотря на тот факт, что большинство студентов обоих направлений подготовки уже трудоустроены (88%), только 52% от их количества трудоустроены в соответствии с направлением деятельности, предусмотренной их учебной программой. Удовлетворение компаний от работы со студентами обусловлено надлежащим уровнем практической подготовки самих студентов. И представители компаний, и студенты сходятся во мнении,

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что внимание во время обучения должно уделяться практическому изучению дисциплин. При этом акцент должен быть сделан на развитии профессиональных компетенций аудиторов, бухгалтеров и потенциальных предпринимателей. Само же обучение должно проводиться путем моделирования и симулирования профессиональной среды. Ключевые слова: профессиональная компетентность; высшее образование; бухгалтер; аудитор; предприниматель; работодатель; методы симулирования.

1. Introduction In recent years, efforts have been made to strengthen the free relationship between the labour market and universities from the point of view of graduate training (Little & Archer, 2010) [9]. The necessity to develop human capital through closer cooperation of universities with the labour market to achieve a positive impact on the development of the whole economy is seen by the authors as the main reason for the establishment of such trends. In the field of professional competences of graduates, state interventions are developed to impact tertiary education to maximize the outputs of universities. The objective of the empirical study adopts two fundamental lines of thought, which are based on a common hypothesis, questioning whether or not the role and scope of integration of practical preparation of future professional accountants, auditors and entrepreneurs in higher edu cation matches the requirements of the labour market, not only at the national level in the Czech Republic (Berková & Plevková, 2017) [3], but also internationally. According to the Entrepreneurship 2020 Action Plan elaborated by the European Commission, the need to implement entrepreneurial learning at all levels and in all sectors of education, including non-formal education (e.g. Bodea, Mogoş, Dascălu, Purnuş, & Ciobotar, 2015) [4], is strongly emphasized.

2. Brief Literature Review In recent decades, interest in the concepts of economic growth and entrepreneurship has started to grow (Ács, Szerb, & Autio, 2013) [1]. This interest is empirically motivated by three aspects: a) it promotes competition by increasing the number of businesses; as competition leads to the development of knowledge and new ideas, it can be said that entrepreneurship again supports entrepreneurship; b) entrepreneurship is an essential mechanism enabling the transfer of knowledge and innovations, which is especially important for start-up entrepreneurs; c) it creates diversity, dissimilarity and uniqueness of businesses, which influences economic growth (Grigore & Drăgan, 2015) [7]. Understanding business environment is essential in order to perform any economic profession. This competence becomes increasingly important for graduates of the economic field achieving higher education, as they must be proficient in the economic-interdisciplinary context. According to Garrido, Da- vids, Gonzales, and Soto (2017) [5], the current social, economic and work situation requires continuous acquisition of skills and knowledge. Obtaining general competences is the main task of professional training. The development of these competences forms an essential part of practical preparation. Stu- dents should undertake to be integrated into the professional world. Smith and Emerson (2017) [15] exa mined causes of the existing gap between accounting practice and academic community with a focus on accounting. The main cause of this problem is that the academic sphere is primarily focused on aca demic research but lacks significant practical experience or certification of academics. After comple ting their studies, the students may have a lack of practical skills required by the labour market. Pluzh- nik, Ilnitskaya and Lucci (2018) [10] characterized and compared the processes and results of entrepreneurship education in the US and the UK. To develop entrepreneurship education, the authors consider it necessary to integrate elements of experiential learning, multidisciplinary, multicultural, and interactive student-centred learning approaches for the development of business models of behaviour, key and variable competencies, and «soft» skills. In their study, Griffin and Coelhoso (2019) [6] describe that students find the greatest importance in communication, teamwork and time management. Siriwardane, Kin Hoi Hu, & Low (2014) [13] focus on the level of competence of accountants and auditors in the ar ea of information technology development in the environment of small- and medium-sized enterprises. Their findings include that the competences of accountants are still at a lower level than that required by professional accountancy organizations, such as IFAC (International Federation of Accountants) and AICPA (American Institute of Certified Public Accountants). Emphasis is placed on the development of human resources management and organizational and interpersonal skills in integration with information technologies. All of these skills are perceived as requirements for professional qualification of

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accountants and auditors (Bahador & Haider, 2012) [2]. In the context of the development of professio nal competences of graduates and in view of the demand for high-quality qualification force, it is necessary to systematically optimize professional competence, which includes theoretical knowledge, practical skills, professional values and ethical aspects (Král & Šoljaková, 2016) [8]. Several European programs identified as best practices were presented at the Oslo Conference Entrepreneurship Education in Europe: Fostering Entrepreneurial Mindsets through Education and Learning. In general, the updated teaching programs encourage critical thinking, creative thinking, communication, research-questioning and problem solving (Rahman et al., 2015) [12] and frequently involve interactive and collaborative online tools (e-learning, mobile devices and learning networks) (Ventura & María José, 2013) [17]. This kind of entrepreneurial experience is also an effective way to teach financial education, as it provides the context and the possibility for the students to apply their knowledge in a particular case of interest to them. In order to develop the required professional competences of university students, a simulation method, which can be used to truly depict the activities of professional accountants and auditors, is used (Ste- phenson, 2017) [16]. Students are subject to a real-world audit with the integration of information technologies, taking into account the current IFAC (International Federation of Accountants) requirements. It is therefore desirable to invite experts from practice (practitioners) to lessons based on simulation of real- world practice. In Jakarta and in the West Province, Pratama (2015) [11] examined differences in professional competences of students in the field of accounting after the lessons, which were delivered by an academician, a university lecturer and a practitioner, respectively. From the point of view of the focus on the development of professional competences towards practice, the practitioners were more successful in teaching, as they were able to bring current hot topics into it. The advantage of the simulation method that acquires the elements of performance is that the students assume a certain professional role they have to identify themselves with and take responsibility for; by this, they form their professional competences. Zulfiqar, Sarwar, Aziz, Chandia, & Khan (2019) [19] concludes that simulation-based studies are a useful, easy and amusing way of learning, which helps students to think critically. Smeureanu and Isăilă (2017) [14] present a Learning Pyramid which depicts to what extent students retain new information, depending on the teaching method used. The most effective method is practice doing (75% of new information is retained), teach others/immediate use (90%). This shows that the methods supporting practical activities of students are the most effective ones. The following can be included among them: a) simulations; b) play-role scenarios; c) working group in competition; d) case studies.

3. Purpose This study is based on the research of the Chinese authors Y. H. Zhao and D. M. Gao (2016) [18], who focused on the requirements of labour market in the area of preparation of students for accounting practice. The empirical study refers to tertiary education, namely the field of accounting and corporate financial management at the University of Economics in Prague, Czech Republic. The basic objectives are defined as follows: • Verification of the importance of practical preparation of future professional accountants and auditors in terms of the role of employees in higher education to cater for their engagement in the financial sector, especially in senior management positions, through the eyes of representatives from practice and students of economic fields with a focus on finance and accounting; • Verification of the importance of practical preparation of future entrepreneurs in higher education with a focus on finance and accounting as independent entrepreneurship. No doubt that from the point of view of the Code of Ethics, the auditor cannot be an employee of service users and should, therefore, understand not only his/her profession but also business laws and the deve lopment of the business environment.

4. Research Methodology Two groups of respondents participated in the survey. The first sample consisted of employers representing the largest consultancy companies relating to transnational business. The research included 24 companies, including the employers who, according to the Universum Survey, were included in the category of the Czech Republic’s most attractive employers and with whom the Uni- versity of Economics, Prague closely cooperated. In total, 60 consultancy companies were addressed. Those were primarily focused on the area of audit, accounting and taxes. In terms of the

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size of the companies, the sample included 75% of respondents with more than 100 employees; the other respondents belonged to the category of small- and medium-sized companies. 75% of the sample were the companies with transnational, global reach. These companies employ the vast majority of graduates of the Faculty of Finance and Accounting of the University of Economics, Prague. The second sample consisted of students of the bachelor and follow-up master degree in accoun ting and corporate financial management of the Faculty of Finance and Accounting of the University of Economy in Prague. The total sample included 139 students, of whom 53 were bachelor-degree students, and 86 students represented the follow-up master study. The sample includes more students of the follow-up master study at the Faculty of Finance and Ac- counting, who specialize in accounting and corporate financial management (62%). The representation of bachelor students (38%) is important to examine the permeability of the whole study at the Univer- sity of Economics and to identify students’ preferences from the beginning until the end of the study. During the study, most students are already employed, including the bachelor students, of whom 75% are employed. The number of employed students of the follow-up master study is 95%. This shows that students of the Accounting and Corporate Financial Management field of study have a very close contact with practice. Although most of the students at both levels of education are employed (88%), only 52% of the students work in the field identical to that they study at the same time. For the data collection, the questionnaire method was used. To conduct the research, we used a questionnaire of our own construction of the web design. Two questionnaires were prepared for each group of respondents. Prior to the research, pre-research was carried out. Before doing the pre-research, we developed a sample having the characteristics of the respondents participating in the main research. This increased the content validity and the reliability of the research tool. The questionnaire contained a combination of closed and open questions, using interval and Likert scales. The questionnaire for each group of respondents contained one open question, which asked about the opinion of the respondents on the professional focus of practically oriented subjects that should be reinforced in the field of study, with an emphasis on audit, taxes and accounting. Only this open question in each questionnaire was evaluated qualitatively; the other questions were evaluated using quantitative me thods. To verify the hypotheses, the data were processed and evaluated by using the NCSS statistical program based on the chi-square independence test, at 5% of signification. This test enabled us to prove dependence (or independence) between two variables. It can be used to determine the relationship between two qualitative or consecutive variables which have several categories, called categorical variables. The null hypothesis claims that the monitored characters are independent; an alternative hypothesis is then the hypothesis of their dependence. Null hypotheses are formulated as follows: 1. There is no dependence between the employers’ satisfaction with graduates of the Faculty of Finance and Accounting of the University of Economics, Prague and the practical preparation of students during the studies. 2. The employers perceive practical students’ preparation in the area of audit and accounting as important as the ability to understand the business environment for their engagement in accoun ting and auditing professions. 3. From the point of view of the students specializing in accounting and corporate financial ma nagement, there is no dependence between the professional training quality and practical pre paration during the study. 4. From the point of view of the students specializing in accounting and corporate financial ma nagement, there is no dependence between the significance of practical preparation during the study and their practical engagement in the role of employees.

5. Results The results show that 75% of the companies representing transnational scope of business perceive the preparedness of the students specializing in accounting and corporate financial ma nagement to be insufficient. At 95% of the test reliability, it was determined that long-term satisfaction of the addressed emp loyers from the category of the Czech Republic’s most attractive employers is conditioned by the practical preparation of students. At 5% of the significance level, we reject hypothesis 0-1H (Table 1). This means that the more the practical component is strengthened and supported by educators and academics, the higher the satisfaction of those addressed employers with the graduates from the given field is. The efforts to promote practical lessons are being stepped up abroad too. They have different forms, for example the involvement of practitioners in teaching. This form brings about a positive effect

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Table 1:

Chi-Square Test for Hypothesis H0-1 and H0-2

Source: Compiled by the authors in the development of professional competences (Pratama, 2015) [11]. These facts are also published in the article by Smith and Emerson (2017) [15] who address the main causes of the gap between accounting practice and academic community. According to the authors, educators focus too much on academic research and point to the lack of practical experience. This causes students to feel less competent after completing their studies. In connection with the development of professional competences, we were also interested in whe ther the employers perceive the practical preparation of students in the field of audit and accounting to be a more important element than understanding the business environment for their employment in accounting and auditing professions. This idea is based on the fact arising from professional practice in the international context, where it is desirable that an expert in the accounting and auditing profession, which is an independent business, should understand not only his/her profession, but also the development of the business environment. Thus, the hypothesis was being verified as to whether the employers perceive these two aspects differently or in the same way, or which aspect they prefer. At 95% of the test reliability, it was found that employers perceived these two aspects in the same way.

