CONTENTS WORLD ECONOMY and INTERNATIONAL ECONOMIC RELATIONS Tikhonova, A., Melnikova, N

ISSN 1728-6220 (Print) ISSN 1728-6239 (Online) CONTENTS https://doi.org/10.21003/ea WORLD ECONOMY AND INTERNATIONAL ECONOMIC RELATIONS Tikhonova, A., Melnikova, N. (Russia), & Lukács, E. (Hungary). Consequences of the integration ECONOMIC ANNALS-XXI to the Eurasian Economic Union: methodology of statistical evaluation and first results 4 Research Journal Since 1996 ECONOMICS AND MANAGEMENT OF NATIONAL ECONOMY 170(3-4)’2018 Lemishko, О. (Ukraine). Modelling of endogenous factors impacting the efficiency of the aggregate capital in Ukraine’s agriculture 10 www.soskin.info/ea/ Sokil, O., Zhuk, V. (Ukraine), & Vasa, L. (Hungary). Integral assessment of the sustainable development of agriculture in Ukraine 15 Publisher Khvesyk, M., Bystryakov, I., Obykhod, H., & Khvesyk, Yu. (Ukraine). Institute of Society Transformation Assessment of the safety of environment in terms of sustainable development 22 (Kyiv, Ukraine)

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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 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), Associate Professor, Director of Institute of Society Transformation, Soskin Oleh Professor, Head of the International Economy Department, 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 Tancosova 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

2 ISSN 1728-6220 (Print) ISSN 1728-6239 (Online) ЗМІСТ https://doi.org/10.21003/ea СВІТОВЕ ГОСПОДАРСТВО І МІЖНАРОДНІ ЕКОНОМІЧНІ ВІДНОСИНИ EКОНОМIЧНИЙ ЧАСОПИС-XXI Тихонова А. В., Мельникова Н. П. (Росія), Лукач Е. (Угорщина). науковий журнал Наслідки інтеграції в ЄАЕС: методика статистичної оцінки та перші результати 4 170(3-4)’2018 ЕКОНОМІКА ТА УПРАВЛІННЯ НАЦІОНАЛЬНИМ ГОСПОДАРСТВОМ Видається з 1996 року Лемішко О. О. (Україна). Моделювання ендогенних чинників впливу Передплата на ефективність сукупного капіталу в сільському господарстві України 10 через редакцію журналу Сокіл О. Г., Жук В. М. (Україна), Ваша Л. (Угорщина). Інтегральна оцінка сталого розвитку сільського господарства України 15 Керівник проекту Хвесик М. А., Бистряков І. К., Обиход Г. О., Хвесик Ю. М. (Україна). Олег Соскін Оцінювання безпеки навколишнього середовища в системі сталого розвитку 22 Головний редактор Надія Матвійчук-Соскіна Міжнародний редактор ЕКОНОМІКА ТА УПРАВЛІННЯ ПІДПРИЄМСТВАМИ Дмитро Масько Попова Н. В., Шинкаренко В. Г., Криворучко О. М. (Україна), Земан З. (Угорщина). Управління підприємствами в умовах VUCA світу 27 Поштова адреса редакції: Славік Ш. (Словаччина). а/с 297, Київ, 01030, Україна Погляд на стартапи: їх функціонування та середовище 32 Тел./факс: (096) 521 0508 Ільченко Н. Б., Кулік А. В. (Україна), Магда Р. (Угорщина). (050) 867 5802 Тенденції розвитку оптової торгівлі в Україні 38 E-mail: [email protected] Костишин Н. С., Семчишин Л. М., Яковець Т. А. (Україна). WEB: www.soskin.info/ea/ Моделювання ефективної стратегії процесу реалізації продукції з урахуванням фактору сезонності 43 Данн Дж. (США), Бруннер Т. (Швейцарія), Легеза Д. Г., Коноваленко А. С., Демчук О. М. (Україна). Журнал перереєстровано Фактори маркетингового зовнішнього середовища, що впливають на виробництво продуктів Міністерством юстиції України дитячого харчування 49 Свідоцтво КВ № 20731-10531ПР від 15.05.2014 р. ГРОШІ, ФІНАНСИ ТА КРЕДИТ Науковий журнал «Економічний часопис-ХХІ» Нор С. М. (Малайзія; Австралія), Зававі Н. Х. М. (Малайзія). Зіставлення оптимальності портфелів з рейтингами корпоративного управління: входить до переліку фахових видань практика Сполученого Королівства 57 з економічних наук (Наказ Міністерства освіти і науки України Хан А. (Індія), Табаш М. (ОАЕ), Сарім М., Ахтар А. (Індія). № 528 від 12.05.2015 р.) Дослідження аномалій на фондових ринках в ісламських країнах з економікою, що розвивається 64

Журнал рекомендовано до друку та поширення через мережу Інтернет ДЕМОГРАФІЯ, ЕКОНОМІКА ПРАЦІ, СОЦІАЛЬНА ЕКОНОМІКА І ПОЛІТИКА Вченою Радою Державної установи Голубкова Т., Калініна К., Мусса Г. (Латвія). «Інститут регіональних досліджень Аналіз міжнародної активності іноземних студентів у Латвії 69 імені М. І. Долішнього Національної академії наук України» Грібанова С., Абелтіна А. (Латвія). Мотивація IT-студентів у Латвії (Протокол №05 від 2 липня 2018 р.) 73 Підписано до друку 10 вересня 2018 р.

Видавець: ОБЛІК, АНАЛІЗ ТА АУДИТ Інститут суспільної трансформації Гуцаленко Л. В. (Україна), Василевский М. (Польща), Мулик Т. О., Марчук У. О., Мулик Я. І. (Україна). Свідоцтво про внесення до Обліково-контрольне забезпечення управління капітальними інвестиціями: реалії сьогодення Державного реєстру України та Польщі 79 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.

3 WORLD ECONOMY AND INTERNATIONAL ECONOMIC RELATIONS

UDC 339.92, 519.23

Anna Tikhonova Nadezhda Melnikova Eszter Lukács PhD (Economics), Assistant Professor, PhD (Economics), Professor, PhD (Economics), Department of Tax Policy and Department of Tax Policy and Associate Professor, Customs Tariff Regulation, Customs Tariff Regulation, Széchenyi István University Financial University under the Government Financial University under the Government 1 Egyetem tér, Győr, H-9026, Hungary of the Russian Federation; of the Russian Federation [email protected] Associate Professor of the Department of 49 Leningradsky Ave., Moscow, 125993, Russia ODCID ID: Statistics and Econometrics, [email protected] https://orcid.org/0000-0001-6066-6881 Russian State Agrarian University - ODCID ID: Moscow Timiryazev Agricultural Academy https://orcid.org/0000-0001-7497-9176 49 Leningradsky Ave., Moscow, 125993, Russia [email protected] ODCID ID: https://orcid.org/0000-0001-8295-8113

Consequences of the integration to the Eurasian Economic Union: methodology of statistical evaluation and first results

Abstract. The study represents an assessment of socio-economic integration consequences within the framework of the Eurasian Economic Union (EEU) for the participating countries - Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia. The authors implemented a personally developed approach of integral efficiency evaluation based on the calculation of the coefficients of state social and economic development indicators of growth as a main method for such assessment. These indicators allow us to characterise the following segments: national welfare, inflation, investment activity, labour market and the level of poverty, and the condition of the main economic sectors. The authors determined that Russia is the only export-oriented member of the Eurasian Economic Union (EEU). The worst consequences of integration in the cross-border trade sphere are observed in Belarus. For the analysed countries (excluding Kyrgyzstan), the first year of the existence of the EEU can be characterised as a period of economic recession (2015). According to the comparison of integral rates for the periods of 2005-2014 and 2015-2017, it was defined that the integration had a positive economic effect in the short term. By now, all the five participating countries have achieved the same level of social and economic development as in the pre-crisis period (2012-2013). In terms of the EEU membership, the calculated economic growth expands from 3% in Kyrgyzstan (by the integral index) up to 30% in the Republic of Belarus. Russia has also significantly strengthened its position (the growth rate of the index in 2015-17 was 25%). Keywords: EEU; Integral Rate; Socio-economic Development; Economic Indicators; International Integration JEL Classification: F15; F36; F43; C43 Acknowledgments: The article was prepared with the support of the Russian Foundation for Basic Research (RFBR); project No. 18-010-00527 (2017). DOI: https://doi.org/10.21003/ea.V170-01

Тихонова А. В. кандидат економічних наук, старший викладач, департамент податкової політики та митно-тарифного регулювання, Фінансовий університет при Уряді РФ; доцент кафедри статистики та економетрики, Російський державний аграрний університет – Московська сільськогосподарська академія імені К. А. Тімірязєва, Москва, Російська Федерація Мельникова Н. П. кандидат економічних наук, професор, департамент податкової політики та митно-тарифного регулювання, Фінансовий університет при Уряді РФ, Москва, Російська Федерація Лукач Е. кандидат економічних наук, доцент, Університет Іштвана Сечені, Дьйор, Угорщина Наслідки інтеграції в ЄАЕС: методика статистичної оцінки та перші результати Анотація. Дослідження присвячено оцінці соціально-економічних наслідків інтеграції в рамках ЄАЕС для країн-учасниць: Вірменії, Білорусі, Казахстану, Киргизстану та Росії. Методикою дослідження передбачено використання авторського підходу до інтегральної оцінки ефективності, заснованого на розрахунку коефіцієнтів росту індикаторів соціально- економічного розвитку держави. Зазначені індикатори дозволяють охарактеризувати такі макроекономічні категорії, як національний добробут, інфляція, інвестиційна активність, ринок праці, рівень бідності, а також стан основних галузей. Авторами статті було визначного, що Російська Федерація є єдиним експортно-орієнтованим членом ЄАЕС. Найгірші наслідки інтеграції спостерігаються в Республіці Білорусь. Перший рік існування ЄАЕС характеризується для аналізованих країн (за винятком Киргизстану) як період економічного спаду. У результаті зіставлення інтегральних оцінок за періоди 2005–2014 рр. та 2015–2017 рр. було визначено, що в короткостроковому періоді інтеграція в ЄАЕС мала

Tikhonova, A., Melnikova, N., & Lukács, E. / Economic Annals-XXI (2018), 170(3-4), 4-9 © Institute of Society Transformation, 2018 4 WORLD ECONOMY AND INTERNATIONAL ECONOMIC RELATIONS

позитивний вплив. На даний момент усім 5 країнам-учасницям вдалося досягти рівня соціально-економічного розвитку, наявного в докризові 2012–2013 роки. За час членства в ЄАЕС економічне зростання визначено від 3% у Киргизстані (за інтегральним індексом) до 30% у Республіці Білорусь. Російська Федерація також істотно зміцнила своє становище (темп зростання індексу в 2015–2017 роках склав 25%). Ключові слова: ЄАЕС; інтегральна оцінка; соціально-економічний розвиток; індикатори економіки; міжнародна інтеграція.