At 5% of the significance level, we do not reject hypothesis 0-2H (Table 1). Practical preparation of future professional auditors and accountants should be focused not only on professional profiles closely connected to these professions, but also on the development of the ability to understand business rules and the development of business environment and the market in relation to the accounting and auditing profession as an independent entrepreneurship. The representatives of the companies also expressed their views regarding the question of overall preparedness of the students (not only from the point of view of practical preparation) and presented the competences the graduates lacked most when entering the labour market. Most of the graduates lack practical experience (such is the opinion of 70.8% of all the respondents), knowledge of foreign languages (41.7%), willingness to work and flexibility (25%). Theoretical knowledge of the graduates in the field of accounting and corporate- fi nancial management is at a very good level; the respondents put this competence to the last place in terms of the most-often lacking skills. The respondents’ answers to the open question inquiring about the opinions on the professional focus of practical subjects that should be strengthened in the field of study with an emphasis on audit and accounting were evaluated qualitatively. In most cases, the companies’ representatives suggested a practical subject in the following forms: a) real simulations of projects in cooperation with potential employers; b) internships or practical training according to student preferences; c) applications of accounting and tax laws and their interpretation in practice; d) fictitious companies that strengthen the education to entrepreneurship and understating the business market. Again, these results were in line with the examples of good practice at the international level. The students’ views of practical preparation in accounting and auditing profession are very similar to those of the practitioners. In terms of the percentage of responses, out of the total sample (n = 139), 57% was dissatisfied with practical preparation in the accounting and corporate financial management. A higher level of dissatisfaction was determined with regard to the students of the follow-up master study: 67% of respondents. Either the situation was better with respect to the bachelor study, or the students did not feel the absence of a practical component - only 40% of students were dissatisfied with the practical preparation. Further results of the analysis focus on exact evaluation of the dependence between the respon ses of the students of both degrees of study (n = 139). Of course, we need to be cautious in terms of any statements explaining the proven results, as our sample is representative of one branch within one university, but which - on the other hand - closely cooperates with the largest consulting companies in the market. At first, hypothesis H0-3 was tested, which claimed that from the point of view of the students, there was no relationship between the quality of professional training and practical preparation during the study. At 95% of the test reliability, it is possible to claim at the level of n = 139 that there is a dependence between the quality of professional training and the practical preparation of the students

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during the study (Table 2). At 5% of the significance level, we reject hypothesis H0-3. This means that the better students perceive the higher quality of professional training, the more the practical component of the lessons is strengthened. Here, the correlation with the opinions of practitioners is also obvious, where it was proven that the more the practical preparation of students is strengthened, the more companies are satisfied with the graduates. However, it has to be noted that the majority of the students agree to the fact that a practical component is missing in the professional training in accounting and corporate financial management, which is in line with the views of the practitioners who respond that practical experience is the most commonly lacking competence of students and graduat es (Griffin & Coelhoso, 2019; Ilnitskaya & Lucci, 2018) [6; 10]. We were also interested in whether the group of students who were already actively engaged in practice considered practical preparation during the study as a necessary educational aspect. At 95% of the test reliability, dependence was found between the significance of practical preparation during the study from the point of view of the students specialising in accounting and corporate financial management and their practical role as employees (Table 2). At

5% of the significance level, we reject hypothesis 0-4H . Given that the proportion of such students in the sample is 88%, this fact is significant for the examples of good practice and relevant recommendations for sustainable development of education. The students also expressed their opinion on the necessity to include a practically oriented subject, with 90% of all the students recommending inclusion of such subjects in the curriculum. Interes tingly, 60% of the bachelor-degree students were satisfied with the practical preparation in the accounting and corporate financial management field of study. Yet, 94% of the same group of respon dents required strengthening of the practical component. Their recommendation may be connected with the emphasis on the diversity and the interesting nature of the study, as well as on clear meaning and usability of the theoretical basis. The respondents’ answers to the open question (the same as with the employers) inquiring about the opinions on the professional focus of practical subjects with an emphasis on audit and accounting were evaluated qualitatively. Most often they mention the establishment of an enterprise from the beginning to the liquidation, i.e. a fictitious company; accoun ting in real economic software (e.g. SAP); an audit project (comprehensive activities related to closing operations or auditor’s report); working with real data related to the processing of tax return or control reports, working with case law or other legal regulations, tax administration; practical accounting with emphasis on dealing with demanding and unusual accounting cases, case studies: Due Dili- gence, Business Modelling, case management according to IFRS and US GAAP. The requirements regarding practical training are identical to the tendencies evolving in the area of the development of professional competences at the international level. Worldwide, there is a growing tendency to develop professional competences for these fields in the area of human resources ma nagement or organizational and interpersonal aspects using IT. Attention is also paid to ethical aspects (Bahador & Haider, 2012; Siriwardane et al., 2014) [2; 13]. The integration of IT in the development of professional competences is particularly desirable, because it changes the way of working with the information and relevant data of the participating companies. Students are guided to the true depicting of the activities of professional accountants, auditors and other professions. The basic idea of such training is to simulate a real professional environment and develop professional competence, which is also required by IFAC or AICPA. These competences are effectively developed by means of a game as a staging method based on the simulation of practical activities (Smeureanu & Isăilă, 2017) [14].

Table 2:

Chi-square Test for Hypothesis H0-3 and H0-4

Source: Compiled by the authors

6. Conclusion In spite of the findings including insufficient practical experience of students and graduates and the need to strengthen practical preparation during the study, for example through simulations, stage games or involvement of practitioners who help create real professional environment in the lessons, the students of the University of Economics in Prague still have very good chances to become employed in the professions such as an accountant, an assistant auditor, a financial analyst or a tax ad- viser with employers with the transnational scope of business. Taking into consideration the results

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of the new research and scientific studies underlying the article, we consider thepr ocedures recommended by the companies representing transnational business, as well as by students, to be justified and relevant internationally. Finally, taking into account international and national development tendencies, it can be concluded that it is currently increasingly desirable to incorporate practice into edu cation in the form of game simulations, stage performances, project activities or internships.

References

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O., & Lucci, F. (2018). Are Entrepreneurs Born or Made? Effective Academic Models to Foster Entrepreneurial Graduates. Obrazovanie i nauka (Education and Science), 20(5), 56-78. doi: https://doi.org/10.17853/1994- 5639-2018-5-56-78 (in Russ.) 11. Pratama, A. (2015). Bridging the Gap between Academicians and Practitioners on Accountant Competencies: An Analysis of International Education Standards (IES) Implementation on Indonesia’s Accounting Education. Procedia - Social and Behavioral Sciences, 211, 19-26. doi: https://doi.org/10.1016/j.sbspro.2015.11.004 12. Rahman, S., Yasin, R. M., Buang, N. A., Oganisjana, K., Fernate, A., & Koke, T. (2015). Using problem-focused approach to nurture creativity and entrepreneurship among students. Procedia - Social and Behavioral Sciences, 191, 2782-2786. doi: https://doi.org/10.1016/j.sbspro.2015.04.628 13. Siriwardane, H. P., Kin Hoi Hu, B., & Low, K. Y. (2014). Skills, knowledge, and attitudes important for present-day auditors. International Journal of Auditing, 18(3), 193-205. doi: https://doi.org/10.1111/ijau.12023 14. Smeureanu, I., & Isăilă, N. (2017). Innovative Educational Scenarios in Game Based Teaching and Learning. Amfiteatru Economic, 46(19), 890-899. Retrieved from http://www.amfiteatrueconomic.ro/temp/Article_2666.pdf 15. Smith, K. J, & Emerson, D. J. (2017). An Analysis of Professional Competence Indicator Possession among U.S. Accounting Faculty. Issues in Accounting Education, 32(2), 17-38. doi: https://doi.org/10.2308/iace-51425 16. Stephenson, S. S. (2017). Accounting Community of Practice pedagogy: a course management invention for developing personal competencies in accounting education. Accounting Education, 26(1), 3-27. doi: https://doi.org/10.1080/0963928 4.2016.1247008 17. Ventura, R., & Quero, M. J. (2013). Collaborative learning and interdisciplinarity applied to teaching entrepreneurship. Procedia - Social and Behavioral Studies, 93, 1510-1515. doi: https://doi.org/10.1016/j.sbspro.2013.10.073 18. Zhao, Y., & Gao, D. (2016). Research on Training Mode of Accounting Personnel in the Demand of Professional Competence. Advances in Intelligent Systems Research: proceedings of the 2016 International Conference on Education, Management and Computer Science, May, 2016 (pp. 1172-1176). Shenyang, Liaoning, P.R. China. doi: https://doi.org/10.2991/ icemc-16.2016.226 (in Chinese) 19. Zulfiqar, S., Sarwar, B., Aziz, S., Chandia, K. E., & Khan, M. K. (2019). An Analysis of Influence of Business Simulation Games on Business School Students’ Attitude and Intention toward Entrepreneurial Activities. Journal of Educational Computing Research, 57(1), 106-130. doi: https://doi.org/10.1177/0735633117746746

Received 16.04.2019 Received in revised form 27.04.2019 Accepted 29.04.2019 Available online 20.08.2019

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ECONOMIC ANNALS-XXI ISSN 1728-6239 (Online) ISSN 1728-6220 (Print) https://doi.org/10.21003/ea http://www.soskin.info/ea/

Volume 176 Issue (3-4)’2019

Citation information: Derenska, Ya. (2019). Approaches to project portfolio formation by pharmaceutical products producers. Economic Annals-XXI, 176(3-4), 99-108. doi: https://doi.org/10.21003/ea.V176-10

UDC 65.012.23:658.512(75)

Yana Derenska PhD (Economics), Associate Professor, National University of Pharmacy 18 O. Nevskyi Str., Kharkiv, 61140, Ukraine [email protected] ORCID ID: https://orcid.org/0000-0001-7428-6249

Approaches to project portfolio formation by pharmaceutical products producers

Abstract Introduction. The pharmaceutical market is characterized by a stable annual growth of 5-6%. According to the results of sales in 2018, the key domestic producers of pharmaceutical products were PJSC «Farmak» (the market share was 5.4%; the sales growth was 20.7%, compared to the previous year), Arterium Corporation (the market share - 3.5%; the sales growth - 17.6%), PrJSC «Pharmaceutical Firm «Darnitsa» (the market share - 3.27%; the sales growth - 15.3%), the Group of Companies «Zdorovya» (the market share - 2.32%; the sales growth - 12.4%). The successful functioning of a modern enterprise largely depends on its ability for sustainable development by means of introducing innovations, developing new products and adopting effective models of management. All these activities require that an enterprise adopts a project approach. As the number of projects is growing, alongside with their cost and life cycle, it is becoming increasingly important to implement the concept of portfolio management. The present research outlines different approaches to creating a project portfolio and describes instruments that can help enterprises select an effective combination of projects in a portfolio. The object of the research is the project activity of a «Pharmaceutical Company «Zdorovya». In order to achieve the purpose of the research, the author applies multiple criteria weighted ranking and cluster analysis. Methods. Multiple criteria weighted ranking is used on the first stage of project evaluation in order to define its ranking (priority). The method of multidimensional classification, as well as cluster analysis in particular, is used to divide all the projects into groups. The advantage of cluster analysis lies in the fact that it allows businesses to group projects according a great number of miscellaneous parameters. Joining (tree clustering) and K-means clustering methods are employed with the help of STATISTICA software. Ward’s method as amalgamation (linkage) rule and Euclidean distances as distance measure are also applied as methods of cluster formation. Results. Project ranking based on the level of risk, the investment cost, the net present value, the profitability index and the discounted payback period allowed the author to define the priority of each project and suggest recommendations as to how they should be included into the portfolio of projects. Nine projects were considered in order to create a project portfolio for a pharmaceutical enterprise. Multiple criteria weighted ranking shows that Project 3 has the highest priority. The conducted clasterisation revealed three clusters of projects that characterise different directions in the process of starting a modern pharmaceutical manufacturing facility (Cluster 3), launching a new medicine into the market (Cluster 2) and expanding the existing range of products (Cluster 1). Conclusion. While forming a project portfolio, it appears worthwhile to use a combination of three parameters: risk, effectiveness and cost. Additively, which is characteristic of net present value criterion, allows businesses to select the most effective combinations of projects in their portfolio. Based on the results of calculations, it is recommended to form a portfolio of 4 projects with a net present value of EUR 179,501. Keywords: Project; Project Priority; Project Portfolio Management; Multiple Criteria Ranking; Project Portfolio Clusters JEL Classification: G11; H33; O21; O22 Acknowledgements and Funding: The author received no direct funding for this research. Contribution: The author contributed personally to this work. DOI: https://doi.org/10.21003/ea.V176-10

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Деренська Я. М. кандидат економічних наук, доцент кафедри управління та економіки підприємства, Національний фармацевтичний університет, Харків, Україна Підходи до формування проектного портфелю фармацевтичних виробників Анотація. У статті розглянуто особливості інвестиційного розвитку сучасного фармацевтичного підприємства шляхом впровадження концепції проектного менеджменту, у межах якого здійснюється відбір кращих для виконання проектів. Метою дослідження є визначення підходів до формування проектного портфелю, а також інструментів, які дозволяють здійснити відбір ефективних комбінацій проектів у портфелі. Для розв’язання поставленої мети автором використано багатокритеріальне ранжування й кластерний аналіз. Ранжування проектів за критеріями: рівень ризику, інвестиційні витрати, чиста поточна вартість, індекс рентабельності, дисконтований період окупності дозволили визначити пріоритет кожного проекту й надати рекомендації щодо подальшого їх розгляду у межах проектного портфелю. З метою формування проектного портфелю фармацевтичного підприємства групи компаній «Здоров’я» досліджувалися такі проекти: «Модернізація ампульного цеху»; «Створення сучасного фармацевтичного виробництва та модернізація існуючого згідно стандартів GMP»; «Виведення на ринок препарату проти похмілля»; «Реєстрація лікарських засобів у В’єтнамі»; «Реєстрація анестетиків для стоматології у Німеччині»; «Розширення виробництва дерматологічного крему протизапальної дії»; «Розширення виробництва дерматологічного крему для лікування грибкових інфекцій»; «Розширення виробництва препарату для лікування мігрені»; «Розширення виробництва препарату для лікування кашлю та застудних захворювань». У результаті проведеної кластеризації визначено три кластери проектів, що характеризують напрями створення сучасного фармацевтичного виробництва, виведення на ринок нового препарату й розширення випуску існуючих видів продукції. Для формування варіантів проектних портфелів рекомендується застосовувати комбінацію параметрів ризик − ефективність − вартість. За результатами розрахунків рекомендовано сформувати портфель із 4-х проектів із сумою чистої поточної вартості 179501 євро. Ключові слова: проект; пріоритетність проектів; управління проектним портфелем; багатокритеріальне ранжування; кластери проектного портфелю.

Деренская Я. Н. кандидат экономических наук, доцент кафедры управления и экономики предприятия, Национальный фармацевтический университет, Харьков, Украина Подходы к формированию проектного портфеля фармацевтических производителей Аннотация. В статье рассмотрены особенности инвестиционного развития современного фармацевтического предприятия путем внедрения концепции проектного менеджмента, в рамках которой осуществляется отбор лучших для реализации проектов. Целью исследования является определение подходов к формированию проектного портфеля, а также инструментов, позволяющих осуществить отбор эффективных комбинаций проектов в портфеле. Для решения поставленной цели автором использованы методы многокритериального ранжирования и кластерного анализа. Ранжирование проектов по критериям, таким как уровень риска, инвестиционные затраты, чистая текущая стоимость, индекс рентабельности, дисконтированный период окупаемости позволило определить приоритет каждого проекта и дать рекомендации по дальнейшему их рассмотрению в рамках проектного портфеля. В результате проведенной кластеризации определены три кластера проектов, характеризующие направления создания современного фармацевтического производства, вывод на рынок нового препарата и расширение выпуска существующих видов продукции. Для формирования вариантов проектных портфелей рекомендуется применять комбинацию параметров риск − эффективность − стоимость. По результатам расчетов рекомендуется сформировать портфель из 4-х проектов с суммой чистой текущей стоимости 179501 евро. Ключевые слова: проект; приоритетность проектов; управления проектным портфелем; многокритериальное ранжирование; кластеры проектного портфеля.

1. Introduction The sustainable development of any modern enterprise and maintaining its market positions requires constant effort. The integral part of this effort is the ongoing implementation of innovative approaches to management where project management is a crucial component. The necessity to adopt the concept of project management remains relevant for Ukrainian pharmaceutical enterprises due to strict requirements for the quality of project implementation. It is caused by the specifics of conducting research, the requirement to adhere to good manufacturing practices in manufacturing, and legal aspects in the registration of medicines. On the other hand, severe lack of time and resources requires a profound analysis of the cost-effectiveness of each particular project. Usually, businesses implement several or even dozens of projects simultaneously. Pro- ject selection is a challenging task as it is important to forecast the consequences of possible

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combinations of projects and their mutual influence on the effectiveness and security of the project portfolio in general.

2. Brief Literature Review Issues of project portfolio management are considered in the works by foreign scientists, such as M. Lappe and K. Spang (2014) [1], A. Jordan (2016) [2], M. Wood (2017) [3], O. Zwikael, Ying-Yi Chih and J. R. Meredith (2018) [4] and others. It is essential to mention J.-P. Paquin, D. Tessier and C. Gauthier (2015) [5], M. M. Sharifi and M. Safari (2016) [6], R. Bayney (2017) [7], G. Locatelli, M. Mikic, M. Kovacevic, N. Brookes and N. Ivanisevic (2017) [8], as well as V. Shnaydman (2018) [9] among the scholars who investigated the project priority. A Guide to the Project Management Body of Knowledge (2008) [10] defines a portfolio as a selection of projects and programs that are united together so that these projects can be ma naged in a more efficient way in order to achieve certain strategic goals. The connection bet ween project portfolio and business strategy is also highlighted in the Standard for Portfolio Management (2008) [11]. That is why the evaluation of each component of the portfolio starts with the analysis of how a particular project contributes to the strategic goals of the company. This evaluation can be descriptive (e.g. the project fully complies with the strategic goals; the goal can be achieved partially; the project only slightly contributes to the achievement of the strategic goals) or quantitative (the extent of goal achievement can be measured by points or by a simple scale: 1 - the project complies with the strategic goal; 0 - it does not). However, the objective evaluation of portfolio components should rely on several parameters. Traditionally, projects are evaluated according to financial benefits criteria such as net present va lue of the project (NPV), discounted payback period (DPP), investment rate of return (IRR), profi tability index (РІ) and return on investment (ROI). Apart from that, the Standard for Portfolio Ma nagement (2008) recommends to use business criteria, risk-related criteria, regulatory compliance criteria, marketing and technical criteria to evaluate the portfolio components. Various calculation and graphic models are applied to make sure that all the necessary criteria are taken into conside ration. Some of the most widely spread calculation models for project evaluation are single criterion prioritisation model, scoring model comprising weighted key criteria and multiple criteria weighted ranking. The results of evaluation are visually presented with the help of graphical comparison based on two criteria. It is worth mentioning that the main peculiarity of project portfolio formation is the necessity to evaluate projects by multiple criteria. Y. Hadad et al. (2016) [12] suggest ranking project activity by duration (in particular the activity cri ticality index, the cruciality index, the coefficient of variation, the significance index and the rank po- sitional weight) and costs (in particular the cost and the expenditure rate). This approach allowed the authors to compile pairwise matrices in order to determine weighted ranking of the selected criteria. A. V. Katrenko et al. (2013) [13] developed a two-stage procedure of project portfolio formation. During the first stage, appropriate project portfolios are selected according to the Pareto principle (the quality of portfolios is considered taking into account the limited availability of resources). During the second stage, project portfolios are finally selected according to the method of analytical hierarchy, i.e. by taking into consideration the general strategic aim of the enterprise. K. Benaija and L. Kjiri (2014) [14] also suggest selecting projects for the portfolio in two stages. The first stage involves a bivariate analysis that combines risk-value-alignment parameters. These three parameters are considered together in order to evaluate projects and create a relevant scale, which helps to evaluate the potential and decide whether a project should be added to the portfolio. Besides, K. Benaija and L. Kjiri estimate the strategic value of the project, i.e. the extent at which it helps to achieve the key benefits for the enterprise. According to V. M. Molokanova (2011) [15], a modern way of project portfolio formation is based on value, which means that added value maximisation is the main criterion. The scholar suggests employing an additive general criterion, which takes into account multiplier normalised criteria and the degree of their importance. There are certain limitations for each of the criteria (e.g. budget, resources, time) in order to optimise linear programming. This model helps to rank projects by the target parameter which is the maximization of the aggregate value of the portfolio. Portfolios which are more focused on profit growth should be evaluated by the criteria of investment (e.g. NPV, DPP,

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PI, ROI), whereas socially-oriented or mixed portfolios should be evaluated according to a larger variety of criteria. Another model of selecting portfolios takes into account their social component. O. Ye. Fedoro- va and O. L. Zhyrov (2015) [16] suggest using three criteria: financial (volume of investment, taxes, pecuniary advantage), social (usefulness, non-tangible benefits) and risk (chances of successful implementation, time, rate of economic alternative). A. T. de Almeida and M. D. Duarte (2011) [17] apply the matrix method in order to combine profit from implementing a project with the additional profit which this project can bring within the portfolio. In other words, a project portfolio is expected to show a certain synergy effect. B. Canbaz and F. Marle (2016) [18] also recommend to evaluate portfolio components with the help of matrices that reflect interconnected resources, benefits and probability of success. Matrix-based management of project portfolios is also supported by Y. M. Teslia and T. V. Latysheva (2016) [19] who use it in order to coordinate portfolio activities of an enterprise. In order to create matrices of investment strategies, T. Ivanenko et al. (2018) [20] believe that it is important to evaluate investment projects and make investment decisions on the basis of a number of financial criteria (NPV, DPP, РІ, and IRR) and risk criteria (Wald’s maximin, Maximax, Hurwicz’s criterion, Laplace’s criterion, Bayes-Laplace insufficient reason criterion, Hodges-Lehmann criterion). An interesting approach is proposed by M. Y. Hrytsiuk and L. I. Maksymiv (2010) [21], which involves building a REV-diagram based on three components, such as risk, efficiency and cost. The analysis of project combinations according to these criteria allows businesses to select the most effective project portfolios. Despite a considerable number of studies, the problem of project portfolio evaluation and selection never loses its relevance. On the one hand, it is explained by the fact that a large number of projects undertaken by enterprises calls for portfolio-oriented approach in business administration. On the other hand, the use of complicated mathematical models for project assessment is not really feasible due to insufficient organisational maturity of Ukrainian enterprises coupled with a lack of time and resources allocated for taking project-related decisions. On the other hand, when choosing criteria for evaluating portfolio components, one should also consider the industry-specific peculiarities of the projects under implementation.

3. The purpose of the article is to suggest different ways of how projects can be grouped and evaluated before being included into a project portfolio. The research also gives recommendations about the feasibility of different project portfolio combinations taking major Ukrainian pharmaceutical enterprises as a reference.

4. Results The pharmaceutical market is characterised by a stable annual growth of 5-6% and, according to forecasts, will increase by 34% next 5 years (2018) [22]. In Ukraine, the volume of sales of pharmaceutical products in 2017 increased by 20% in money or by 7% in packages. Over the past ten years, Ukrainian pharmaceutical companies have increased sales 9 times - from EUR 111.7 million to EUR 880.2 million. Today, the sector is also characterised by a significant increase in the share of domestic companies’ market. In 2010, Ukrainian manufacturers of medicines had 54.5% as a market share; however in 2017 their share rose to 73.5%. The pharmaceutical industry is characterised by a significant number of enterprises, 115 companies have licenses for the manufacture of medicines (2018) [23]. A significant number of manufacturers of pharmaceutical products results is the small market share each of them. According to the results of the sales in 2018, the key domestic producers of pharmaceutical products were: • PJSC «Farmak» (the market share was 5.4%; the sales growth was 20.7%, compared to the previous year), • Arterium Corporation (the market share - 3.5%; the sales growth - 17.6%), • PrJSC «Pharmaceutical Firm «Darnitsa» (the market share - 3.27%; the sales growth - 15.3%), • the group of companies «Zdorovya» (the market share - 2.32%; the sales growth - 12.4%) (2019) [24]. Since 2010, PJSC «Farmak» has been the leader of the pharmaceutical market in Ukraine and the largest exporter of medicines thanks to product quality and innovation. It is a Ukr ainian manufacturer complying with European standards. According to the official site of the com-

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pany (https://farmak.ua) its product portfolio consists of 220 names of medicines. In 2018, PJSC «Farmak» brought to the market 34 new nomenclature positions, which are 17 brands. A quarter of the company’s products is exported to more than 20 countries of the world, including the CIS and the EU countries, such as Poland, Slovakia, and Germany. Farmak’s strategic goal is to expand its foreign economic activity. By 2020, the company plans to increase the share of exports to 40%, while remaining the leader of the Ukrainian market. Arterium Corporation was established in 2005. It integrates two Ukrainian companies «Kievmedpreparat» and» Galychpharm», which have over 150 years of pharmaceutical manu facturing experience. According to the official site (http://www.arterium.ua), there are more than 150 medicines in the company’s product portfolio. With representative offices in Azerbaijan, Belarus, Kazakhstan, Russia and Uzbekistan, Arterium Corporation is committed to becoming a regional market leader in all these countries. It exports products to 11 CIS countries and Vietnam. The share of export in the company’s income is 25%. PrJSC «Pharmaceutical Firm «Darnitsa» is a domestic producer of medicinal products, having long-standing pharmaceutical traditions. The company was established in 1938. According to the official site of the companyhttp://www.darnitsa.ua ( ), «Darnitsa» produces more than 250 names of medicines. In 2016 «Darnitsa» manufactured the greatest number of products in the form of pills - 121,578,463 packs. The modern development strategy of «Darnitsa» is primarily aimed at strengthening the company’s market leadership and competitiveness, based on increasing the performance of the organisation, introduction of innovations in production and management, personnel development, working out and updating of the product portfolio. The object of the research is the project activity of the «Pharmaceutical Company «Zdorovya». This is a modern high-tech enterprise whose production level meets all international requirements applied to medicines. According to the official site of this enterprise (https://zt.com.ua), the company produces more than 250 names of medicines; more than 50 medicines are in development. The sales are greater by 30%, compared to the previous year. More than 20% of the entire volume of sales accounts for exports. Company exports to 21 countries of the world. The amplification of the investment activity of the company in 2016-2018 revealed a need to use the project management tools. The example of the enterprise data shows recommendations for reviewing the current portfolio of projects (the end of 2018). In order to create a project portfolio for a pharmaceutical enterprise, the following projects were considered: 1 - «Ampule shop floor modernisation» (2019-2020); 2 - «Establishing a modern pharmaceutical manufacturing facility and renovating the existing one according to GMP standards» (fundamental project, 2016-2021); 3 - «Launching a new hangover remedy into the market» (2019-2021); 4 - «Registration of medicines in Vietnam» (2019-2021); 5 - «Registration of dental anaesthetics in Germany» (2019-2021); 6 - «Expansion of production of anti-inflammatory dermatological cream» (2019-2020); 7 - «Expansion of production of antifungal dermatological cream» (2019-2021); 8 - «Expansion of production of medicine for migraine» (2019-2021); 9 - «Expansion of production of medicine for cough and cold» (2019-2020). According to the best practices of project management, each investment project was evaluated by key performance indicators: NPV, PI, and DPP. Due to limited funding, the cost of investment was also considered as an important parameter for project evaluation. The industry-specific peculiarities of the projects are reflected in the level of risk which is estimated depending on the complexity, variability and standardisation of works carried out under the project. Table 1 displays the results of project evaluation and ranking. Multiple criteria weighted ranking shows that Project 3 has the highest priority. Projects 1 and 6 are both ranked as second best. They are followed by Projects 8 and 9. Project 2 turns out to be the least attractive. However, this is a fundamental project for the enterprise, which explains its high cost, long-term payback period and a high level of risk. Joining (tree clustering) method was employed to unite projects into clusters. The results are reflected in the tree diagram on Figure 1. The horizontal axis of the tree diagram shows all the projects that were analysed (С1…С9, or case 1…case 9, which stand for Project 1…Project 9). The vertical axis reflects the distance measure. Following this principle, Projects 4 and 5 were the first projects to be joined together as