Тихонова А. В. кандидат экономических наук, старший преподаватель, департамент налоговой политики и таможенно-тарифного регулирования, Финансовый университет при Правительстве Российской Федерации; доцент кафедры статистики и эконометрики, Российский государственный аграрный университет – Московская сельскохозяйственная академия имени К. А.Тимирязева, Москва, Российская Федерация Мельникова Н. П. кандидат экономических наук, профессор, департамент налоговой политики и таможенно-тарифного регулирования, Финансовый университет при Правительстве Российской Федерации, Москва, Российская Федерация Лукач Э. кандидат экономических наук, доцент, Университет Иштвана Сечени, Дьёр, Венгрия Последствия интеграции в ЕАЭС: методика статистической оценки и первые результаты Аннотация. Исследование посвящено оценке социально-экономических последствий интеграции в рамках ЕАЭС для стран-участниц: Армении, Беларуси, Казахстана, Кыргызстана и России. В качестве методики исследования использован авторский подход к интегральной оценке эффективности, основанный на расчете коэффициентов роста индикаторов социально-экономического развития государства. Указанные индикаторы позволяют охарактеризовать следующие макроэкономические категории: национальное благосостояние, инфляцию, инвестиционную активность, рынок труда, уровень бедности, а также состояние основных отраслей экономики. Авторами статьи определено, что Российская Федерация является единственным экспортно-ориентированным членом ЕАЭС. Самые худшие последствия от интеграции отмечены в Республике Беларусь. Первый год существования ЕАЭС характеризуется для анализируемых стран (за исключением Кыргызстана) как период экономического спада (2015 год). В результате сопоставления интегральных оценок за периоды 2005–2014 гг. и 2015–2017 гг. определено, что в краткосрочном периоде интеграция в ЕАЭС принесла положительный экономический эффект. На данный момент всем 5 странам–участницам удалось достичь уровня социально-экономического развития, отмеченного в докризисные 2012–2013 гг. Экономический рост за время членства в ЕАЭС определен от 3% в Киргизии (по интегральному индексу), до 30% в Республике Беларусь. Российская Федерация также существенно упрочила свое положение (темп роста индекса в 2015–2017 гг. составил 25%). Ключевые слова: ЕАЭС; интегральная оценка; социально-экономическое развитие; индикаторы экономики, международная интеграция.

1. Introduction 2. Brief Literature Review Integration unions have a significant impact on the na- Scientists from around the world asses the consequen tional economies of their members. However, the results ces of economic integration from different sides [6]. From the from membership in international inions are not always posi- standpoint of this study, the methodology of such assess- tive (Stiglitz, 2010) [1]. Given the relatively low competitive- ment is of the greatest interest, since it is almost impossi- ness of national economic and financial systems, openness ble to analyse the efficiency of integration with a high level of leads to the vulnerability of some sectors of the economy probability within the framework of the existence of the EEU (Colacito and Mariano, 2010) [2]. of one year. The Eurasian Economic Union itself was created The establishment of the Eurasian Economic Union has only in 2015. become a logical result of the strengthening of international The study dedicated to the consequences of China in- relations of the Customs Union. On the one hand, the fruitful tegration and to technological changes in the multi-country cooperation of the EEU member countries, both on the po- Ricardian-Heckscher-Olin quantitative model, conducted litical and economic arena, for quite a long time (more than by American scientists (Julian di Giovanni, Andrei A. Lev- 25 years) allows predicting high potential results of such in- chenko, Jing Zhang, 2014) attracts a great interest [7]. The tegration [3]. On the other hand, existing barriers, primarily authors used a scenario approach that consists of two al- of economic nature, can affect national competitiveness ad- ternative growth option evaluations: «balanced», in which versely [4]. For instance, it is important to note the fact that China’s productivity grows at the same speed in each sec- the economic basis of the EEA member countries has sig- tor of the economy, and «unbalanced», in which the com- nificant impact on the main factor of the competitiveness of paratively undeveloped sectors of the Chinese economy domestic products - pricing (the Russian platform is based develop much faster than the average productivity by coun- on private business, while the Belarusian one is based on tries of the world. A completely different approach based public administration). on the use of nonparametric criteria was used to assess the Moreover, there is a need to expand the EEU internal integration of China into the world in a similar study (Adao, market, primarily due to the growing number of union par- Costinot, Donaldson, 2017) [8]. P. Fabrizio and V. Kvadrini ticipants [5]. However, this provision is very controversial, (Fabrizi, Quadrini, 2018) analysed the impact of internatio for example, regarding the inclusion of Kyrgyzstan with its nal integration on financial crises of the participating coun- very low population solvency, and a large number of eco- tries using imitation mathematical modeling [9]. The results nomic problems at the state level. In this regard, the as- obtained by the authors show that international unions are sessment of the consequences of integration at the first the least susceptible to financial crises, but if such a cri- stage of the formation of the EEU is very relevant. In ad- sis occurs, all members of the union suffer from the nega- dition, an analysis of economic results in the EEU member tive impact. countries is required not only in the period of its operating Some studies are devoted to the assessment of economic (2015-2017), but also in the previous years. The period of integration, take into account the political influence. A. Sapir 2005-2014 was used to determine the trend. This defines (2011) shows, by the example of the European Union, the im- the purpose of the scientific research, which is to assess pact of the policy on the euro-dollar exchange rate, and, as the socio-economic impact of the establishment of the EEU a consequence, the economic situation within the integration on the participating countries. union [10].

Tikhonova, A., Melnikova, N., & Lukács, E. / Economic Annals-XXI (2018), 170(3-4), 4-9 5 WORLD ECONOMY AND INTERNATIONAL ECONOMIC RELATIONS

T. P. Aldohina uses an integrated approach to assess 5. Condition of the main economy branches. The sphere of the effectiveness of integration processes (on the example material production (agriculture and industry), as well as of the EEU). In the study, she offers a system of statistical construction (this branch is an indicator of the financial indicators that allow making a comprehensive assessment condition of any county and this area is most sensitive to of the socio-economic consequences for the EEU member crisis) and transport are chosen as priority sectors [13-15]. countries [11]. Transport has a significant impact on internal and external The article of M. Zos-Kior, I. Kuksa, Iu. Samoilyk, logistics. Therefore, it increases business attractiveness M. Storoška is dedicated to the study of the integral eva [16-18], both in terms of the availability of manufactured luation of the globalisation consequences [12]. As a basic goods for consumers and the increase of the turnover rate ca tegory of evaluation, the authors use the integral deve for producers. lopment index created by the Swiss Economic Institute. The The identity of the methodologies used to calculate cor- main difference between the proposed integral index and responding indicators is an obligatory statistical condition in the authors’ methodology is that rank coefficients are used order to conduct an intercountry analysis. In this regard, da- to calculate the main macroeconomic indicators. However , ta relating to the seventeen indicators studied for the period this approach does not allow us to assess minor econo of 2005-2016 was taken from the official EEC (Eurasian Eco- mic trends due to low ranks sensitivity. Moreover, the rank- nomic Commission) website in a comparable form. The only based approach is focused on spatial assessment (by coun- exception was made for the average monthly nominal wage in tries), while the coefficient approach allows to study chan the Republic of Armenia. Starting from 2013, the National Sta- ges in dynamics separately for each EEU member. This fact tistical Committee of Armenia included mandatory social in- determines the scientific novelty of this study. surance payments, as well as military salaries in the indicator. 3. Research Methodology In this connection, closing of the dynamic series of this indi- As the basic study methodology, the statistical methods cator through the conversion factor determined by the data of for dynamic series analysis of the EEU members’ cross-bor- 2012 (1) was calculated: der trade indicators were used. To assess the impact of integration processes in the Eurasian economic space, the authors applied an integrated approach based on the cal- (1) culation of the aggregate indicator of economic growth. Se venteen indicators characterising the EEU countries were selected as indicators of economic growth. These indicators where: reflect the following segments (Figure 1): K - the coefficient of dynamic series closure;

1. National welfare, represented in the form of the gross do- q 2012-1 - the average nominal wage in 2012 according to the mestic product of each EEU member. calculation methodology of 2013;

2. Inflation. The approach of inflation estimation through the q 2012-0 - the average nominal wage in 2012 according to the consumer price index. calculation methodology of 2012. 3. Investment activity. This aspect is evaluated through the The indicators of 2017 are taken from the official websites volume of investment in the fixed capital and, among other of the national statistical committees of the EEU countries things, it characterises the investment attractiveness of na- with the verification of their calculation methodology accor tional economies for foreign partners (including the EEU ding to the EEC data. members). The next step in determining the integral index of econo 4. Labour market and poverty level. This segment allows to mic development is the calculation of the growth coefficients assess the impact of EEU membership on the aggregate for the relevant indicators. Since comparison of different quali level of wages (as on one of the elements of state com- ty characteristics is impossible, there occurs an objective need petitiveness), as well as the degree of social inequality and for their transformation into a comparable form. The authors population stratification by income level. used the coefficient approach, in connection with the fact that it allows not only to bring the data in a comparable form but also to determine the main economic trends (growth or decline). In the context of the implementation of this methodology, it is necessary to take into account that the selected economic indicators have a multidirectional effect (some act as indicators of growth, others act as a recession). Thus, for growth indicators, the coefficients should be calculated as a ratio of the indicator values in the reporting year to the base one, calculations for the indicators of decline should be inverse. Among the selected indicators, only four reveal the destructive nature of the changes. They are the poverty level, %; the coefficient of funds; the Gini index and the consumer price index, in % to De- Fig. 1: System of state social and economic development indicators cember of the previous Source: Compiled by the authors year.

Tikhonova, A., Melnikova, N., & Lukács, E. / Economic Annals-XXI (2018), 170(3-4), 4-9 6 WORLD ECONOMY AND INTERNATIONAL ECONOMIC RELATIONS

As a result, the final stage of the analysis is the calcu- growth. It is worth noting that these indicators of cross-bor- lation of the socio-economic development integral indica- der trade balance of the EEU countries were achieved even tor as the arithmetic mean of seventeen individual coeffi- during growth of aggregate turnover (Table 2). cients (2): To assess the impact of integration in the Eurasian Eco- nomic Area, we analysed the integral indicator of the socio-economic development of participating countries. (2) The indicators (by EEU members) of the development of the main manufacturing industries for the period between 2005 to 2017 are represented in Table 3. The growth coef- where: ficients calculated on the basis of the indicators are shown ki - the individual growth factor for the i -th indicator; in Table 4. n - the number of selected indicators (17 in the authors’ study). 4. Results Tab. 1: External and mutual trade balance of the EEU countries To assess the direction of the foreign trade (export-import), USD million policy of the EEU countries (either exports or imports), we determined the trade balance for each participating country (Table 1). The analysis showed that only the Rus- sian Federation among the EEU countries is an export-oriented member (exports exceed imports consistently in 2015-2017). The Russian trade balance grew by 11% in 2017, as compared to 2016. At the same time, the trend of the cross-border trade with those states that are not EEU member countries is not determined in Russia. On the one hand, the trade balance remains Source: Calculated by the authors based on [19] positive despite the difficult economic and political situation. On the other hand, it has declined by 22% over the three-year pe Tab. 2: Growth rates of exports and imports volume by EEU member countries riod. The reduction in the balance of foreign trade is not secured by the same reduction in domestic trade. Armenia and Kyrgyzstan are impor ting countries both in foreign and domestic trade during the analysed period. Be- larus sharply lost its positions, especially in 2016, when the trade balance of the country became negative. At the same time, Kazakhstan managed to consolidate its positions. The trade balance in the country increased by 22% for 3 years, and the same indicator for the 1st quarter of 2018 also confirms the tendency towards Source: Calculated by the authors based on [19]

Tab. 3: Initial data for the integral indicator of socio-economic development calculation (example of the Russian Federation)

Source: Calculated by the authors based on [19]

Tikhonova, A., Melnikova, N., & Lukács, E. / Economic Annals-XXI (2018), 170(3-4), 4-9 7 WORLD ECONOMY AND INTERNATIONAL ECONOMIC RELATIONS

Tab. 4: Growth coefficients of the main indicators of social and economic development (example of the Russian Federation)

Source: Calculated by the authors based on [19]

The integrated indicators for each EEU member country were determined based on Tab. 5: Integral indicators of socio-economic development the growth coefficients of the main indicators of the EEU countries of socio-economic development (Table 5). The analysis has shown that the first years of the EEU existence may be characterised as a period of economic recession (2015-2016) for all the member countries, but Kyrgyzstan. The Russian Federation (the integrated index - 0.87) and the Republic of Belarus (the integrated index - 0.84) incurred the most significant losses in 2015. At the same time, it is impossible to link negative tendencies to the EEU membership only. The decline in the integral of socio-econo mic development is the result of the multiplica- tive impact of integration processes, economic and administrative sanctions against the Rus- Source: Calculated by the authors based on [19] sian Federation, political tension and instability (Figure 2). The periodization of socio-econo mic indicators of the EEU has revealed that the economies of the member countries were in recession: a gene ral trend is evident in all the five countries for the 2005-2015 period. Howe ver, for the last three years, the cumulative integral indicator has increased insignificantly, which indicates the re lative efficiency of the EEU integration. The application of the term «re lative» in this situation is not acciden- tal, since the first positive shifts (both in terms of the growth of the integra ted assessment and individual indicators of socio-economic development) were traced only in 2017. Therefore, it is premature to talk about the long- term effectiveness of the joint work of the EEU countries now. 5. Conclusion In this study, the authors have developed a methodology for a comprehensive assessment of the EEU integration effectiveness. This methodolo gy has a significant advantage, since it Fig. 2: Periodization of socio-economic indicators of the EEU countries becomes possible to apply it to both: Source: Calculated by the authors based on [19]

Tikhonova, A., Melnikova, N., & Lukács, E. / Economic Annals-XXI (2018), 170(3-4), 4-9 8 WORLD ECONOMY AND INTERNATIONAL ECONOMIC RELATIONS the level of the Eurasian Economic Union as a whole and positive results in the short term. These results are asso- individual participants in particular. The approbation of the ciated with the increase in indicators of socio-economic integral indicator revealed economic recession in the EEU growth in Russia, Kazakhstan, Belarus, Armenia and Kyr- countries in 2005-2015, yet their integration led to first gyzstan.

References

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Received 20.05.2017

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Tikhonova, A., Melnikova, N., & Lukács, E. / Economic Annals-XXI (2018), 170(3-4), 4-9 9 ECONOMICS AND MANAGEMENT OF NATIONAL ECONOMY

Оlena Lemishko UDC 336.510.517.631.1 PhD (Economics), National University of Life and Environmental Sciences of Ukraine 11 Heroiiv Oborony Str., Kyiv, 03041, Ukraine [email protected] ORCID ID: https://orcid.org/0000-0002-6216-652X

Modelling of endogenous factors impacting the efficiency of the aggregate capital in Ukraine’s agriculture

Abstract. The economic situation in the country is estimated by using both GDP indicators and the growth rates of quantitative indicators of the national economy, including capital. The article is devoted to the economic-mathematical model of the dependence of the effectiveness of the aggregate capital of economic entities in the agricultural sector of Ukraine on endogenous factors. It is determined that factors determining financial security, capital turnover and productive processes stimulate the growth of the efficiency of aggregate capital. Proceeding from the fact that the model is significant and adequate in modern business conditions, the author of the article has concluded that the use of the developed model will allow making effective management decisions regarding the agricultural sector of Ukraine in the medium term. In this regard, a forecast for the period up to 2021 according to the determined indicators has been worked out. According to our estimates, we forecast the largest increase over the period between 2017 and 2021 for endogenous factors affecting the profitability of aggregate capital by the capital productivity ratio, and moderate growth by the investment ratio and the asset turnover ratio. The proposed model can be used as a basis when creating a long-term forecast. To do this, it is proposed to expand the analysis of factor indicators affecting the profitability of aggregate capital in agriculture on the basis of taking into account the impact of exogenous factors. The target parameters of the impact of exogenous factors should correlate with financial and economic indicators as well as the efficiency index for agriculture in terms of macroeconomics. Keywords: Economic-mathematical Model; Endogenous Factors; Impact; Aggregate Capital; Agriculture; Financial Provision; Reproduction; Asset Turnover JEL Classification: C31; C65; D24; G23; G30; Q14 DOI: https://doi.org/10.21003/ea.V170-02

Лемішко О. О. кандидат економічних наук, доцент, кафедра фінансів, Національний університет біоресурсів і природокористування України, Київ, Україна Моделювання ендогенних чинників впливу на ефективність сукупного капіталу в сільському господарстві України Анотація. У статті побудовано економіко-математичну модель залежності ефективності сукупного капіталу суб’єктів господарювання у сільському господарстві України від ендогенних чинників впливу. Визначено, що зростання ефективності сукупного капіталу стимулюють фактори стану фінансового забезпечення, оборотності капіталу та стану відтворювальних процесів. Розроблена модель є значимою та адекватною сучасним умовам господарювання. Її можливо застосовувати для формування середньострокового прогнозу. При розширенні аналітики макроекономічних індикаторів впливу на прибутковість сукупного капіталу у сільському господарстві дану модель можна використовувати як базову для побудови довгострокового прогнозу. Ключові слова: економіко-математична модель; ендогенні фактори впливу; сукупний капітал; сільське господарство; фінансове забезпечення; відтворення; оборотність активів.

Лемишко Е. А. кандидат экономических наук, доцент, кафедра финансов, Национальный университет биоресурсов и природопользования Украины, Киев, Украина Моделирование эндогенных факторов влияния на эффективность совокупного капитала в сельском хозяйстве Украины Аннотация. В статье предложена экономико-математическая модель зависимости эффективности совокупного капитала субъектов хозяйствования в сельском хозяйстве Украины от эндогенных факторов влияния. Установлено, что повышение эффективности совокупного капитала стимулируют факторы финансового обеспечения, оборачиваемости капитала и состояния воспроизводственных процессов. Разработанная модель является значимой и адекватной современным условиям хозяйствования. Ее можно применять для формирования среднесрочного прогноза. При расширении аналитики макроэкономических индикаторов влияния на прибыльность совокупного капитала в сельском хозяйстве данную модель можно использовать как базовую для построения долгосрочного прогноза. Ключевые слова: экономико-математическая модель; эндогенные факторы влияния; совокупный капитал; сельское хозяйство; финансовое обеспечение; воспроизводство; оборачиваемость активов.

1. Introduction are not scientifically substantiated. Hence, the purpose of The economic situation in the country is estimated by the research is to substantiate the dependence of the pro using both GDP indicators and the growth rates of quanti- fitability of capital on financial support, capital turnover and tative indicators of the national economy, including capital. productive processes, to determine the multi-factor corre- Therefore, the study of the impact of external (exogenous) lation and regression dependence in the model and the de- and internal (endogenous) factors on the effective functio velopment of the medium-term forecast on this basis. The ning of capital at the macro- and micro-levels is relevant. author has used the following methods to conduct the re- Today, the key factors that lead to an increase in the profi search: statistical and economic methods to study the in- tability of capital on an endogenous basis in relation to busi- terconnections between financial and economic processes, ness entities, including the agrarian sector of the economy, and to identify factors impacting performance indicators;

Lemishko, О. / Economic Annals-XXI (2018), 170(3-4), 10-14 © Institute of Society Transformation, 2018 10 ECONOMICS AND MANAGEMENT OF NATIONAL ECONOMY the forecasting method to justify probability of future deve of operating activities were determined based on the per- lopment of the research object in a given time period, based formance indicators. on the analysis of retrospective data and endogenous im- The main factors of the production process and finan- pact factors. cial support that affect the capital outflow of fixed assets (Y1) 2. Brief Literature Review were as follows: the ratio of long-term financial security of A significant contribution to statistical theory and mo the first order (the first degree for the investment factor), the delling was made by P. M. McCullagh and J. A. Nelder ratio of funds and expenses coverage, the real value ratio of (1989) [11]; D. V. Hinkley, N. Reid and E. J. Snell (1991) [5]. fixed assets in the enterprise property, the depreciation fac- A toolkit for applied regression analysis has been worked tor of fixed assets, the factor of suitability of fixed assets, the out by J. O. Rawlings, G. P. Sastry and D. A. Dickey (2001) ratio of fixed assets renewal, the ratio of long-term financial [16]. A. Dobson (1990) [3] presented a unified theoretical and provision of second order (second degree), the ratio of the conceptual framework for statistical modeling in an acces- cumulative rate of reproduction of fixed assets. Despite the sible form. strong and very strong impact of each of the individual fac- Z. Naglova, B. Boberova., T. Horakova and L. Smutka tor, we consider, the dependence of capital productivity on