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Table 1: Multiple criteria weighted evaluation and ranking of the 9 prospective pharmaceutical enterprises’ portfolio projects

Source: Compiled by the author

Figure 1: Tree diagram of the project portfolio clusters Source: Compiled by the author based on calculated data in the programme STATISTICA the distance between them is minimal. After that, Projects 6-9 were added to this cluster as well. Another cluster contains Projects 1 and 3. And there is one more cluster which is represented by Project 2 alone. The mean values and standard deviations for each project that was part of cluster analysis are presented in Table 2. Having united the projects into groups according to K - means clustering method, it was discovered that the first cluster includes Projects 1 and 3. What is characteristic of these projects is that they both have considerable NPV, high PI and moderate DPP and the average level of

Table 2: Means and standard deviations (cluster analysis) of the prospective pharmaceutical enterprises’ portfolio projects

Source: Compiled by the author based on calculated data in the programme STATISTICA

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risk. Therefore, it is recommended to add these projects into the portfolio. The second cluster (Projects 4 - 9) has a bigger variance of parameter values. This cluster involves projects with a predominantly low level of risk, low cost of investment, low NPV, moderate DDP (except Pro- ject 9), and average PI. Project 2 that belongs to the third cluster requires considerable funding, high NPV, high level of risk, long DPP, and low РІ. All the characteristic peculiarities of clusters are presented in Tables 3-5. A well-balanced portfolio in terms of its performance, investment resources and level of risk can be achieved if it contains projects belonging to different clusters. In this respect, it is recommended to include Project 2 (which is fundamental for the enterprise), Projects 1 and 3 (as the most effective ones) and partially some projects that belong to cluster 2. Considering the results of the multiple criteria weighted ranking, it also appears worthwhile to include Projects 6, 8, 9 to the portfolio and suspend Projects 4, 5, and 7. In order to define possible combinations of projects in the portfolio and predict their outcomes, the overall level of risk was estimated together with investment cost and NPV (see Table 6). The V - risk parameter describes the risk level of a particular project within the portfolio, and it is defined as the relative risk weight of a project within the general sum of all risk levels of all the projects within the portfolio. Considering possible combinations of projects within the portfolio (63 variants) requires tho rough analysis, taking into account the correlation between the cost of investment and the obtained result. The following dependency appears logical: bigger amount of investment higher NPV. To make the analysis even easier, all the expected effects of project portfolio implementation with different investment and V - risks are reorganised starting with the lowest NVP (see Table 7). The project portfolios marked in bold are those that are not recommended for implementation because they violate the principle according to which bigger investment should lead to higher effectiveness. In other words, it is not recommended to choose projects where bigger investment does not guarantee higher NPV in comparison with other portfolio combinations. Likewise, it is not worthwhile to form portfolios that only contain one or two projects. As it was mentioned above, it is recommended to include Projects 1, 2, 3 into the portfolio and later analyse combinations with

Table 3: Descriptive statistics for Cluster 1. Cluster contains 2 cases

Source: Compiled by the author based on calculated data in the programme STATISTICA

Table 4: Descriptive statistics for Cluster 2. Cluster contains 6 cases

Source: Compiled by the author based on calculated data in the programme STATISTICA

Table 5: Descriptive Statistics for Cluster 3. Cluster contains 1 case

Source: Compiled by the author based on calculated data in the programme STATISTICA

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Projects 6, 8, 9. In the first place, it is advisable to implement Project 9, followed by Project 6 and project 8 (Portfolios 6.17; 6.30; 6.32 respectively).

5. Conclusion Studying current approaches to project evaluation in the process of project prioritisation and selection for project portfolio pointed to the conclusion that project evaluation involves multiple

Table 6: Estimated values of various parameters after project portfolio implementation taking into account V-risks factor

Source: Calculated by the author

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Table 7: Variability of expected effects after project portfolio implementation with different amount of investment andV -risks

Notes: * - portfolios the effectiveness of which does not comply with the recommended dependency «cost of investment - effectiveness» but that cannot be excluded because they contain Project 2.

Source: Calculated by the author criteria. However, in most cases, decisions on whether an investment project should be added to a portfolio almost entirely depends on financial criteria, in particular NPV, DPP, PI, and the level of risk. At the same time, a larger range of criteria for portfolio components requires more flexible approaches. The paper suggests uniting projects into groups by means of cluster analysis, whose main advantage is the possibility to apply miscellaneous criteria to project description. In order to determine

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possible combinations of projects within a portfolio, it is recommended to consider parameters such as cost, risk and effectiveness at the same time. Practical application of this approach helps to identify and reject project portfolios that may violate the principle of direct correlation between cost of investment and effectiveness.

References

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The Effectiveness of Portfolio Risk Diversification: An Additive Approach by Project Replication. Project Management Journal, 46(5), 94-110. doi: https://doi.org/10.1002/pmj.21526 6. Sharifi, M. M., & Safari, M. (2016). Application of Net Cash Flow at Risk in Project Portfolio Selection. Project Management Journal, 47(4), 68-78. doi: https://doi.org/10.1177/875697281604700406 7. Bayney, R. (2017, November 29). Project Prioritization: Quantifying the Cost of Strategy. Retrieved from https://www.projectmanagement.com/articles/421015/Project-Prioritization--Quantifying-the-Cost-of-Strategy 8. Locatelli, G., Mikic, M., Kovacevic, M., Brookes, N., & Ivanisevic, N. (2017). The Successful Delivery of Megaprojects: A Novel Research Method. Project Management Journal, 48(5), 78-94. doi: https://doi.org/10.1177/875697281704800506 9. Shnaydman, V. (2018, May 21). Practical Portfolio Optimization. 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Projects’ portfolio formation using two-step procedure. Informatsiyni Systemy ta Merezhi (Information Systems and Networks), 770(1), 169-176. Retrieved from http://science.lp.edu.ua/sites/default/files/Papers/22_129.pdf (in Ukr.) 14. Benaija, K., & Kjiri, L. (2014). Project portfolio selection: Multi-criteria analysis and interactions between projects. International Journal of Computer Science Issues, 11(6), 134-143 Retrieved from https://arxiv.org/ftp/arxiv/papers/1503/1503.05366.pdf 15. Molokanova, V. M. (2011). Problems of forming a strategic portfolio of projects. Upravlinnia Rozvytkom Skladnykh System (Management of Complex Systems Development), 7, 44-47. Retrieved from http://www.knuba.edu.ua/doc/urss7/urss_7!!/44-47.pdf (in Ukr.) 16. Fedorova, О. Ye., & Zhyrov, O. L. (2015). Modeling investment portfolio choice considering social component. Ekonomichnyi Visnyk NTUU «KPI» (Economic Bulletin of NTUU «KPI»), 12, 526-531. Retrieved from http://ela.kpi.ua/bitstream/123456789/14205/1/77.pdf (in Ukr.) 17. de Almeida, A. T., & Duarte, M. D. O. (2011). A multi-criteria decision model for selecting project portfolio with consideration being given to a new concept for synergies. Pesqui. Oper, 31(2), 301-318. doi: https://doi.org/10.1590/S0101- 74382011000200006 18. Canbaz, B., & Marle, F. (2016). Construction of project portfolio considering efficiency, strategic effectiveness, balance and project interdependencies. International Journal of Project Organisation and Management, 8(2), 103-126. Retrieved from https://hal.archives-ouvertes.fr/hal-01206933v2/document 19. Teslia, Y. M., & Latysheva, T. V. (2016). Development of conceptual frameworks of matrix management of project and programme portfolios. Skhidno-Ievropeiskyi Zhurnal Peredovykh Tekhnologii (Eastern-European Journal of Enterprise Technologies), 79(3), 12-18. doi: https://doi.org/10.15587/1729-4061.2016.61153 (in Ukr.) 20. Ivanenko, T., Hrushko, V., & Frantsuz, A. (2018). Optimal investment decision making on the model of production enterprise with limited resources. Investment Management and Financial Innovations, 15(4), 61-68. doi: https://doi.org/10.21511/imfi.15(4).2018.05 21. Hrytsiuk, M. Y., & Maksymiv, L. I. (2010). An account of risks in the task of management the projects portfolio of tourist industry development in the Ukrainian Carpathians region. Naukovyi Visnyk NLTU Ukrainy (Scientific Bulletin of UNFU), 20(11), 48-61. Retrieved from http://tourlib.net/statti_ukr/grycjuk2.htm (in Ukr.) 22. Center for Contemporary China «TianXia Link» (2018, September 12). Competition in the global pharmaceutical market is better to overcome together. Retrieved from http://www.tianxia.link/uk/article/7141-konkurientsiiu-na-svitovomu- farmatsievtichnomu-rinku-krashchie-dolati-spil-no (in Ukr.) 23. Vashe Zdorovya (2018, December 12). Ukrainian pharmaceutical market demonstrates rapid growth. 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ECONOMIC ANNALS-XXI ISSN 1728-6239 (Online) ISSN 1728-6220 (Print) https://doi.org/10.21003/ea http://www.soskin.info/ea/

Volume 176 Issue (3-4)’2019

Citation information: Slaba, M. (2019). Factors influencing customer loyalty towards mobile phones brands - evidence from the Czech market. Economic Annals-XXI, 176(3-4), 109-117. doi: https://doi.org/10.21003/ea.V176-11

Marie Slaba PhD (Management), College of Polytechnics Jihlava 16 Tolstého Str., Jihlava, 586 01, Czech Republic [email protected] ORCID ID: https://orcid.org/0000-0001-9607-1521

Factors influencing customer loyalty towards mobile phones brands - evidence from the Czech market

Abstract. The concept of customer loyalty has started to become very important in all spheres and attracted lots of attention in the last decades. Building customer loyalty has become a vital element to achieve competitive advantage and long-term profitability. This article aims to examine the proposed factors influencing customer loyalty toward mobile phone brands and analyse the relationship among different factors for customer loyalty at the mobile phone market in the Czech Republic. The quantitative research was done with a sample of 350 customers in 2018, specifically mobile phone users to determine critical factors influencing customer loyalty in the mobile phone market and the relationship between the proposed factors and customer loyalty. The author’s research revealed a positive correlation between trust, satisfaction, experience, promotion and perceived quality and loyalty at the confidence level of at least 95%. Keywords: Consumer Loyalty; Mobile Phone Market; Trust, Customer Experience; Promotion; Customer Satisfaction; Perceived Quality JEL Classification: M30; M31; M39 Acknowledgements and Funding: The author received university funding for this publication. Contribution: The author contributed personally to this work. DOI: https://doi.org/10.21003/ea.V176-11

Слаба М. кандидат економічних наук, Висока політехнічна школа Їглави (Їглавський політехнічний університет), Їглава, Чеська Республіка Фактори, що впливають на лояльність клієнтів до брендів мобільних телефонів (на прикладі чеського ринку) Анотація. За останні десятиліття концепція лояльності клієнтів набула більшої значущості й привернула до себе увагу в усіх сферах діяльності. підвищення рівня лояльності клієнтів стало життєво важливим фактором, що сприяє набуттю конкурентних переваг і забезпеченню тривалої прибутковості. Метою цієї статті є вивчити фактори, що впливають на лояльність клієнтів до брендів мобільних телефонів, і проаналізувати взаємозв’язок між різними факторами лояльності на ринку мобільних телефонів у Чеській Республіці. Кількісне дослідження з вибіркою з 350-ти осіб було проведено в 2018 році. У вказане число респондентів було включено користувачів мобільних телефонів для того, щоб визначити критичні фактори, що впливають на лояльність клієнтів на ринку мобільних телефонів, а також установити взаємозв’язок між цими факторами та лояльністю клієнтів при рівні довіри не менше 95%. Ключові слова: лояльність клієнтів; ринок мобільних телефонів; довіра; клієнтський досвід; просування; задоволеність клієнтів; сприйнята якість.

Слаба М. кандидат экономических наук, Высокая политехническая школа Иглавы (Иглавский политехнический университет), Иглава, Чешская Республика Факторы, влияющие на лояльность клиентов к брендам мобильных телефонов (на примере чешского рынка)

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Аннотация. За последние десятилетия концепция лояльности клиентов приобрела большую значимость и привлекла к себе внимание во всех сферах деятельности. Укрепление лояльности клиентов стало жизненно важным фактором для приобретения конкурентных преимуществ и обеспечения долгосрочной прибыльности. Целью данной статьи является изучить факторы, влияющих на лояльность клиентов к брендам мобильных телефонов, и проанализировать взаимосвязь между различными факторами лояльности на рынке мобильных телефонов в Чешской Республике. Количественное исследование с выборкой из 350-ти лиц было проведено в 2018 году. В указанное число респондентов были включены пользователи мобильных телефонов для того, чтобы определить критические факторы, влияющие на лояльность клиентов на рынке мобильных телефонов, а также установить взаимосвязь между данными факторами и лояльностью клиентов. В ходе проведения исследования была выявлена положительная корреляция между доверием клиентов, их удовлетворенностью, опытом, продвижением бренда на рынке, воспринимаемым качеством и лояльностью клиентов при уровне доверия не менее 95%. Ключевые слова: лояльность клиентов; рынок мобильных телефонов; доверие; клиентский опыт; продвижение; удовлетворенность клиентов; воспринимаемое качество.