(2017) [14] conducted a statistical analysis of the factors im- the investment factor (X1), the ratio of aggregate reproduc- pacting the results of agricultural enterprises’ activities of the tion (X2), the ratio of fitness of fixed assets (X3) to be statis- Czech Republic. tically significant in the multifactorial equation, with the ra- O. Oliynyk and V. Adamenko (2015) [15] identified the tios of pair correlation equalling 0.838; 0.854; 0.838, respec- main financial indicators and conducted a comparative ana tively. Herewith, the tightness of communication is 0.894 lysis of the financial system of Ukraine and leading European (strong), and the determination ratio is 0.797. Consequently, countries. the variation in capital productivity by 79.7% depends on the Ukrainian scientists has made a significant contribution investment ratio, the ratio of aggregate reproduction, the ra- to the study of factor indicators impacting financial acti tio of suitability of fixed assets. vity and enterprises capital functioning. The expediency of The correlation and regression dependence of capital pro-

using the indicators of liquidity, financial stability, business ductivity (Y1) on the factors is the following: activity and profitability for assessing the financial stability of enterprises was justified by N. M. Davydenko (2015) [2]. Y1 = -2,1681 + 0,0222X1 + 0,0621X2 + 0,0350X3 . (1) The effectiveness of the application of multifactorial discriminant analysis to assess creditworthiness was defined by We can conclude that with an increase in the ratios of in- O. H. Malii, (2017) [10]. vestment, aggregate reproduction and suitability of fixed as- Research on effective management decisions regar sets by 1%, capital productivity will increase by 0.02%, ding fixed assets and enterprises capital through modelling 0.06% and 0.03% respectively, according to the average va and forecasting methods was carried out by L. V. Smoliy and lues in the sample. The return on capital shows the efficiency S. M. Kolotukha (2017) [18], N. Shura (2012) [17] and S. O. Ish- of the use of fixed capital and is calculated as the ratio of the chuk (2015) [6]. increase in the value (in monetary terms) of agricultural pro 3. Purpose ducts at a certain time to the original average annual value The purpose of the research is to construct an economic- of fixed capital, which shows what sum of the value of gross mathematical model of the dependence of the efficiency of output falls per UAH 1 value of fixed capital. aggregate capital of economic entities in the agricultural sec- In the works by Ukrainian economists, it is noted that tor of Ukraine on endogenous impact factors. The purpose in a period of inflation, when the prices for fixed assets are determines a set of properties in modelling the object, which growing at a rapid pace, it is expedient to determine the will be reflected in the model. In our study, we proceeded from capital output by the commodity output estimated at cur- the fact that factors that are endogenous in nature are de- rent sales prices [1; 4; 8]. Concerning the effect of infla- pendent on the financial policy of the enterprise and specifics tion, we consider this conclusion to be correct. At the same of industrial activity. Endogenous factors are subjective and time, the issue of the capital returns calculation on the ba- have a quantitative estimate. The construction of the model sis of the value of commodity output is under discussion will take place in three stages. for the reasons given below. The specificity of agricultu 4. Results ral production lies in the fact that agricultural products pro- Construction of the basic model duced during a certain time are mainly consumed within the At the first stage of research, we collected and pro- agricultural sector, for example by households, the share cessed statistical data and financial reporting on the agri- of which in the structure of intermediate consumption was cultural sector of Ukraine in respect of the period between 45% in the period between 2012 and 2016 [19]. An in- 2001 and 2016 [12-13; 19]. Also, we calculated the main crease in the share of intermediate consumption in the out- indicators of economic activity, as well as financial indica- put volume of agricultural products leads to an increase in tors of selected economic entities. After studying the ana- the cost and production capital intensity, decreasing capi lytical material, we identified endogenous factors impacting tal productivity gains. Therefore, in our opinion, the initial the profitability of the aggregate capital indicators of pro- data for the capital output calculation should not be com- ductive processes and determined the efficiency of produc- modity output, but the total output of agricultural output in tion and economic activity, based on indicators of financial current prices (as part of the country’s domestic product, support and capital turnover of economic entities in the ag- which allows an objective assessment of the current ac- riculture in Ukraine. tivities of the agricultural enterprise). Another specific fea- At the second stage, by constructing an extended cor- ture is that gross agricultural output includes a recurrent relation matrix, we verified the selected factors in terms of account, which depends directly on the volume of produc- multicollinearity, which allowed us to select the most ap- tion of own production, which will be used (consumed) in propriate factors to create the basic model. Having iden- the future period to sustain the production process. There tified the nature of the relationships between the factors is no doubt that the capital reproduction factor is one of the ( linear, logarithmic, quadratic, hyperbolic, etc.), we detec factors that impacts the efficiency of capital productivity. ted the impossibility of applying a logarithmic, quadratic, We proceed from the assumption that the level of suitabi and hyperbolic dependences (insignificance according to lity and renewal of fixed assets characterise the overall po- the Student’s criterion, and inappropriateness to Fisher’s tential of the economy, and the dynamics of the fixed capi- criterion) was established. As a result of the statistical ana tal value reflects general trends in the country’s social and lysis, a high reliability of linear interdependence was found, economic development and the ability of capital to be ex- which led to further research based on the use of a linear panded [6]. The positive dynamics relating to the excess of multifactorial model. Consequently, we constructed two ba- fixed assets value received during the year over the initial sic models, in which the capital return and the profitability cost of all fixed assets at the beginning of the year testifies

Lemishko, О. / Economic Annals-XXI (2018), 170(3-4), 10-14 11 ECONOMICS AND MANAGEMENT OF NATIONAL ECONOMY

to the stability of the trend of aggregate reproduction of follows: the working capital, the absolute liquidity ratio, the capital in Ukraine’s agriculture. However, the estimated da- rapid liquidity ratio, the current liquidity ratio, the ratio of ta show that there was no qualitative increase in the fixed general liquidity balance, the assets turnover ratio and the capital reproductive potential - the actual level of suitabili- mobility factor. Despite the strong and very strong influence ty of fixed assets for the period from 2001 to 2016 was not of each individual factor on the result, on the basis of the very high (Table 1). calculations, the dependence of the operating profitabili-

The maximum output for UAH 1 of fixed capital can ty (Y2) on the total balance liquidity ratio (Z1) and the asset also be ensured due to the growth of production volumes turn over ratio (Z2) is statistically significant in the multifacto without attracting additional investments. Practical imple- rial equation; the communication tightness is 0.838 (strong), mentation of this process requires effective mobilisation of and the determination ratio is 0.702. Thus, the variation in own financial resources. If an economic entity has poten- the profitability of operating activities by 70.2% depends tial to cover (financially secure) investments in non-current on the overall liquidity of the balance sheet and the assets assets with its own capital, the investment ratio will equal turnover. to 1 or exceed it. The ratio of the growth rate of equity and The correlation and regression dependence of the opera non-current assets was examined in our previous studies ting profitability on factors is the following: [9]. We consider the investment ratio to be an endogenous

factor of capital output productivity. In agriculture, during Y2 = -18,838 + 0,16639Z1 + 0,45344Z2 . (2) the period under study, the share of sources of own funds in the private sector in covering non-current assets was quite With the increasing ratio of general liquidity of the balance high (Table 2). This trend is explained, among other things, sheet and the rate of return on assets by 1%, the profitability by the stable profitability of agriculture and the exceeding of operating activity increases by 0.16% and 0.45%, respec- ave rage value of the equity capital profitability level over tively, regarding the average values in the sample. the average rate of capital output among the branches of Creation of an integrated model of the impact of endoge- the economy [8]. nous factors on the productivity To a certain extent, the investment factor is the financial Positive dynamics of effective activities of economic en- stability indicator in relation to determining the level of enti- tities in agriculture is the basis for stabilizing productive pro- ty solvency, the liquidity of its assets and the liquidity of the cesses on an expanded basis. The determination of the im- balance sheet. Financial policies of each enterprise should pact of the state of the fixed assets, the capital turnover and be aimed at ensuring the optimal combination of liquidity the efficiency of production processes on capital profitabi and profitability of the enterprise. Profitable use of available lity, production efficiency and economic activity in the con- resources by economic entities reflects the resource pro- ditions of financial and economic stabilization in the agricul- ductivity rate, which is the assets turnover rate (aggregate tural sector of Ukraine is of particular relevance. Therefore, capital). Taking into account the fact that the turnover rate the second stage of our research is aimed at constructing of the aggregate capital (assets turnover) of the enterprise an integrated model of the impact of endogenous factors shows the corresponding effect of each unit of assets in re- on productivity, including the profitability (viability) of ag- lation to the full cycle of production and capital turnover, gregate capital. A quantitative and qualitative assessment we consider it expedient to determine the impact of fac- of the aggregate capital efficiency provides a definition of tor indicators on the profitability of operating activities. In its profitability level for net profit. We consider it appropriate this sense, we agree with the conclusions made by leading to base this conclusion as follows: the return on aggregate scientists who have proved that the production efficiency capital at net profit is a profitability indicator, which indi- and economic activity are impacted not only by the state of cates the amount of net income generated by each hryvnia capital reproduction but also by factors such as the use of (UAH), invested in the value of the aggregate capital. The current assets, their turnover, the efficiency of financial and aggregate capital of an economic entity affects the level of investment activities, etc. [2; 10; 17]. a certain generation in the operational, financial and invest- The main factors of the capital turnover that affect ment sectors, combining them into a single complex. It is the profitability of operating activities are determined as a complex of operational, financial, investment actions that integrates the net profit. The conducted research and Tab. 1: Analytical indicators of fixed assets reproduction (agribusiness entities in Ukraine) calculations allow us to select factor indicators which closely correspond with the outlined modelling purpose. The analysis of the two previous basic models was also taken into account. Thus, the ana lysis of the system of factors directly affecting the efficiency of aggre-

gate capital (net profit margin) (Y3) makes it possible to conclude that there are endogenous factors such

as the investment ratio (X1), capital Source: Compiled by the author based on [12-13; 19] productivity (Y1) and return on assets ratio (Z2). The communication tightness, which is considered to be Tab. 2: Indicators of long-term financial security of agricultural entities in Ukraine strong, is 0.882, while the determination ratio is 0.777. As the determination ratio shows, the variation in the return on aggregate capital

by net profit (Y3) by 77.7% depends on the total impact of the three factors under investigation, inclu ding 21.4% on capital productivi ty, 11.5% on assets turnover and 44.8% on the investment factor. The correlation and regressive Source: Compiled by the authors using [12-13; 19] dependence of the profitability of

Lemishko, О. / Economic Annals-XXI (2018), 170(3-4), 10-14 12 ECONOMICS AND MANAGEMENT OF NATIONAL ECONOMY aggregate capital on the net profit resulting from the above for the approximation of empirical (actual) data. The expo- factors is the following: nential curve and the polynomial dependence of the 2nd degree approximate our output data the best, as evidenced

Y3= -14.904 + 1.3338Y1 + 0.09256Z2 + 0.101011X1 . (3) by the obtained determination ratios (Table 4). We have to construct trend lines for the investment ratios, the fixed as- On the basis of the obtained equation, let us analyse the sets total reproduction, the fixed assets suitability the total ratios of the equation and interpret their meanings: balance liquidity, the assets turnover, capital returns. For

Y1 = 1.3338 - on the condition of the invariability of other fac- example, Figure 1 shows a graph of forecasting the invest- tors, with an increase in capital efficiency by 1.0%, the return ment ratio using the trend line. It contains the graph of pre- on aggregate capital by net profit will increase by 1.33%; diction of the aggregate reproduction ratio of fixed assets

Z2 = 0.09256 - if the asset turnover ratio increases by 1.0%, using the trend line and the aligned polynomial curve. The the net profit profitability of the net profit will also increase polynomial approximation is used because the ratio of ag- by 0.09%, provided that all other factor indicators will re- gregate reproduction of fixed assets calculated on the basis main unchanged; of actual data for the period of 2001-2016 is an amount that

Х1 = 0.101011 - if the investment factor increases by 1.0%, may either increase or decrease and is unstable. then the net profit margin of the net profit will increase by The second-order polynomial, the deviation of which from 0.10%, which means that there is a direct link between the the graph of the initial function is minimal, is defined as sui return on aggregate capital and the potential of the entity to table for our study. The method of least squares is chosen cover equity investments in non-current assets. for the polynomial approximation method. The polynomial ap- Thus, on the basis of the constructed economic and proximation based on the ratio of aggregate reproduction of mathematical model, we have determined a linear depen fixed assets has a degree of certaintyR 2 = 0.3457, (the con- dence (communication tightness - 0.882, determination ra- nection is moderate but not weak). Also, according to the cal- tio - 0.777) of the efficiency of aggregate capital of agribusi- culations, this connection proved to be more reliable than in ness enterprises in Ukraine on endogenous impact factors, other variants of alignment by analytic functions. including: the state of reproductive processes (capital pro- As noted, the exponential curve approximates in the best ductivity), capital turnover (the asset turnover ratio), the fi- way for the ratios of investment, the fixed assets aggregate nancial support indicator (the first-rate ratio of long-term fi- reproduction, the fixed assets suitability, the total balance li- nancial security, which is the investment ratio). We consider quidity, the assets turnover and capital returns. The data va it appropriate to make relevant management decisions re- lue of the ratios (calculated on the basis of actual data for the garding the efficiency of aggregate capital, with the help of period between 2001 and 2016), either increases or decrea calculations on the basis of the obtained model. By adjus ses at an ever-increasing rate. The ratios do not contain nega- ting the factors mentioned in the model, it is possible to pre- tive values, which also confirms the correctness of the choice dict the efficiency of aggregate capital in the medium term, of the approximation curve. Hence, the exponential trend line which in turn will impact decision-making on managing in- is most suitable for our values. All factors that we predict have vestment activities and increase the productivity of opera- a high degree of prognosis (Table 3). tional activities of business entities in the agricultural sector Further, we calculate the forecasted performance indica- in Ukraine. Also, the developed model can be used as a fi- tors. We determine, therefore, the forecast of factor and per- nancial mechanism for substantiation of perspective direc- formance indicators for the years 2017-2021. tions of financial activity. According to our estimates, we forecast the largest in- Creation of the medium-term forecast of factor and perfor- crease over the period between 2017 and 2021 for endo mance characteristics genous factors affecting the profitability of aggregate capi The next step of our research is to build a forecast for tal by the capital productivity ratio, and moderate growth by the period up to 2021, according to the determined indicators. Based on mathe matical models constructed using the Tab. 3: The result of alignment by analytic functions correlation and regression analysis and taking into account information about the object of forecasting and its deve lopment, we regard it appropriate to consider the following provisions. The information in the output arrays which belongs to continuous values; its accuracy is due to calculations for the long- term period (2001-2016). According to the actual and estimated data, we constructed a trend line. Also, we proceeded from the fact that the choice of model Source: Author’s own calculations for forecasting depends on the reliabi lity of the forecast. To present our forecast, we considered the following types of approximating dependencies: linear , logarithmic, polynomial, power, exponential, linear filtration, etc. [3; 5; 11]. Approximation, as a method of scientific research, is used to analyse, synthesise and further apply the empirical results [5; 11]; To determine the accuracy of the forecast, the value of the approximation error (R2) is used: the closer the value (R2) to 1, the more precisely the chosen model reflects the tendency of development, which means that our forecast is more reliable [16-17]. Fig. 1: Forecast chart of the investment ratio using the trend line aligned with the On the basis of the analysis, we set exponential curve (degree of reliability, R2 = 0.8783) a type of curve, which is better suited Source: Author’s own calculations

Lemishko, О. / Economic Annals-XXI (2018), 170(3-4), 10-14 13 ECONOMICS AND MANAGEMENT OF NATIONAL ECONOMY

ses stimulate the growth of the efficien- Tab. 4: Forecasting factors and, accordingly, forecasting performance indicators cy of aggregate capital. An increase in for the 2017-2021 period the impact of endogenous factors (capi tal outflow, asset turnover and investment) leads to an increase in the return on capital. To model the impact of endo genous factors on the efficiency of aggregate capital in agriculture, we propose the following: processing of statistical and financial reporting data, calculation of the main indicators of financial and econo mic activity of economic entities, determination of the impact of endogenous factors on the return on aggregate capital; the construction of an expanded correlation matrix and the verification of selected indicator factors for the presence of multicollinearity between them, the creation of a basic model; construction of an in- Source: Author’s own calculations tegrated model of the impact of endogenous factors on the outcome; a medium- term forecast of the dependence of the the investment ratio and the asset turnover ratio. This mo profitability of aggregate capital on the financial security, the del is designed for the medium term. To build the forecast turnover of capital and productive processes in the agricultural of changes in the profitability of the aggregate capital in the sector in Ukraine. long-term period, the proposed model can be modified. At We have created a multifactor correlation model which the same time, it is necessary to take into account that the takes into account development factors of economic pro- main thing in developing a long-term forecast is the poten- cesses with regard to agribusiness entities in Ukraine. The tiality, which should be reflected by the relevant information model is significant and adequate in terms modern condi- [7, 328]. The information field of the research should be ex- tions of management in the agricultural sector. Therefore, it panded and supplemented with analytical data on exoge- is expedient to use it to forecast the profitability of aggre- nous factors impacting the capital profitability. The econo gate capital of economic entities in the agricultural sector mic phenomena of exogenous nature exist autonomously; of Ukraine on the basis of taking into account endogenous they do not integrate and do not pass into each other, but impact factors. The use of this model makes it possible to there is systemic interaction between exogenous and en- more clearly define the structure of the estimated indica- dogenous impact factors, which together represent a diffe tors of endogenous impacts on the capital productivity and rentiated multi-level system. The target parameters of the allows making effective management decisions relevant to impact of exogenous factors should correlate with financial the agricultural sector in the medium term. We consider it and economic indicators as well as the efficiency index for possible to use this model as a basis for forming long-term agriculture in terms of macroeconomics. forecasts. To do this, it is proposed to expand the analysis 5. Conclusions of indicator factors affecting the profitability of aggregate As the correlation analysis shows, the factors relating to fi- capital in agriculture on the basis of taking into considera- nancial security, the capital turnover and production proces tion exogenous factors.

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Received 14.03.2018

Lemishko, О. / Economic Annals-XXI (2018), 170(3-4), 10-14 14 ECONOMICS AND MANAGEMENT OF NATIONAL ECONOMY

UDC 657.1:330.34:631.95

Oleh Sokil Valeriy Zhuk Laszlo Vasa PhD (Economics), Associate Professor, D.Sc. (Economics), Professor, PhD (Agricultural Economics), Professor, Accounting and Taxation Department, National Scientific Center Széchenyi István University Tavria State Agrotechnological University «Institute of Agrarian Economics» 1 Egyetem tér, Győr, 18 B. Khmelnytskyi Ave., 10 Heroiv Oborony Str., H-9026, Hungary Melitopol, 72310, Ukraine Kyiv, 03127, Ukraine [email protected] [email protected] [email protected] [email protected] ORCID ID: ORCID ID: ORCID ID: https://orcid.org/0000-0002-3121-826X https://orcid.org/0000-0003-1367-5333 https://orcid.org/0000-0002-3805-0244 Integral assessment of the sustainable development of agriculture in Ukraine

Abstract. Introduction. An integrated assessment of the accounting and analytical supplying indicators for the sustainable development of agricultural enterprises is the basis and starting point for the development of methodical and methodological background for the compilation of non-financial or expanded financial reports supplemented by social and environmental data of agricultural enterprises’ external and internal activities. The purpose of the article is to develop a cross-functional procedure for the integrated assessment of accounting indicators and analytical support of the sustainable development of agriculture at the micro and macro levels. Methods. As a methodological basis of the study, the authors use the provisions of the statistical and structural system along with comparative analysis, as well as theories of agriculture growth. Results. The need to use componential methodology for managing agricultural sustainable development is emphasised in the article. The relevant indicators are obtained in accordance with clear economic, environmental and social objectives and realistic requirements for data collection and calculations. After a detailed study of the methods for assessing the sustainable development of agriculture, we propose a diagnostic technique based on two methods. The first method involves the quantitative parameters of the development index and scores of economic, environmental and social factors. The second is based on the intuitive approach, in the situation where it is impossible to take into account impacts of many factors due to object complications, including social indicators of sustainable development. The authors of the article propose a number of indicators characterising the economic, ecological and social component of the management system for a comprehensive calculation of the agriculture sustainable development integral index. Conclusions. The results of our analysis allow elucidating the advantages of the method of indicator standardisation for the integral indicator of agriculture sustainable development. The choice and justification of the indicators to characterise certain elements of sustainable development, i.e. economic, social and environmental elements, is the basis for an integral assessment of the level of sustainable development of agriculture in Ukraine. The importance of this method lies in its simplicity, unification, harmonisation and universality, which is achieved by using two completely different levels and objects of research: for the local level - the level of agricultural enterprises, and the unrestricted level, which is the level of the district, region or country. The purpose of the developed methodology is to determine the integral indicator of agricultural sustainable development without attracting additional knowledge and skills from the researcher in the presence of the necessary primary data. The calculations show that Ukraine there are three relevant groups in Ukraine: most regions of Ukraine have a medium level of the integral indicator of agriculture sustainable development; three regions in the western part of Ukraine (Ivano-Frankivsk, Chernivtsi, Zakarpattia) have a low level, while a capital Kyiv region has a level which is higher than the average level. Keywords: Sustainable Development; Agriculture; Integrated Assessment; Accounting and Analytical Support, Environment JEL Classification: O13; R11; M41 DOI: https://doi.org/10.21003/ea.V170-03

Сокіл О. Г. кандидат економічних наук, доцент, доцент кафедри обліку і оподаткування, Таврійський державний агротехнологічний університет, Мелітополь, Україна Жук В. М. доктор економічних наук, професор, Національний науковий центр «Інститут аграрної економіки», Київ, Україна Ваша Л. кандидат економічних наук, професор, Університет Іштвана Сечені, Дьйор, Угорщина Інтегральна оцінка сталого розвитку сільського господарства України Анотація. У статті наведено методику оцінки та визначення інтегрального показника сталого розвитку сільського господарства на основі обліково-аналітичних показників результатів діяльності аграрних підприємств України та регіонів. Представлені оцінка й контент трьох складових сталого розвитку (економічного, екологічного, соціального), на основі яких розраховано інтегральний показник сталого розвитку. Ключові слова: сталий розвиток; сільське господарство; інтегральна оцінка; обліково-аналітичне забезпечення; навколишнє середовище.