1. Introduction A strong competitive environment forces companies not only to sell their goods but also to focus on the long-term relationship with their customers and mainly to build a long-term relationship with loyal customers. Loyal customers are the first ones who can spread their positive experience regar ding the product. The importance of customer loyalty reflects the rising attention paid to this concept in recent years by researchers, practitioners and businesses. Therefore, many authors consider customer loyalty as one of the most fundamental constructs in marketing and management effort. Cus- tomer loyalty positively affects long-term customer relationships, repeat purchases, and profitability (Caruana, 2003). Keeping existing loyal customers is much less demanding than getting new ones (Bravo, Matute, & Pina, 2010). The studies have shown that increasing customer loyalty by 5% can lead to an increase in profitability of up to 25%, depending on the specificities of the individual’s business activities. For example, it has been shown that profitability increased by 125% in the credit card sector in the 1990s (Reichheld & Sasser, 1990). Several researchers suggest that customer loyalty routinise the consumers’ purchase of the product or brand, and it represents a force that resists the consumers’ willingness to shift to other brands. Thus, we can state that the value of any brand increases as much as customer loyalty to the specific brand (Yoo et al., 2000; Travis, 2000). As stated by Athanasopoulou (2009), achieving customer loyalty is only possible through the development of long-term and mutually beneficial relationships between a company and its customers. Acquiring customer loyalty and long-term success of the company is based on the perfect knowledge and ability to quickly respond to the changing customer needs and factors that influence customer loyalty. Bayraktar et al. (2012, p. 99) claim that «A key motivation for the fast-growing emphasis on customer satisfaction and loyalty can be attributed to the fact that higher customer sa tisfaction and loyalty can lead to the stronger competitive position resulting in larger market share and profitability». The mobile phone market has become incredibly competitive due to this continuous growth as well as rapid technology development. Mobile phones are part of people’s daily life and an essential tool of marketing communication. Therefore, researches focusing on the mobile phone market have begun to emerge in recent years. There were 4.15 billion mobile phone users worldwide in 2015. In 2021, the number of mobile phone users is going to exceed 7 billion users (Statista, 2019). There were 5.1 billion unique mobile subscribers in 2018, and the penetration rate reaches 67% of the population, the number of mobile internet users is growing, too (GSMA, 2019). There were 3.6 billion mobile internet users in 2018. The number of smartphone users is growing worldwide. The deve loped countries have the highest smartphone adoption (80% in North America and 72% in Europe) (GSMA, 2019). These facts bring lots of new business opportunities for all companies worldwide. The situation in the Czech Republic is similar. There are 14 million SIM cards, and 58% of the po pulation use smartphones, and 98% of households have access to some mobile phone (Czech Sta- tistical Office, 2017). Based on the facts mentioned above, the author decided to focus on the mobile phone market, the purchasing behaviour of customers on the mobile phone market and the factors that influence the customer behaviour in this market. This article builds on the previous author’s research on consumer behaviour in the mobile phone market. The methodology of prior research was based on selected factors of the Theory of Planned Behaviour and further explores the customer loyalty that is critical to the success of today’s business.

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2. Brief Literature Review Since this article deals with customer loyalty, it is crucial to define what customer loyalty is. F. Reichheld and K. Aspinall (1993) emphasise that any customer who regularly and frequently purchases a specific product over a long period generates highly more revenues to a company and is relatively much cheaper for a company to serve than any other customer. The concept of customer loyalty has been an essential part of researches for many deca des. Customer loyalty is a critical factor for all business entities that have to take it into account during every strategic decision (Auka, Bosire, & Matern, 2013). The customer can be loyal to different objects (e.g. company, brand, store), and this loyalty is shown by positive tendencies and propensities (behavioural or attitudinal) towards these objects. Customer loyalty lite rature contains many definitions, e.g., J. Jacoby and R. Chestnut (1978) cited 53 definitions in their review concerning customer loyalty. The concept of customer loyalty is not a new phenomenon. J. Sheth (1968) dealt with customer and brand loyalty already in the 1960s. J. Sheth (1968, p. 397) defines brand loyalty as «a positively biased emotive, evaluative and/or beha vioural response tendency toward a branded, labelled or graded alternative or choice by an individual in his capacity as the user, the choice maker, and/or the purchasing agent». A. Eisin gerich and S. Bell (2006, p. 89) define customer loyalty as an «as consumers’ intent to stay with an organization and customer commitment that deepens the breadth and depth of a customer’s relationship with a company». We can state that customer loyalty is the customer’s intention to remain a regular customer of the company. D. Gremler and S. Brown (1996, p. 175) define customer loyalty as «the degree to which any customer exhibits repeat purchasing consumer behaviour from a goods or service provider, possesses an important positive attitudinal disposi- tion toward the concrete provider, and considers using this concrete provider when a need for this goods or service arises». Basing on literature search, we can find plenty of researches, studies, articles, etc. which review the determinants of customer loyalty and the factors influencing customer loyalty with different focus (e.g. Mao, 2010; Yang & Peterson, 2004; Haghighi, Dorosti, Rahnama, & Hosein- pour, 2012; Kuusik, 2007, etc.). C. Ong and S. Salleh (2015) deal with customer loyalty of SMEs. Some research papers focus on customer loyalty programs (e.g., Evanschitzky, et al., 2011; Na- stasoiu & Vandenbosch, 2019; Lacey & Sneath, 2006; Ou, Shih, Chen, & Wang, 2011). M. Ismail and N. Safa (2014) try to reveal the factors influencing customer loyalty in electronic commerce. B. Yap, T. Ramayah and W. Shahidan (2012) explore satisfaction, trust and customer loyalty of financial institutions. Based on the literature search, the following factors can be considered as the most important factors affecting customer loyalty at the general level: perceived quality, perceived value, brand equity, satisfaction, trust, switching costs, and experience, quality of services, recommendation, expectation and price sensitivity. In recent decades, more and more researches and articles have been focused directly on customer loyalty in the mobile phone and mobile operator markets (e.g. Bayraktar, et al., 2012; Khundyz, 2018; Dehestani, Zadeh & Noori, 2013; Rasheed & Anser, 2017 and many others). H. Said (2014), S. Donighi and S. Davarpanah (2013); E. Bayraktar, et al. (2012); H. Rasheed and M. Anser (2017) propose to consider the following factors influencing customer loyalty in the mobile phone market: customer expectations, perceived quality, customer satisfaction, perceived and expected value, brand image, trust, price tolerance, repurchase likelihood, brand awareness, promotion, product and services quality. Besides, each business area has certain specific factors that affect customer loyalty in this area. Researches focusing on customer loyalty in banking services revealed as particular factors for customer loyalty, for instance, bank fees or switching costs (e.g. Auka, Bosire, & Matern, 2013; Gecti & Zengin, 2013; Ali, Fu, & Rehman, 2014). Specific factors affecting customer loyalty in the mobile phone market include: brand name, model of mobile phone; usability; interactivity, mobile applications, service quality and style (Azad & Shamser, 2014; Dehestani, Zadeh, & Noori, 2013; Doostdar, Rad, & Mahboobeh, 2013; Lee, et al., 2015; Aydin & Özer, 2005, etc.). The most critical factors that affect customer loyalty in the mobile phone market are as follows: customer satisfaction, trust, expectation, perceived quality, experience and promotion. These factors become part of the author’s research. Although customer satisfaction is seen as one of the most critical factors in customer loyalty and a statistically significant relationship between customer satisfaction and customer loyalty has been demonstrated, it is not always possible to say with confidence that a satisfied customer

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is a loyal customer (Srinivasan, Anderson, & Ponnavolu, 2007). H. Said (2014) revealed that there is a significant positive elationshipr between customer satisfaction and loyalty in the mobile phone market. A satisfied customer should not be a loyal one, even though there is a correlation between satisfaction and loyalty, for example, if the customer lacks the trust toward the company, or if the price does not meet the needs of the customer. On the other hand, any unsatis- fied customers should be a loyal one due to the commitment and attachment with the company (Megdadi, Aljaber, & Alajmi, 2013; Srinivasan, Anderson, & Ponnavolu, 2007). Since the 1990s, many types of research show that trust is another crucial determinant of the customer loyalty (Rasheed & Anser, 2017; Chaudhuri & Holbrook, 2001; Reicheld & Schef ter, 2000; Khundyz, 2018). Either a brand name or a trademark causes a very significant competitive advantage. Customer trust in a brand is always based on the customer positive beliefs regarding customer expectation in the product (Rasheed & Anser, 2017) that results in custo mer loyalty. R. Singh (2016) claims that customer or brand loyalty is nothing more but the provision satisfaction to any customer, and this customer satisfaction derives from the trust of the customer towards a particular product, service or brand. A. Kuusik (2007) found that trust is the most critical determinant to establish loyalty and is directly related to purchasing. Upaman- nyu, Bhakar and Gupta (2015) state that brand trust represents a feeling of safety during any interaction with concrete product or brand and is based on commitment, expectations, and promises in the context of reliability and sense of responsibility toward customer and community welfare. Customer satisfaction and loyalty usually depend on other factors like previous experience, customer expectation, and perceived quality (Megdadi, Aljaber, & Alajmi, 2013). Perceived qua lity is closely related to customer loyalty. Perceived quality is defined as a result of the compa rison that customers make between expectations about service and perception of the way the service has been performed (Chumpitaz & Paparoidamis, 2004). D. A. Aaker (1991) defined perceived quality as customer perception of the quality of the product compared to products of competitors. S. Aydin, G. Özer and Ö. Arasil (2005) argue that product quality represents the overall judgment about superiority and excellence of the product and one of the vital marke ting positioning tools. G. Lodorfos, K. Mulvana and J. Temperley (2006) proved that previous experience is another important determinant of customer loyalty. As F. Reichheld and P. Schef ter (2000) stated, customer loyalty is won through the delivery of customer experience. Nega- tive previous experience with any brand or product or accompanying services can lead in swit ching between products (Brakus, Schmitt, & Zarantonello, 2009). D. Lee et al. (2015) suggest that customer expectation have the potential to influence customer loyalty toward a mobile phone. In several studies, customer expectation is linked to perceived quality (Azad & Shamser, 2014). J. Dotchin and J. Oakland (1994) refer to perceived quality as the extent to which a product or service meets customer expectations or needs. Continuous good promotion is another crucial factor which leads to brand loyalty, since promotion and advertisement build brand awareness and help customers to identify different brands. Promotion helps to establish ideas or perception and positioning in the customer’s mind and represents an essential tool for differentiation (Tabish, Hussain, & Afshan 2017). J. K. Mise and K. Chandrasekar (2013) examined the relationship between promotion and customer loyalty and concluded that well-targeted promotion leads to customer loyalty. A. Azad and R. Shamser (2014) emphasise that any promotional campaign not only attracts a potential customer but builds up an image in the customer’s mind. D. Agra wal (1996) sees optimal promotion and advertising as a defensive tool to build customer loyalty, too. Agrawal’s research (1996) indicates that stronger customer loyalty requires less advertising and promotional activities than weaker customer loyalty. A more significant loyal segment, on the other hand, requires more promotional activities than a smaller one (Agrawal, 1996).

3. The purpose of the paper is to investigate and analyse key elements and factors of custo mer loyalty toward mobile phones in the Czech market. The author deals with the key determinants of customer loyalty - satisfaction, trust, perceived quality, customer experience and promotion. The author tries to reveal the contribution of these factors to customer loyalty. The core aim of this paper is to verify the developed hypotheses that reflect the impact of the proposed factors and answer the main research questions. What are the crucial factors influencing loyalty in the Czech mobile phone market? Is there any statistically significant correlation between proposed factors and customer loyalty in the Czech mobile phone market?

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4. Material and methods Based on the extensive literature search of prior researches, studies and academic papers described above, the author generated the first initial version of the determinants of customer loyalty in the mobile phone market. Most authors focus on satisfaction, trust, perceived quality, customer experience and promotion. Less effort is devoted to customer expectations, and the perceived price and price sensitivity of the customer, which is in negative relationship to customer loyalty and satisfaction, as demonstrated by H. Said (2014). Therefore, the author chose these factors for detailed investigation and research of customer loyalty in the mobile phone market in the Czech Republic. The stated research hypothesis will be empirically tested against primary data collected using a questionnaire survey. The questionnaire involved a standardised set of questions and statements and was anonymous. The questionnaire was divided into two sections. The first part involved the collection of statements for evaluation, and the second part included demographic information of respondents. The author used a five-point Likert scale in the assessment of proposed statements ranging from strongly disagree with scale point 1 to strongly agree with scale point 5. Statements were divided into five groups related to the factors as mentioned above - satisfaction, trust, perceived quality, customer experience and promotion. The last group of statements was devoted to customer loyalty. Data were collected based on simple random sampling. The methodology of this article is based on the previous research by the author, which is based mainly on the study of G. Lodorfos, K. Mulvana and J. Temperley (2006) and also on specific papers and analysis that have been applied to the mobile phone markets on internatio nal markets (e.g. Bayraktar, et al. 2012; Caruana, 2003; Khundyz, 2018; Donighi & Davarpanah, 2013; Dehestani, Zadeh, & Noori, 2013; Rasheed & Anser, 2017; Azad & Shamser, 2014; Doos tdar, Rad, & Mahboobeh, 2013; Lee, et al., 2015; Aydin & Özer, 2005). Based on these resear ches, the statements regarding the chosen factors were identified. Four statements were selec ted for each factor, which was evaluated by the respondents on a five-point Likert scale (for de- tails see Table 1). Based on the literature search, the author stated 5 hypothesis (Table 2). In order to test the stated hypotheses, the regression analysis will be used.