Сокол О. Г. кандидат экономических наук, доцент, доцент кафедры учета и налогообложения, Таврический государственный агротехнологический университет, Мелитополь, Украина Жук В. Н. доктор экономических наук, профессор, Национальный научный центр «Институт аграрной экономики», Киев, Украина Ваша Л. кандидат экономических наук, профессор, Университет Иштвана Сечени, Дьёр, Венгрия Интегральная оценка устойчивого развития сельского хозяйства Украины Аннотация. В статье приведена методика оценки и определения интегрального показателя устойчивого развития сельского хозяйства на основе учетно-аналитических показателей результатов деятельности аграрных предприятий Украины и регионов. Представлены оценка и контент трех составляющих устойчивого развития (экономического, экологического, социального), на основе которых рассчитан интегральный показатель устойчивого развития. Ключевые слова: устойчивое развитие; сельское хозяйство; интегральная оценка; учетно-аналитическое обеспечение.

1. Introduction works by V. D. Zalizko (2014) [20], M. M. Kocherha (2013) [21], The calculation of accounting and analytical indicators of Yu. M. Lopatinsky and S. I. Todoruk (2015) [1], O. L. Popova agricultural sustainable development provides the basis for the (2010) [2; 22], L. Solomkina, N. Sukhomlinova and V. Baranov development of economic activities and increasing the ability (2005) [23], R. M. Chumak (2012) [24], K. A. Lewis and K. S. Bar- of agrarian enterprises to maintain sustainable development. don (1998) [25], T. Svenson (1998) [26] and others. They have Moreover, the criteria for their selection are recommended by examined and disclosed the main essence of the tools used to the world community (UN Conference on Environment and De- assess and define sustainable development, both comprehen- velopment in Rio de Janeiro in June 1992), determines enter- sively and separately in terms of the three components, inclu prises’ vector impact on social environment and generates pos- ding economic, social and environmental subcomponents. sible options which may help to evade degradation. Such indi- Currently, there are many methods applied to assess, in- cators are worth implementing because the voluntary system of cluding those used to assess sustainable development in ag- regional ecological sanitation can supplement mandatory regu- riculture. Yet, most of them are not universal for determining lation. Meanwhile, agricultural enterprises, despite the compe- the level of sustainable development of small or large enter- tition, should use the indicators of green accounting with the prises in agriculture, or assessing sustainable development at subsequent improvement of the environmental situation. It is the macro level for the agricultural region, district or country. the encouragement of enterprises to control and manage their 3. The purpose interac tion with the environment that is more expedient than ob- The purpose of the article is to develop a universal me ligatory observance of general rules and regulations. thodology which can be used to assess the indicators of ac- 2. Brief Literature Review counting and analytical support for sustainable development The appropriateness of our research orientation towards in agriculture at the micro and macro levels. the use of indicators as a tool for measuring sustainable de- 4. Results velopment of agriculture is confirmed by the scientific interest Foreign systems for indicators of the sustainable deve of both Ukrainian and foreign authors. Researchers agree that lopment of regions and agricultural enterprises are developed the adequate indicators are rarely used in practice and recom- to provide voluntary improvement of agricultural environmen- mend indicators that are aimed at quantifying the effect (ac- tal indicators, grouped by ways of their using nutrients in feed tion) of agricultural practices in relation to a specific goal (as and fertilizers, energy and pesticides [15]. Approaches and in- opposed to indicators characterising economic practices or dicators vary depending on systems and agricultural practices means of production) [1; 2, 62; 3-4]. as well as physical units using accounting systems [27]. Some On 25 September 2015, 193 member states of the United systems cover all the three components of sustainable deve Nations adopted the 17 Sustainable Development Goals (SDGs) lopment, others specialise in one or two of them. of the 2030 Agenda for Sustainable Development, with the Most indicator systems calculate nutrient balances of ag- global objectives which are expected to guide the actions of the ricultural enterprises, their usage of pesticides per hectare international community over the next 15 years (2016-2030) [5]. and energy consumption per kilogram of a product. These in- The new agenda includes: 17 goals, 169 targets and 230 indica- dicators are easy to calculate, however obtained information tors. This methodology is very complicated for calculating and needs additional interpretation [26]. requires knowledge and skills in such area. Moreover, such cal- Modelling allows us to demonstrate a relationship between culations take a lot of time to get the result. economic activity and environmental problems (for example, Along with an assessment of the sustainable development the calculation of the pesticide leaching effect is more signifi- level, there must be a strategy. For example, G. B. Bunin and cant than the calculation of their amount) and to easily inter- G. Zinoviev (2003) [6] define the aim of the sustainable deve pret the results. However, modelling of emissions measure- lopment strategy as providing a way out of the crisis and crea ment and other losses gives uncertainty to the indicator, be- ting conditions for a sustainable, that is socially, economical- cause the norm is set taking into account past experience. ly and environmentally balanced development. On the other Insufficient accuracy in measuring environmental and eco- hand M. Bastan at al. [7] evaluate sustainable development of nomic indicators due to the scientific uncertainty of some en- agriculture as a system model that promotes saving water and vironmental actions and the complexity of controlling these land usage. This model comprises limited mathematical cal- actions on individual enterprises is the key problem in the culations and cannot be used to identify the sustainable de- findings by G. Lamberton (2000) [14]. velopment of agriculture for enterprises and agricultural areas. Another difficulty is to use several units of measure, bea Another model of sustainable development of agriculture [8-9] ring in mind that the goals of sustainable development con- may not be understandable for a typical economist or a book- tain economic, social and environmental elements. L. Solom- keeper working for an agricultural enterprise. kina, N. Sukhomlinova and V. Baranov (2005) [23; 31] propose Problems of regional research in the context of sustaina- to determine the environmental and economic damage within ble development are highlighted by such scientists as A. V. Be- the system of agriculture in terms of natural ecological indi- lov and L. Kirichenko (2011) [10], A. V. Litvinenko (2014) [11], cators (loss of soil, humus, nutrients, products shortage) and A. N. Stasiuk (2012) [12], M. S. Filiak (2016) [3], V. Ya. Cibuliak cost (compensation costs relating to the use of fertilizers, the (2014) [13], S. Azar (1996) [4], J. Lamberton (2000) [14], P. Mayer- cost of lost crops due to a decrease in yields on erosive soils, hofer (1996) [15], S. Schalteegger (1990; 1999) [16-17], G. Götz etc.) [13, 31]. and A. Schäffler (2015) [18], Y. Vertakova (2016) [19] and others. Socio-ecological and economic indicators increase the ef- Peculiarities of the methods application for assessing sus- ficiency of calculations due to wider coverage of data than in tainable development in agriculture have been studied in the the case of using only financial data.

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Thus, M. M. Kocherha (2013) [21] proposes to measure Its indicators should be obtained in accordance with clear and the primary level of companies’ environmental efficiency by precise economic, environmental and social objectives and rea the purchasing cost of noncurrent environmental asset within listic requirements for data collection and calculations. a separate account. Consequently, the grouping of environ- Determinative methods were proposed after a detailed ment-oriented investments will allow determining the financial study of the agriculture sustainable development manage- result associated with environmental activities. ment, based on the use of two methods. The first supposes It is to be noticed that S. Schalteegger (1999) [16, 119] the development of indexes and scores quantitative para offers to determinate the main environmental performance meters of economic, environmental and social factors. The indicator as a criterion of economic and environmental effi- second is based on the intuitive approach, in the situation ciency, or eco-efficiency. when it is impossible to take into account the impact of many In the opinion of A. V. Neverov (2005) [28, 134], eco-eco- factors due to the complications of the research object, in nomic efficiencyE ( E ) can be determined at the regional level particular, social indicators of sustainable development. by the formula: Thus, the assessment is carried out on the basis of the indicator system of sustainable development of agricultural enterprises and regions, formed from three subsystems (eco- (1) nomic, ecological and organizational, and socio-territorial) characterised by certain properties and nomenclature indica- where: tors (Tables 1-3). Each indicator is given by definition score,

ЕSP - environmental assessment of social production (produc- taking into account the maximum possible, determined by tion of waste-free or low-waste production), unit of money; the methodology. The methodology allows using the indices

PP - products produced with environmental standards violations when calculating the dynamic indicator. (social damage from environmental pollution), unit of money; The determining characteristics of the agricultural eco- С - current costs for the protection, restoration and exploita- nomic development are vitality, independence, energy securi- tion of natural resources, unit of money; ty and efficiency. The authors offer a number of indicators that

NC - normative coefficient of environmental and economic ef- characterise the economic component assessing the system ficiency of natural resource use; of management in terms of agricultural sustainable develop- E - one-time expenses for the protection, restoration and ment (Table 1). exploitation of natural resources, unit of money. N. N. Kocherha (2013) [21, 32] notes that Tab. 1: Economic component of the assessment system one of the main functions of any industry of agriculture sustainable development management should be ecologisation of production, which is characterised by the use of non-waste (low-waste) technology. In our case, the environmental and economic assessment of waste should be deducted from the value added at a particular enterprise, demonstra ting the ecological purity of production. S. Schaltegger and A. Sturm (1990) [17] determine ecological efficiency, first of all, according to the desired result of the applied Source: Compiled by the authors environmental impact, where the added environmental action is a magnitude of all environmental inter- Economic viability as an indicator of the economic compo- ventions assessed in accordance with relative environmental nent of a sustainable development system is defined as the ra- action. So, economic and environmental efficiency, or eco- tio of the difference between the gross-result of operation and efficiency, is a correlation between the value-added and the the needs for financial resources to the number of enterprise induced added environmental action. employees. The gross result of the operation is equal to the Social development emerges as a full-fledged source of added-value lower taxes and fees (income tax is not taken into sustainable development in agriculture, while being in re- account), including the staff costs (wages, social deductions, source dependence of economic development [11, 216]. qualification improvement, etc.). Value-added is defined as the That is, all components of sustainable development are in- sum of gross profit (proceeds from the sale of goods minus the terrelated and complementary (Figure 1). cost of these goods) and the products of the enterprise (sold Figure 1 presents the vector of agriculture sustainable de- products, inventories and non-current assets), minus raw and velopment (SR ) in the three-dimensional plane, which maxi- outsourced materials, as well as other supplies. mally contributes to the development of its three components The economic specialization indicator determines the diver- (economic, ecological and social) at the end of vector - point P. sification of an agricultural enterprise or a region in relation to the The author emphasises the need to use an integrated me branching of its own activities, which makes it possible to create thodology for managing agricultural sustainable development. added value from various sources, thus protecting against external impact factors on a particular production type. Independence combines financial sustainability and self- sufficiency, which determines the share of financial activity charges (liabilities) and various subventions received from the outside as a result of the operation. The ratio of the amount of capital and gross assets can be used to calculate the local financial self-sufficiency indicator. Energy security indicates the number of energy capacities per one hectare of agricultural land. This indicator is important for assessing the economic component of sustainable development because of its impact on the final results of agricultural enterprises. Production profitability is the final and decisive characte ristic of the economic parameter of sustainable development Fig. 1: The vector of agricultural enterprises’ sustainable in agriculture, which mainly depends on all the managerial de- development cisions made during the production activity, and it is not only Source: Developed by the authors a result but also a goal.