5. Results The questionnaire was randomly distributed among 400 mobile phone users. Out of those, 50 questionnaires were excluded from the final evaluation. The final size for this paper is 350 questionnaires. The demographic profile of respondents is summarised in the Table 3. Out of 350 respondents, 58% were female, and the rest 42% - male. Among respondents, the most represented age groups fell below the age group of 25-24 and 35-44 years. The majority

Table 1: Analysed statements

Source: Own processing

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Table 2: Hypotheses

Source: Own processing

Table 3: Demographic profile of respondents

Note: 1 EUR = 24 CZK Source: Compiled by the author of respondents belong to the income group CZK 20,001-30,000 (38%). Most of the respondents own a Samsung mobile phone (20%), Huawei (16%), Xiaomi (12%) and Apple (11%), followed by Nokia (9%), Lenovo (8%), HTC (6%) and LG (4%). Compared to the research published by Statista.com, Nokia and Lenovo are represented more in the Czech market in comparison to worldwide. First of all, respondents were asked if they were using a mobile phone, since this research focused only on the mobile phone user. All of the respondents, as expected, were mobile phone users. Before the evaluation of statements, the respondents were asked if they were loyal to the brand of mobile phone that they used (the five-point Likert scale was used). The overall customer loyalty toward the mobile phone brand is summarised in Table 4. As we can see, the research proved a high level of customer loyalty toward owned mobile phone brand, as stated in the investigation by A. Azad and R. Shamser (2014).

Table 4: Mobile phone customer loyalty

Source: Author’s research

Standard regression analyses were performed between all proposed factors and customer loyalty. The results of the regression analysis show a very significant positive relationship bet ween customer satisfaction and customer loyalty. Since the p -value in the ANOVA table is less than 0.01 of (p = 0.00011), we can state that there is a statistically very significant relationship between customer satisfaction and loyalty at the 99% confidence level. The correlation coefficient andR -squared statistics support the result. The R -squared statistic indicates that the model, as fitted, explains nearly 97.57% of the variability in customer satisfaction. The value of correlation coefficient (0.98767) indicates a strong relationship between variables. In his -re search, H. Said (2014), revealed similar findings - a significant positive relationship between customer satisfaction and loyalty at the confidence level of 99% (p = 0.0001). The results support K. Lanza (2008), who proves the positive and significant correlation between customer satisfaction and loyalty in his study of automotive brands. The regression results of the research confirm the significant positive relationship between perceived quality and customer loyalty at the confidence level 95%, since the p -value of test performed is less than 0.05. R -squared statistics supported that the model explains nearly 90% of the variability in perceived quality. Similarly, there is a statistically significant positive relationship between trust and loyalty and promotion and loyalty at the confidence level of 99%. The result of a testing relationship between trust and loyalty and promotion and loyalty is supported by the correlation coefficient, as well as by the R -squared statistics. The value of the correlation coeffi cient for promotion (0.8879) indicates a relatively strong relationship between variables, and the R -squared statistics demonstrates that the model, as fitted, explains nearly

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85.57% of the variability in customer satisfaction. The correlation coefficient for trust is much higher (0.9253), as well as the R -squared statistics that demonstrates 90.5% of the variability. The research by H. Rasheed and M. Anser (2017) proved a positive relationship between trust and loyalty at the 95% confidence level (p -value < 0.05) and the strong positive correlation between satisfaction and loyalty and perceived quality and loyalty at the 99% confidence le vel (p -value < 0.01). M. Tabish, S. Hussain and S. Afshan (2017) examined the impact of indivi dual factors on customer loyalty and concluded that customer satisfaction, trust, and promotion have a significant effect on customer loyalty. The strong positive relationship was approved between customer experience and loyalty at the 95% confidence level. 91.4% of the variance in customer experience to customer loyalty was explained by the model (R -square 0.915, correlation coefficient 0.9476).

6. Conclusions Investigating loyalty is a fundamental research issue, as loyalty plays an essential role in achie ving success in very competitive markets and gaining a competitive advantage in practice. Loy- alty is a critical determinant that affects customers, particularly when deciding on switching between different brands and repeated purchases (Inman & Zeelenberg, 2002). Therefore, it is essential to build long-term relationships with customers and support all of the proposed factors. These factors contribute to creating positive customer loyalty, as demonstrated by the author’s research. Results of the author’s research cannot be generalised, since the study was based on a sample of specific mobile phone users. However, the used methodology can be applied to any other area, particular brand or company. All hypotheses stated by the author were approved by the author’s research. The results of the conducted regression analysis demonstrate a statistically significant relationship between all proposed variables (trust, satisfaction, perceived quality, experience, promotion) and customer satisfaction at the confidence level 95% and 99%. As stated in the literature review, there are several specific factors positively affecting customer loyalty in the mobile phone market (brand name, usability, interactivity, the model of the mobile phone, mobile applications or style). This must be taken into account if a company operating in the mobile phone market wants to create a loyal customer base. Furthermore, it should be noted that there are also factors that can negatively affect customer loyalty. H. Said (2014) revealed that customer loyalty has a negative statistically significant correlation with perceived price. Surprisingly sometimes, even though the price is increasing, consumers are going to buy the brand. In this case, the increasing price supports customer loyalty. H. Said (2014) claims that a specific group of customers who are loyal to the brand of a product are willing to buy the product regardless of the increasing price of the product. Therefore, the investigation of the price in a specific market is another essential factor influencing negatively or positively customer loyalty. This article focuses only on the relationship between the proposed factors and customer loyalty. Therefore, further author’s research will focus on other factors (specific factors of the mobile phone market, the impact of the price). References

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Received 23.04.2019 Received in revised form 30.04.2019 Accepted 12.05.2019 Available online 20.08.2019

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ECONOMIC ANNALS-XXI ISSN 1728-6239 (Online) ISSN 1728-6220 (Print) https://doi.org/10.21003/ea http://www.soskin.info/ea/

Volume 176 Issue (3-4)’2019

Citation information: Grosu, V., Anisie, L., Hrubliak, O., & Ratsa, A. (2019). Managerial accounting solutions: Lean Six Sigma application in the woodworking industry. A Practical aspect. Economic Annals-XXI, 176(3-4), 118-130. doi: https://doi.org/10.21003/ea.V176-12

UDC 657.372 Veronica Grosu D.Sc. (Economics), Professor, Stefan cel Mare University 13 Universitatii Str., Suceava, 720229, Romania [email protected] ORCID ID: https://orcid.org/0000-0003-2465-4722

Laureniu Anisie PhD Student (Economics), Stefan cel Mare University 13 Universitatii Str., Suceava, 720229, Romania [email protected] ORCID ID: https://orcid.org/0000-0002-3838-2812 Oksana Hrubliak PhD (Economics), Associate Professor, Yuriy Fedkovych Chernivtsi National University 2 Kotsyubynsky Str., Chernivtsi, 58012, Ukraine [email protected] ORCID ID: http://orcid.org/0000-0002-7198-9747

Alexandr Ratsa PhD (Economics), Assistant Professor, Yuriy Fedkovych Chernivtsi National University 2 Kotsyubynsky Str., Chernivtsi, 58012, Ukraine [email protected] ORCID ID: https://orcid.org/0000-0002-1881-901X Managerial accounting solutions: Lean Six Sigma application in the woodworking industry. A Practical aspect

Abstract. The increasing complexity of business relations in the conditions of increased competition, manifested in the process of allocation and use of economic resources as well as in the process of seizing the outlets, has led to a profound revolution in the field of both management and accounting as the main source of information, being of a significant use in the decision-making process. The configuration and complexity of the functional, technical and organisational structure of economic entities, including the variety of carried out activities and the continuous introduction of advanced technologies, are thefactors that assert managerial accounting as an essential component of the accounting system. In this context, entities are constrained to a rational use of the factors of production in which the consumed resources are minimised and the benefits are maximised. In today’s global context, organisations are trying to find optimal solutions to deliver products or services that add new value, satisfying customer requirements at low cost and high quality. These issues can be answered by various methods, including Kaizen (part of Lean Manufacturing), 5Why, Six Sigma, etc. Kaizen is a Japanese word that means Continuous Enhancement. 5 Whys is a technique used in the Analyse phase of the Six Sigma DMAIC (Define, Measure, Analyse, Improve, Control) methodology. It is the great Six Sigma tool that does not involve data segmentation, hypothesis testing, regression or other advanced statistical tools, and in many cases can be completed without a data collection plan. The concepts and methods to be presented in the paper provide solutions based on complex evaluation and reporting systems. At the same time, the paper also includes some of the experience gained in the process of analysing the activity of a company operating in the woodworking industry. Lean Six Sigma can be used with maximum efficiency by woodworking firms. This enables them to achieve superior sustainable performance. The Lean Six Sigma techniques, among others, improves and accelerates processes, reducing scrap and intermediate stocks. Implemented correctly and continuously, Lean Six Sigma leads to visible improvements in the financial results. Keywords: Six Sigma; DMAIC; Accounting; Manufacturing; Woodworking Industry; Information Technology; Costs JEL Classification: M41 Acknowledgements and Funding: The authors received no direct funding for this research. Contribution: The authors contributed equally to this work. DOI: https://doi.org/10.21003/ea.V176-12

Grosu, V., Anisie, L., Hrubliak, O., & Ratsa, A. / Economic Annals-XXI (2019), 176(3-4), 118-130 © Institute of Society Transformation, 2019

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Гросу В. доктор економічних наук, професор, Сучавський університет імені Штефана чел Маре, Сучава, Румунія Анісіє Л. аспірант, Сучавський університет імені Штефана чел Маре, Сучава, Румунія Грубляк О. М. кандидат економічних наук, доцент, Чернівецький національний університет імені Юрія Федьковича, Чернівці, Україна Раца О. Б. кандидат економічних наук, асистент, Чернівецький національний університет імені Юрія Федьковича, Чернівці, Україна Рішення управлінського обліку: використання технологій Six Sigma в деревообробній промисловості. Прикладний аспект Анотація. Зростаюча складність ділових відносин в умовах загострення конкуренції, що виникає як у процесі розподілу й використання економічних ресурсів, так і захоплення торгових точок, стала рушієм у галузі управління та опосередковано в бухгалтерському обліку. Конфігурація та складність функціональної і техніко-організаційної структур господарюючих суб’єктів, різноманітність діяльності й постійне впровадження передових технологій є факторами, які роблять управлінський облік найважливішим компонентом системи бухгалтерського обліку. У цьому контексті компанії обмежені раціональним використанням факторів виробництва, за яких ресурси мінімізуються, а доходи максимізуються. Підприємства намагаються знайти оптимальні рішення стосовно виробництва продукції або послуг, які створюють нову цінність, що задовольняє вимоги клієнтів щодо низьких витрат і високої якості. На ці виклики можна відповісти різними способами, включаючи Kaizen (частина Lean Manufacturing), 5Whys, Six Sigma тощо. «Каizen» означає «безперервне вдосконалення», 5 Whys - метод, який використовується у фазі «Аналіз» Six Sigma DMAIC. Це відмінний інструмент Six Sigma, який не включає в себе сегментацію даних, перевірку гіпотез, регресію або інші передові статистичні інструменти, і в багатьох випадках його можна виконати без плану збору даних. Поняття та методи, які будуть представлені у статті, здатні забезпечити рішення на основі складних систем оцінки та звітності. Водночас у статті також міститься досвід, отриманий у процесі аналізу діяльності компаній деревообробної промисловості. Ключові слова: Six Sigma; DMAIC; управлінський облік; бухгалтерський облік; інформаційні технології; виробництво; витрати; деревообробна промисловість.