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A detailed calculating methodology of the system of economic components of mana Tab. 2: Environmental and organisational component ging sustainable development in agriculture of the assessment of sustainable development management in agriculture can be provided by the reader’s personal appeal. The next stage in determining the level of sustainable development is the ecological and organisational subsystem (Table 2). The environmental and organisational component determines the opportunities and directions for achieving the goals of sustainable development in agriculture, contributing to the assessment of rural areas on the basis of the diversified types of entrepreneurial activities. The manifestation of the multiplier effect is the rational use of the resource potential. The diversification perspectives in agriculture are the development necessity through a variety of activities aimed at achieving sy nergies at agricultural enterprises in terms of their sustainable operation, the increasing possibility of employment of the rural popu- Source: Compiled by the authors lation and obtaining stable family budgets in conditions of seasonality of traditional agricultural activity, and a necessity of a fuller use Tab. 3: Social and territorial component of the assessment system of technical capacities [24, 45]. of agriculture sustainable development management The spatial approach to the sustainable use of agricultural land should be considered as a process covering changes in the context of crop rotations, the size of land plots and the use of fertilizers in terms of increasing their efficiency subject to economic and environmental laws. Agricultural practice is a key element in the assessment and management of sustai nable development, including the use of mi neral fertilizers and plant protection products, veterinary activities, land and water management and energy dependence. O. L. Popova (2010) [22, 25-26] alludes to the lack of opportunities to direct the vector of sustainable development in Ukraine, because Source: Compiled by the authors it is necessary to lay the economic foundation and establish a stable economy to ensure social progress ning the optimal number of intervals on which the measure- and to solve environmental problems. In such a way the en- ment range of the test points is broken when constructing a vironmental and organisational component of the sustainable histogram. Grouping based on the Sturges’ method is worth development in agriculture is a key to economic and social paying attention to [12]. However, one has to agree with the growth. author’s approach to the formation groups by the maximum A detailed calculating methodology of the economic com- permissible value at the level of 10% of the national average, ponents of the management system of sustainable develop- because the use of the method in crisis times and peaks of ment in agriculture can be provided by the reader’s personal economic growth is debatable. In our opinion, the maximum appeal. The next stage in determining of the level of sustaina- permissible values should be determined at the stage of unifi- ble development is the social and territorial subsystem (Table 3). cation of indicators with their norm (optimal or limiting value). The next step is to determine the boundaries of regions The interval scale is used to interpret the assessments re- grouping according to the integrated indicators of sustainable sults. There are five separate groups defined to assess the le development in agriculture. vel of regions’ development: a critically low level, a low level, a Let us consider existing grouping approaches in view of medium level, a level which is higher than average and a high the research objects with a focus on the intensity of the main level of integrated assessment of sustainable development or attribute, basing on the methodology developed by E. B. Alaev the manifestation of its individual component (Table 4). (1977) [29, 6]. It should be noted that the imperfection of clus- Characteristics the levels of sustainable development in tering by the method of averages for these purposes, which agriculture are not always dependent on external factors or consists in the data availability on the exact number of clus- compared with other investigation objectives. Also, the use ters given exogenously. In such a case, it is inappropriate to of economic, environmental and social opportunities and re- use Sturges’ rule [30], because this is a method for determi sources can have an impact.

Tab. 4: Integral scale of agriculture sustainable development

Source: Compiled by the authors

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The economic component of the integral indicator of sus- The average level of the environmental and organisational tainable development of agricultural enterprises was analysed component of sustainable development in agriculture among by the authors under the usage of statistical data of the Ukrai the Ukrainian regions in 2017 exceeded the average results of nian agriculture [31-32]. It was found that the following regions the economic component (Figure 3). of Ukraine had the highest level in 2017: Kyiv - 53 (1st place), Only Kyiv region (76 points) is characterised by a high level Ukraine as a whole - 49 (2nd place), Vinnytsia - 47 (3rd place), of the environmental component of sustainable development. Kharkiv - 47 (3rd place), Odesa - 45 (4th place). Regions such Dnipro (75 points), Ivano-Frankovsk (70 points) regions and as Ivano-Frankivsk - 19 (25th place), Chernivtsi - 23 (24th place), Ukraine as a whole (71 points) are relating to districts with a level Zakarpattia - 26 (23rd place) are significantly inferior to the other which is above the average in terms of this indicator. Luhansk country regions by the indicator of sustainable development in region has a critically low level of the environmental indicator 2017 (Figure 2). (48 points). Among the 16 most significant indicators of the en- Undoubtedly, the profitability of economic activity is the vironmental subsystem of the sustainable development system determining factor of the economic component of sustai there are the annual crops variety, the perennial crops variety, the nable development. The leading place is occupied by indi- fertilizer treatmentand the environmental protection expenditures. cators such as economic viability and production profita The average level of the social and territorial component of bility, according to which the regions, for example, Volyn, sustainable development in agriculture among the Ukrainian Zakarpattia, Ivano-Frankivsk and Chernivtsi, show the lo regions in 2017 exceeded the average results of the environ- west results. mental and organisationalcomponent (Figure 4).

Fig. 2: The level of economic component of agricultural enterprises’ sustainable development by Ukrainian regions in 2017, points Source: Compiled by the authors based on [31-32]

Fig. 3: The level of the environmental component of agricultural enterprises’ sustainable development by Ukrainian regions in 2017, points Source: Compiled by the authors based on [31-32]

Fig. 4: The level of social component of agricultural enterprises sustainable development by Ukraine regions in 2017, points Source: Compiled by the authors based on [31-32]

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Fifteen regions of Ukraine have a high integral scale. They The group indicators allow assessing the components of are Kharkiv (83 points), Zaporizhzhia (79 points); Kirovohrad agricultural sustainable development in the regions and thus and Kherson (78 points), Zhytomyr (77 points); Ukraine as a make it possible to identify the strengths and weaknesses of whole, Mykolaiv, Sumy and Ternopil have 76 points. Agricul- their development. Group indicators range from 19 points (the tural enterprises of Zakarpattia region (45 points) have the economic component of the development in Ivano-Frankivsk lowest indicator among the outsiders of social development, region) to 83 points(the social component in Kharkiv region). which corresponds to a low level. Social development indica- The representation (Figure 5) of the regions based on the in- tors include 12 indicators based on comparison of economi- tegrated indicator of agricultural sustainable development was cally territorial indicators. There are most significant indicators carried out using the method of equal distribution values, ba of social development, such as the provision of products, the sing on the proposed integrated assessment scale in Table 4. labour intensity, the average salary and the profit per person. The investigation results (Figure 5) show that most regions The next stage of the investigation is the selection of a have a medium level of sustainable development in agricul- methodological approach to determine the integral index of ag- ture (51-60 points): Cherkasy, Zaporizhzhia, Poltava, Mykolaiv, ricultural development. One such approach is to find the ave rage of the arithmetic or geometric group integral indices (for example, the integral group determining eco- Tab. 5: Group and integral indicators of sustainable development nomic, ecological and social indices is obtained from the in Ukrainian agriculture in 2017 primary indicators) that are derived from the standar dised primary indicators in a similar way [13; 20]:

(2)

where: Igij - the group integral index; N - the number of indicators. O. Belov and O. Stasyuk [10; 12] use the geometric- analytical approach to calculate the integral indicator which has the form of radar. The advantages of this approach are the clarity, calculation simplicity (the integral indicator is determined by the area of the figure formed by group indices, deferred on the radar axes) and the absence of a weight coefficient affecting the resulting indicator. However, the purpose of calculating the integral indicator of agricultural sustainable development by the regions of Ukraine is to obtain additional information for management needs. It has a synthetic character, and we can calculate it by Formula (2) at two stages. Firstly, we define group indicators, and then the integral indicator resulting from them. The results of group calculating and final integral indicators of sustainable development in agriculture in 2017 are given in Table 5. Source: Compiled by the authors based on [31-32]

Fig. 5: Integral indicator of agricultural sustainable development by Ukrainian regions in 2017 Source: Compiled by the authors based on [31-32]

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Kherson, Vinnytsia, Kirovohrad, Khmelnytskyi, Odesa, Sumy, The choice and justification of the indicators to characte Lviv, Chernihiv, Ternopil, Donetsk, Zhytomyr, Volyn region, rise certain elements of sustainable development, i.e. eco- Luhansk an Rivne regions. The second group is related to nomic, social and environmental elements, is the basis for the low level of development (41-50 points) is represented by an integral assessment of the level of sustainable develop- Ivano-Frankivsk, Chernivtsi, Zakarpattia regions. The primary ment of agriculture in Ukraine. The importance of this me reason for the insufficient level of sustainable development for thod lies in its simplicity, unification, harmonisation and uni- the abovementioned regions is the low indicators of the eco- versality, which is achieved by using two completely different nomic component of the integral indicator, namely the low gross levels and objects of research: for the local level - the level operating result (defined as value added, net of staff costs, xta es of agricultural enterprises, and the unrestricted level, which and fees), insufficient energy supply and low, and sometimes is the level of the district, region or country. The purpose of negative, production profitability. Together with the calculation the developed methodology is to determine the integral indi- of the level of agricultural sustainable development by regions, cator of agricultural sustainable development without attrac we have determined the common integral indicator for Ukraine, ting additional knowledge and skills from the researcher in which corresponds to the minimum value of the medium level the presence of the necessary primary data. Integral assess- with 65 points. This indicates that, along with the different trend ment is the central component of accounting and analytical of Ukrainian sustainable development by the regions, the ge supplying and a basis for making informed operational and neral level of agricultural sustainable development in Ukraine is strategic management decisions, forming strategies for sus- ave rage, which not only proves permanent improvement of the tainable development in agriculture at the level of enterprises social and environmental component, but also marks an oppor- or at the regional level. tunity to increase the level of sustainable development of the As a result of consideration of the diagnostics issues of Ukrainian agro-industrial complex as a whole. the level of sustainable development, indicators of integrated 5. Conclusions assessment of the accounting and analytical support for the The results of our analysis allow us to elucidate the ad- sustainable development of agricultural enterprises is the ba- vantages of the method of isotropic indicators standardisa- sis and the starting point for the development of methodical tion when calculating the integral indicator of agricultural sus- and methodological bases which are to be used for the com- tainable development. It should be noted that weighted coef- pilation of non-financial or expanded financial reports supple- ficients were not used on the basis of the assertion that the mented by social and environmental data relevant to agricul- components of sustainable development are equivalent. The tural enterprises’ external and internal activities. Ukrainian regions were grouped by the straight-line method Prospects for further researches in this area include the (with the aim of maintaining the compliance of the regions development of an accounting and analytical support concept with the level of development). The results are presented on for the reporting of sustainable development of agricultural en- the map-scheme (Figure 5). terprises as part of methodology and standardisation.