Гросу В. доктор экономических наук, профессор, Сучавский университет имени чел Маре, Сучава, Румыния Анисие Л. аспирант, Сучавский университет имени Штефана чел Маре, Сучава, Румыния Грубляк О. М. кандидат экономических наук, доцент, Черновицкий национальный университет имени Юрия Федьковича, Черновцы, Украина Раца О. Б. кандидат экономических наук, ассистент, Черновицкий национальный университет имени Юрия Федьковича, Черновцы, Украина Решения управленческого учета: применение технологий Six Sigma в деревообрабатывающей промышленности. Прикладнoй аспект Аннотация. Растущая сложность деловых отношений в условиях обострения конкуренции, проявляющаяся как в процессе распределения и использования экономических ресурсов, так и захвата торговых точек, привела к революции в области управления и косвенно в бухгалтерском учете. Конфигурация и сложность функциональной и технико-организационной структуры хозяйствующих субъектов, разнообразие осуществляемой деятельности и постоянное внедрение передовых технологий являются факторами, утверждающими управленческий учет в качестве важнейшего компонента системы бухгалтерского учета. В данном контексте компании ограничены рациональным использованием факторов производства, когда потребляемые ресурсы минимизируются, а выгоды максимизируются. В сегодняшнем глобальном контексте организации пытаются найти оптимальные решения для предоставления продуктов или услуг, которые добавляют новую ценность, удовлетворяя требования клиентов касательно низких затрат и высоког о качества. На данные вызовы можно ответить различными способами, включая Kaizen (часть Lean Manufacturing), 5Whys, Six Sigma и т.п. 5 Whys − метод, используемый на этапе анализа методологии Six Sigma DMAIC. Это отличный инструмент Six Sigma, который не включает в себя сегментацию данных, проверку гипотез, регрессию или другие расширенные статистические инструменты; во многих случаях его можно выполнить без плана сбора данных. Концепции и методы, представленные в статье, предоставляют решения, основанные на сложных системах оценки и отчетности. В то же время в статье также содержится опыт, накопленный в процессе анализа деятельности компании, работающей в деревообрабатывающей промышленности. Ключевые слова: Six Sigma; DMAIC; управленческий учет; бухгалтерский учет; информационные технологии; производство; расходы; деревообрабатывающая промышленность.

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1. Introduction Small and medium-sized enterprises in almost all EU countries constitute inexhaustible wealth, both in terms of knowledge that is concentrated in the work of artisans and specialised operators, and on the opportunities for growth and economic development. However, the current economic and financial situation has forced many of these companies to «lose their ground» or even withdraw from the market. Competition is fierce and the economic survival under such realities usually depends on the ability to create and maintain a delicate balance between the quality and uniqueness of the offered product. The uniqueness and the internal efficiency distinguish this kind of bussinesses from industrial production. Almost all handicraft companies emerge in the manufacturing field and therefore base their own success on the ability to produce something unique and economically sustainable. If the issues of administrative and accounting management can be standardised on the basis of deadlines, regulations and legislative requirements, then it is possible to make a difference in the production process by creating a basis for survival and success on the market. According to a study by PwC Romania, it is important to underline that the direct contribution of the wood industry to the formation of GDP in Romania has been relatively constant over the last decade, ranging between 1.1% and 1.5%. From this point of view, Romania was ranked 9th in 2014 within the European Union (1.1% compared to the EU average of 0.4%). According to a press release, if the indirect and induced effect on the economy is considered, Romania’s forestry and wood processing industry contributes 3.5% to GDP (PWC, 2015). However, the forestry sector and the wood industry in Romania were in the challenging position in the 2013-2018 period in the sense that costly control systems has been implemented, the illegal cuts had been significantly reduced, and the wood industry had evolved. Unfortunately, overregulation that hampers the legal use of resources (wood) has remained unchanged. The transition from reducing the illegal cuts to investment and increasing the volume of legal exploitation has not been achieved yet. Fordaq statistics also show that the small business segment was the most affected, both in the operating sector and in the primary processing and furniture industries. «More than 1,800 small businesses in the mining sector, more than 2,800 of the primary woodworking and over 500 of the furniture industry have arrived with their own capital in the negative area, practically most of them will be in a state of incapacity to pay and they will cease activity. The worst crisis is in the wood exploitation sector, where the disappearance of small businesses makes it increasingly difficult to mobilize the resource from small forestry properties» (Financial Magazine, 2017). Any entity aims to produce and distribute the goods at acceptable prices while being attentive to any competitive pressure that has arisen. The question is not only how to introduce the necessary changes in a way to streamline processes but also how to implement a mechanism that encoura ges direct participation of the whole labour force. A firm will always want to meet competitive criteria with better machinery or a modern design of products. Unfortunately, these advantages are not long-lasting. The disadvantage of classical systems is that they are aimed at producing large quantities of products. Over the life of such systems, they are increasingly influenced by bigger and sophistica ted storage, new handling systems, increasingly complex production lines, all of which are implemented to respond any problem that arises. Another problem is the cost of labour. The use of such complex systems brings an increase in expectations regarding remuneration.

2. Brief Literature Review «Achieving an efficient, flexible and high quality production process is an inevitable challenge for each production company. This requires a well-established strategy, the identification of explicit objectives for the productive function and focused actions to achieve these objectives» (Cagliano & Spina, 2000). One of the most common challenges for those who need to manage a small entity is to find an appropriate level of application of formalised managerial practices and tools that have succeeded in en- forcing a wide range of applicability and have been very successful and in larger companies. Practi- cally, by applying these tools, we strive to standardise and optimise processes, organisational practices and structures to achieve a global economic process that is as efficient and effective as possible across the enterprise. It is important to emphasise that it is not possible to apply these instruments according to the same standards as in large industrial enterprises because it may lead to the destruc- tion of the uniqueness that originally determined the source of success for all small businesses.

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It is known that an enterprise is seen as a set of human, material and immaterial resources, organised in a way to achieve the objectives set for its existence and proper functioning. If we analyse the resources of an enterprise, they can be classified and organised in different ways, when using complementary or alternative methods that take into account different resource characteristics (considered as priority or discriminatives), depending on the objectives of their use, or the way they are used. Choosing one method over another depends on a number of factors, including organisational culture, willingness to change, general vision of the company management and the process of creating internal value, socioeconomic context in which the enterprise competes. Among the various theories, there are two which continue to relate to an adequate examination of the relating issues, namely: functional, which is a historical view resulting from the research of the specialisation developed by Smith, and the one covering more recent processes, which has expanded a lot over the last decades. T. H. Davenport and J. Short (1990) analyse the changes in the production and commercial scenario that led to the application of the Taylor model in search of an alternative model that can respond effectively to the relevant changes. The authors argue that the purpose of Taylor’s revolution at the beginning of the century was to increase the productivity of the organisation by applying the same engineering principles that have so far demonstrated the reliability of solving purely technical problems, to human work. What Taylor created is called industrial engineering. However, in the early 1990s, two information age tools began to transform enterprises to the same levels as Taylor applied industrial engineering principles. In the work by T. H. Davenport and J. Short (1990), these two tools are information technology (the possibilities offered by computers, software applications and telecommunication services) and business process redesign (the analysis and redesign of work resource flows and processes within an organisation). «The ideas and possibilities offered by these two instruments simultaneously have the potential to create a new type of industrial engineering, changing the way they are practiced and the capacity to be practiced» (Davenport and Short, 1990). In addition to the traditional vision of enterprise functions, it was discovered that an organisation attaches to the processes of achieving the goals of enterprise efficiency and effectiveness, both in terms of customer satisfaction and cost reduction. [...] A client- driven process management, capitalising on the human resources present in the enterprise, and continuous attention to innovation are key issues for the enterprise to be competitive (Davoli, 2003). D. Pierantozzi (1998) believes that the enterprise that knows how to successfully change critical processes becomes more efficient, cheaper, faster and, consequently, increases customer satisfaction and loyalty. However, it should be remembered that «process management not only means selecting a supplier and buying software, but above all, adopting a series of methods, a way of thinking and orga nizing work and acquiring skills, issues that are often underestimated [...]. Process analysis means practically focusing on objectives, manufactured products or services provided, and aggregating their activities around them, then assigning responsibility for the end-to-end process, and not on the function that at this moment becomes just an accessory» (Sinibaldi, 2009). A process is a set of structured and measured activities designed to produce a certain output for a particular market or customer (Davenport, 1995). In fact, all processes convert inputs into outputs by executing specific, resource-specific activities, respecting obligations and standards, to meet customer needs. The activities forming a process are «interdependent and aim at achieving a common goal such as identifying for each process the part of value creation for the output recipient, but which, for the process network that makes up the organization, coincides in the end with its values and its objectives The enterprise receives a certain input (of material nature, instructions and requirements of the client) to which it adds value-adding transformations using the organization’s own resources, ie human resources, means of production and structures, transfers to the external environment the required output, product / service information» (De Risi et al., 1999). The process network that is part of the enterprise’s economic context is therefore a practical implementation of the company’s strategies with regard to the final outcome and the way in which the available internal resources are exploited. Each process has a global, unique, complete and relevant input; all the activities that make up this process have a common goal, namely to achieve output. The same output cannot come from different processes, otherwise it would be impossible to identify the origin of this output (Ostinelli, 1995). Regarding the applied methods and the purpose of our work, we will focus only on the analysis of the Six Sigma method, a quality management methodology based on statistical techniques. The

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term sigma, in fact, is a standard deviation of the normal probability distribution, also known as the Gaussian distribution, which governs many physical phenomena. Six Sigma represents a variation from the average production of a process equal to 3.4 defects per million; it is therefore a synonym for the ability to reduce anomalies to a considerable level that cannot be neglected. In the manufacturing or manufacturing sphere it translates to the goal of producing everything in accordance with certain specific requirements, accepting a very small percentage of error. If a single-output standard process is envisaged, we can say that we follow this reasoning when the process itself is able to always produce identical outputs, according to established requirements, starting from the same inputs. The possibility of obtaining nonconformity must be connected to the phases necessary to obtain the desired input. The more activities are required to obtain the inputs in question, the greater is the likelihood that the deviations from the desired output value will be. In fact, any activity may be the source of a total or partial nonconformity, which may then lead to a nonconformity in the end result. Reducing the possibility of error at all stages of execution means redu cing the possibilities to identify errors and nonconformities in the final product. Six Sigma offers a quantitative approach to the issue of continuous improvement and cost reduction by reducing the variation in output of a process to the level most appropriate for a particular organization. The acceptable range depends on the product and is specified by two lower values, the Lower Specification Limit (LSL) and the Upper Specification Limit (USL). These two values will identify a service level that the enterprise intends to provide to its customers, which corresponds to a probability of effective compliance of outputs with the required specifications. Defining these le vels will allow for the definition, for each output of the process, of an average, a standard deviation and, therefore, the form of effective data distribution (Sinibaldi, 2009). Implementing a Six Sigma approach at the level of small firms can lead to reengineering of the company’s management. The reengineering of the economic process is about fundamental recon- sideration and radical redesigning in order to achieve profound and long-term changes in quality, cost, service, leadership, flexibility and innovation. In this respect, an economic process has to undergo significant changes in order to optimise productivity and quality, and radical changes, contra- ry to gradual changes, are made precisely to achieve these profound improvements at each stage of the production process (Ciappli et al., 2006). Quality has always been an important objective for the enterprise pursuing environmental, economic and affiliation conditions. From a historical perspective, businesses have always resorted to quality control methods, especially post-production, using more or less statistical tools (the famous control sheets). Until the second half of the 1950s, concern over the quality of products or servi ces did not take up much time and space. Only since the 1970s the quality concept has been am- plified, being interpreted as a response to the requirements a product (Crosby) had to meet in the manufacturing process. For example, Fitzegorld proposes a system of indicators for service enterprises, based on empirical research, suggesting a comparison of the company’s performance with traditional management control. The model is based on measuring the final outcome (financial and competitive) and defining the determinants performance in achieving quality, flexibility, resources and innovation. While the former are largely common to non-service enterprises, the determinant values are specified depending on the type of offered services (professional, end-user or engross). The objective is to establish a balance between different categories of indicators in order to avoid excessive attention focused on short-term outcomes, which can compromise the entire gear or chain of values on which they rely in the medium term. The values examined by the model are the competitive outcome, the financial result, the quality of the services, the flexibility, the resource use and the innovation. Basically, the main points considered are: • for competitiveness: the market share on the following position, the sales growth rate and customer indicators; • for economic and financial results: the revenues, the liquidity level, the capital structure and the financial market indicators; • for quality of service: credibility (fidelity), the ability to respond, aesthetics / image, cleanliness / order, comfort, cordiality, communication, courtesy, skills, accessibility, availability and safety; • for flexibility: the volume flexibility, the flexibility in distribution speed and the flexibility in -spe cific achievements; • for the use of resources: productivity and efficiency; • for innovation: the results pursued in the innovation of the exploitation process.

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3. Managerial accounting solutions The activity of an economic entity involves the use of costs. These can be generating added va lue (e,g. direct production processes, welds, painting, etc.) or may not generate value (e.g. handling times, large stocks of raw materials, finished materials and products, inefficient processes, inefficient employees, etc.). To be more explicit, referring to costs that do not add value, we can say that these can be ge nerated by (Liker, 2004): • Overproduction. It is one of the most important sources of loss. It can generate stocks, surplus staff and occupied spaces. • Stocks. Large volumes of stocks of raw materials, materials, or finished products are blocking values that can be used for high-value purposes. • Waiting times. The time when machines or staff are on hold can very easily turn into costs due to lack of productivity. • Unnecessary goods movements. Transfers of various types of goods (raw materials, materials, semi-finished products, finished products) through various compartments and storage spaces can generate additional costs. • Incorrect processing or overprocessing. Unnecessary operations included in the working processes or the design errors. • Unnecessary labour movements. • Defects. Poor processing can generate products that are not in compliance with the required standards. • Lack of using the creativity of employees. Lean Six Sigma is a philosophy or attitude that promotes ongoing efforts to ideally reduce and eliminate losses in the organisation. At the same time, Lean’s main focus is on customer requirements, and the relations with them is viewed through value or non-value added internal processes. The value added tasks are the only operations the client is willing to pay for. The Six Sigma methodology was developed by Bill Smith at Motorola in the late 1980s to provide a consistent data-driven approach to solving difficult business problems (Sharma, 2003). He used statistical data in manufacturing processes to determine the root causes of arised problems, develop and implement solutions, and monitor implementation of solutions to prevent occurrence of problems. The idea of creating a flow in Lean production is to offer products and services only at the right time, in the right quantities and at the required quality levels. Lean Six Sigma tools are the most commonly used for removing errors, waste, making value flows, etc (Cudney, Furterer & Dietrich, 2013) (see Figure 1). This method or philosophy uses 5 steps (D - Define, M - Measure, A - Analyze, I - Improve, C - Control), each with a precise purpose (Brassard & Ritter, 2001). The Defining Phase is the one in which the scaled project is defined. The goal of the Measure- ment Phase is to understand and measure the current processes. In the Analysis phase, we analyse the data collected in the measurement phase to identify the underlying causes of identified problems. In the Improvement phase, mechanisms and solutions for efficiency are developed and implemented. The purpose of the Control phase is to ensure that the improvements have had a positive impact and that they will be sustained and controlled. For the system to be successfully deployed, it is required that it is supported by the decision- makers in viewv of the entity’s precise objectives and involved teams if the project area is not too wide(Antony, Kumar & Labib, 2008). The most commonly used tools in each phase are presented in the table below (Cudney, Furte rer & Dietrich, 2013):

3.1. Defining the problem Six Sigma specialists begin by defining the problem. They identify the problems that are cause the operation to fall short of customer expectations try to fix them and with various tools (Pojasek, 2003). The woodworking industry, and in particular the goods manufacturing branch has many advantages: • the many active production processes within the entities allow a thorough study and the possibility of improving them; • waste and scrap are tricky problems that can find solutions in Lean Six Sigma;

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Figure 1: Lean Pyramid Source: Cudney, Furterer & Dietrich, 2013

Table 1: DMAIC tools

Source: Compiled by the authors after Cudney, Furterer & Dietrich, 2014

• reduced production costs and maximized profits; • improved product quality and increased customer satisfaction; • an increased degree of involvement of human capital. The objectives are multiple: • to analyse production flows and find solutions to improve them by using Lean Six Sigma tools; • to analyse the variability of inventories of finished products, raw materials and materials (where applicable); • to determine true costing of finished products by using Lean Six Sigma tools (Value Stream Map- ping, etc.); • to use of specific tools in order to deal with problems, waste and other inefficiencies caused by inefficient processes. The studied company (Flaro International SRL Botosani) was established in 1994 and the object of activity is the production of wooden toys. The company’s turnover was in 2017 approximately EUR 850,000 and in 2018 approximately EUR 920,000. The company is working on a niche market (the production of wooden toys). According to our science, the number of companies in Romania producing wooden toys is under 10.95% of the production is exported. The main beneficiaries are clients from Japan, France, Italy, Belgium and England. In order to be able to draw a correct picture of the processes taking place within the company, it is necessary to study them through direct observation. In in such a way, they can cr eate a true image of materials, persons, and information flows that form the entire production process. Direct observation has some notable advantages: • it can graphically present production flows; • you can set time can be set separately for each subprocess and solutions can be offered for processes with large variation ranges; • inter-process intermediate stocks can be calculated; • Value Stream Mapping graph tool can be used as management support in later optimizations.

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3.2. Measuring The goal of the measuring is to quantify the problem by gathering information about the current situation. The key outputs of the measure phase include (Antony,Vinodh, Gijo, 2016): collecting data on the problem discovered in the process, how effective is the process. Measurement of the various parameters in production processes is used to document the current state of the processes to be improved by collecting the necessary information. The activities carried out and the tools applied during the measurement phase may be: maps of processes, Values Stream Mapping, Spaghetti diagrams, Pareto charts, Cost Of Poor Quality (Figure 2). Measuring of the various parameters relating to the processes is done by identifying their levels and determining important activities and their degree of complexity. The constructed map tends to document a more detailed level of process. Thus, it may be useful to understand material flows or flow of information at a higher level. Another tool used to measure the various parameters is the Value Stream Mapping. It aims to provide useful information in the cost system, process efficiency, optimal inventory va lue, delays and waste control. Below is a map of the value flow for the section of manufactured products (Figure 3). The presented processes are of two kinds: those that bring value (green) and those that produce losses (red) (Figure 4). As a result of studying the processes, work procedures have changed that led to a 80% reduction in scrap and waiting times. Pareto diagrams present another mechanism that helps identify the critical areas that cause most problems. Also, it provides a summary of some vital issues. The Pareto principle states that 80% of the problems are created by 20% of the causes, so that these profound causes can be investigated in the Analysis Phase. Diagrams help us to position issues in order of importance and focus on eliminating issues with the highest frequency of occurrence (Atmaca & Girenes, 2013). Thus, to generate charts, it is necessary to categorise defects and types of problems and determine their importance in current processes (Table 2, Figure 5 and Figure 6).

Figure 3: Value Stream Mapping Source: Compiled by the authors

Figure 4: Figure 2: Operational Flux Values fluxes Source: Compiled by the authors based Source: Compiled by the authors on Rother & Shook (2003)

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3.3. Analysing On the analysis side, fishbone charts (cause-effect, Ishikawa diagram) have a major impact in determining the problems and their effects on processes. The key questions that are answered in the analysis phase are as follows (Franchetti, 2015): 1. What is the current cycle time for the product or process? 2. What percentage of activities are value-added? 3. What are the non-value added activities? 4. What is the cost and profit to produce one unit? 5. What is the capacity of the process? Thus, the problems are sorted, the causes are determined and their impact on the final product is calculated (Figure 7). Another useful tool in causality analysis is the 5 Why diagram (Cudney, Furterer & Dietrich, 2013). The purpose of this tool is to generate the underlying causes of problems. The mechanism uses an incremental set of questions to determine the root causes of the problems (Figure 8). As a result of the analysis of the causes, further action steps are being established to solve the problems that have arisen. On the improvement side, various tools can be used to illustrate the conclusions drawn from the analysis. In the studied entity working in the woodworking industry, based on the carried out analyses, several directions of action have been determined which aim to improve the activity, increase the customer satisfaction and, implicitly, enhance the profitability by: • improving the various parts of processes based on value flow maps: this has greatly accelerated processes by removing some redundant parts from them; • reducing waste and scrap: the 5Why, the VSM, and the Pareto graphs have revealed the parts of the activity that generate the most problems; with these tools, action plans have been crea ted that aim to minimise losses; • a portion of the existing sub-processes have been optimised, modifying material flows from Push (pushing the materials from the bottom to the top) to Pull (dragging the materials to the top from the bottom). As a result of these changes, half-finished stocks were halved. At the same time, the workforce involved was redistributed for more efficient employment and streamlining of material and value flows.

Table 2: Defect type/Occurence

Notes: Project name: Tower. Period: 11.12.2017 - 18.12.2017 Source: Own processing based on examples of https://asq.org/quality-resources/pareto

Figure 5: Figure 6: Pareto chart - Defect type / Event Occurence Pareto chart - Defects by type of opperation Source: Own processing Source: Own processing

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A particular attention was paid to how to reconfigure the machines between the processing processes. Thus, the Single Minute Exchange of Dies (SMED) analysis determines the time of machine reconfiguration and testing in a particular process and inter-processes. As a result of the analysis, a considerable reduction in machine reconfiguration and testing time has been achieved. At the same time, a greater involvement of the human factor directly responsible for this process has been achieved. In the last phase of the efficiency plans, there is also a tool called PDCA.

3.4. Improve and Control Kaizen as Lean’s core is a milestone in several management approaches, such as Lean Produc- tion, Total Quality Management and Six Sigma. These have proved effective over time to resolve various business issues (Bhuiyan & Baghel, 2010).

Figure 7: Ishikawa diagram Source: Own processing based on examples on https://asq.org/quality-resources/fishbone

Figure 8: 5Why’s diagram Source: Compiled by the authors

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A well-known method that implements continuous improvement is the PDCA cycle. The PDCA cycle has its roots in quality management and was perfected by Walter Shewhart in the 1930s as the Plan-Do-Study-Act (PDSA) (Schmidt et al., 2014). An important feature of the PDCA is the emphasis on the planning stage. For this, several tools have been developed to simplify the process (Ishikawa Diagram, Pareto diagram and scatter diagram) (Bergman & Klefsjo, 2010). Plan - Do - Check - Act (Plan-Do-Check-Act, 2018) is a four-step model that shows how chan ges will be made. The circle is closed because the cycle never ceases (Figure 9). Thus, the loop itself presents the Lean philosophy (minor and continuous improvements).

4. Research methodology Consistent with the proposed purpose, this work is based on a holistic approach in that all stages of a production process are considered and analysed so that it can finally recommend measures to reorganise activity and responsibility within a production enterprises which are currently operating and are competing in the furniture production market. As far as research strategy is concerned, it can be summed up to the following phases: • collecting and analysing data to build the production process mechanism as it stands; • designing an internal control system and analysing the possibility of redesigning internal processes; • proposing an organisational structure compatible with internal processes; • implementing corrective measures to stabilise the current situation. Each of the phases listed above required the use of the techniques presented in the first part of the paper. The objective of our analysis was not focused on deepening the individual phases that make up the production process, but with their detailed mapping, we focused specifically on defining the connections between the different phases, identifying the information provided, the timing and methods to be followed to recreate a fluid flow within a well-defined process and to limit unforeseen problems and events.

5. Results and Discussions The cost of obtaining a quality level corresponding to the Six Sigma specifications will be even greater as far as the standard deviation of the distribution is higher, and therefore the distribution itself is more dispersed. Once critical aspects of the quality of the final product are determined, based on which the trend will be checked over time, this type of approach divides them into:

Figure 9: PDCA cycle Source: Compiled by the authors

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• External Critical to Quality: quality objectives expressed by the customer, therefore not expressed in terms usable for measurements and controls; • Internal Critical to Quality: describes in measurable terms the client’s quality objectives. After defining the above aspects, it is necessary to identify the parameters of the production process that influence these qualitative measures and, of course, to analyse how the variations of these parameters influence the final quality of the production. The application of the method is based on a cycle, called DMAIC, presented by Sinibaldi (2009), composed of: • Define: the phase of defining project objectives, to be expressed by the translation of External CTO in Internal CTO; • Measure: start measurements and collect data. This will allow for values for distribution, average and standard variation; • Analyse: the phase that provides for the analysis of the data collected in the previous point, rec- ognising which ones and how they can relate to the qualitative performance of outputs. In this phase, it may be useful to use charts such as Ishikawa, known as the fishbone diagram, which identifies the cause-effect relationship between process parameters and final outputs; • Improve: after analysing the causes, it will be possible to apply the corrections, i.e. to design and implement those corrective actions to bring the outputs of the process into the previously defined acceptance intervals; • Control: the created situation must be monitored to see if the changes made have actually produced the desired and planned goods. In our case, the objective has been identified with the definition of the connections, roles and functions of a production structure that has expanded over time according to the operational needs of the enterprise. The flow of information in the production process and between it and the other economic or business processes has presented many gaps and inconsistencies. Creating tools dedicated to the distribution and collection of data and information in this process, as a result of defining the macro phases that make up it, aims at linking the different phases of the process, thus enabling it to provide information even in the external environment. Processes that make up an economic context must be able to communicate with each other in order to achieve the ultimate goal of the business. The configuration and complexity of the functional and technical-organisational structure of economic entities, the variety of activities carried out and the continuous introduction of advanced technologies are factors that assert managerial accounting as an essential component of the accounting system. In this context, entities are constrained to a rational use of the factors of production in which the consumed resources are minimised and the benefits are maximised. Moreover, it is necessary to look at the economic activities in terms of their valorisation by the clients. Starting from this premise, economic entities need to design management models that provide cost-effective design and follow-up solutions, analyse economic processes and optimise them both in terms of time horizons and value-added flows. Thus, the use of Lean Six Sigma accelerates problem solving time, aims at reducing costs and losses, and increasing customer satisfaction.

6. Conclusion Improvement approaches come and go, but improving the bottom line never goes out of style. The financial crisis is encouraging leaders and organizations to view Lean Six Sigma as an approach to reduce costs and keep the cash flowing (Snee, 2010). As can be seen from the detailed analysis and the results obtained, the mapping of production processes proved to be more complicated than we expected, while practical interventions that could lead to tangible improvement and better results and much faster were met with much availability and management support. This is probably also due to the fact that domestic management has reached such a high level of criticism that immediate action has been needed to ensure a return to optimum operating conditions. We believe that the economic reality within the enterprise, its size, staff training and operational habits lead to underestimation of strategic issues and actions, with medium to long-term results compared to practical, operational and short-term interventions. In order to cope with a process of restructuring a consolidated economic reality, it is necessary to start with the awareness that we need to structure a gradual process, consisting of several micro-interventions related to a global strategy but with practical feedback, capable of involving those

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who operate in production and analysis and motivate their participation by introducing a number of small improvements. The risk associated with this type of activity is that micro-interventions are disconnected from each other and do not target a single final strategic goal.

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