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V., & Derevjago, I. P. (2005). Sustainable nature management: essence, concept, mechanism of realization. Minsk, Belarus: BSTU (in Russ.). 29. Alaev, E. B. (1977). Economic-geographical terminology. Moscow: Mysl (in Russ.). 30. Sturges, H. A. (1926). The choice of a class-interval. Journal of the American Statistical Association, 153(21), 65-66. doi: https://doi.org/10.1080/01621459.1926.10502161 31. State Statistics Service of Ukraine (2017). Realization of agricultural products by agricultural enterprises in 2017: statistical collection. Retrieved from http://www.ukrstat.gov.ua/ druk/publicat/kat_u/publ7_u.htm (in Ukr.) 32. State Statistics Service of Ukraine (2017). Agriculture of Ukraine in 2000-2017: statistical collection. Retrieved from http://www.ukrstat.gov.ua/druk/publicat/Arhiv_u/07/Arch_sg_zb.htm (in Ukr.) Received 10.05.2018 Acknowledgements: This paper was partially written in the framework of EFOP-3.6.1-16-2016-00017 project: «Internationalisation, initiatives to establish a new source of researchers and graduates, and development of knowledge and technological transfer as instruments of intelligent specialisations at Széchenyi István University».

Sokil, O., Zhuk, V., & Vasa, L. / Economic Annals-XXI (2018), 170(3-4), 15-21 21 ECONOMICS AND MANAGEMENT OF NATIONAL ECONOMY

Mykhailo Khvesyk UDC 330.837:502.57 Full Member, National Academy of Agrarian Sciences of Ukraine, D.Sc. (Economics), Professor, Honoured Scientist of Ukraine; Director, Institute of Environmental Economics and Sustainable Development of the National Academy of Sciences of Ukraine 60 Taras Shevchenko Blvd., Kyiv, 01032, Ukraine [email protected] ORCID ID: https://orcid.org/0000-0003-4306-4904 Igor Bystryakov D.Sc. (Economics), Professor, Deputy Director, Institute for Scientific Work, Institute of Environmental Economics and Sustainable Development of the National Academy of Sciences of Ukraine 60 Taras Shevchenko Blvd., Kyiv, 01032, Ukraine [email protected] ORCID ID: https://orcid.org/0000-0001-6482-7099

Hanna Obykhod D.Sc. (Economics), Head, Department of Natural-Technogenic and Environmental Safety, Institute of Environmental Economics and Sustainable Development of the National Academy of Sciences of Ukraine 60 Taras Shevchenko Blvd., Kyiv, 01032, Ukraine [email protected] ORCID ID: https://orcid.org/0000-0002-3201-6803 Yuliia Khvesyk D.Sc. (Economics), Professor of the Department of Economic and Social Geography, Taras Shevchenko National University of Kyiv 2A Hlushkov Ave., Kyiv, 03187, Ukraine [email protected] ORCID ID: https://orcid.org/0000-0002-9226-5473

Assessment of the safety of environment in terms of sustainable development

Abstract The article reveals the main ecological and natural and technogenic prerequisites for the formation of adverse environmental conditions in today’s Ukraine. The authors consider the functional dimension of modern threats to sustainable development and propose a classification depending on their origin, including classic and synergistic threats, transformations of human consciousness as well as social, ecological and economic imbalances. It has been found that the main problems of institutional ensuring of the environmental protection in Ukraine are primarily caused property transformation, economic relations, restructuring of the mechanisms relating to the functioning of industrial enterprises, which is aggravated by the difficult social and economic situation in the regions. The study is devoted to the development of conceptual bases, principles and scenarios of modelling of environmental safety in the system of sustainable development. It considers artificiality, structural instability, quantifiability and duality of environmental safety. Factor and time components of safety determined according to the modified stochastic approach are also disclosed. They interpret the dependence of the environmental competitiveness of the region with regard to environmental hazard (component by component), innovation and investment activity aimed at improving the state of the environment. The authors of the paper argue that safety modelling, in view of institutional transformations (or responses), characterises the level of response to challenges, taking into account the analysis of environmental safety issues in terms of sustainable development, the state of legal mechanisms, the struggle against threats and risks, etc. In the light of the aforementioned, the authors of the article have developed an econometric model of the period and change in the dependence of the ecological competitiveness of the territory with regard to environmental hazard, innovation and investment activities aimed at improving the state of the environment. The obtained results, based on the modified stochastic approach using real information that quantitatively reflects the features of such processes, have prove a significant impact of genetic factors on the competitiveness of Ukraine. Keywords: Safety Modelling; Assessment; Sustainable Development; Scenario Approach; Environmental Safety; Institutionalisation JEL Classification: E11; Q21; Q28; Q31 DOI: https://doi.org/10.21003/ea.V170-04

Хвесик М. А. академік Національної академії аграрних наук України, доктор економічних наук, професор, заслужений діяч науки і техніки України, дійсний член (академік) Міжнародної інженерної академії, директор, Державна установа «Інститут економіки природокористування та сталого розвитку НАН України», Київ, Україна Бистряков І. К. доктор економічних наук, професор, заступник директора з наукової роботи, Державна установа «Інститут економіки природокористування та сталого розвитку НАН України», Київ, Україна Обиход Г. О. доктор економічних наук, старший науковий співробітник, завідувач відділу природно-техногенної та екологічної безпеки, Державна установа «Інститут економіки природокористування та сталого розвитку НАН України», Київ, Україна Хвесик Ю. М. доктор економічних наук, професор кафедри економічної та соціальної географії, Київський національний університет імені Тараса Шевченка, Київ, Україна

Khvesyk, M., Bystryakov, I., Obykhod, H., & Khvesyk, Yu. / Economic Annals-XXI (2018), 170(3-4), 22-26 © Institute of Society Transformation, 2018 22 ECONOMICS AND MANAGEMENT OF NATIONAL ECONOMY

Оцінювання безпеки навколишнього середовища в системі сталого розвитку Анотація У статті представлено основні передумови формування несприятливих екологічних умов в Україні. Автори розглядають функціональний вимір сучасних загроз для сталого розвитку та пропонують їх класифікацію залежно від походження: класичні та синергетичні загрози, перетворення людської свідомості та соціально-еколого-економічний дисбаланс. Запропоновано сценарій моделювання екологічної безпеки в системі сталого розвитку. Доведено, що моделювання безпеки з урахуванням інституційних перетворень характеризує рівень реакції на виклики та ілюструє стан правових механізмів, боротьбу із загрозами тощо. Отримані результати моделювання, що базуються на модифікованому стохастичному підході з використанням реальної інформації, що кількісно відображає особливості таких процесів, доводять значний вплив виділених генетичних факторів на екологічну безпеку України. Ключові слова: моделювання безпеки; оцінка; сталий розвиток; сценарний підхід; екологічна безпека; інституціоналізація.

Хвесик М. А. академик Национальной академии аграрных наук Украины, доктор экономических наук, профессор, заслуженный деятель науки и техники Украины, действительный член (академик) Международной инженерной академии, директор, Государственное учреждение «Институт экономики природопользования и устойчивого развития НАН Украины», Киев, Украина Быстряков И. К. доктор экономических наук, профессор, заместитель директора по научной работе, Государственное учреждение «Институт экономики природопользования и устойчивого развития НАН Украины», Киев, Украина Обиход А. А. доктор экономических наук, старший научный сотрудник, заведующая отделом природно-техногенной и экологической безопасности, Государственное учреждение «Институт экономики природопользования и устойчивого развития НАН Украины», Киев, Украина Хвесик Ю. М. доктор экономических наук, профессор кафедры экономической и социальной географии, Киевский национальный университет имени Тараса Шевченка, Киев, Украина Оценка безопасности окружающей среды в системе устойчивого развития Аннотация В статье представлены основные предпосылки формирования неблагоприятных экологических условий в Украине. Авторы рассматривают функциональное измерение угроз для устойчивого развития и предлагают их классификацию в зависимости от происхождения: классические, синергетические, угрозы преобразования человеческого сознания и социально-эколого-экономический дисбаланс. Сформированы концептуальные основы моделирования и оценки экологической безопасности в системе устойчивого развития. Доказано, что оценка и моделирование безопасности с учетом институциональных преобразований характеризует уровень реакции на вызовы, иллюстрирует состояние механизмов борьбы с угрозами и т. д. Полученные результаты оценки, основанные на модифицированном стохастическом подходе с использованием реальной информации, количественно отражают особенности таких процессов, доказывают значительное влияние выделенных генетических факторов на экологическую конкурентоспособность Украины. Ключевые слова: моделирование безопасности; оценка; устойчивое развитие; сценарный подход; экологическая безопасность; институционализация.

1. Introduction 4. Multiplicity of models. The emerging model should reflect, Environmental, natural and technogenic safety deter- first of all, those properties of the real system (or pheno mines the level of protection of individuals, society and the mena) that affect the chosen efficiency indicator. state from the adverse impact of the environment that is 5. Aggregation. A complex system preferably contains units caused by natural, technogenic and anthropogenic factors. (subsystems), the adequate formal consideration of which On the whole, the current ecological situation in Ukraine can is promoted by standard mathematical schemes. be characterised as extremely tense. 6. Parametrisation. In a number of cases, the modelled sys- Both society and the state are considered to be safe tem includes some relatively isolated components that are when implementing a model of balanced development is im- characterised by appropriate parameters, including vec- plemented, and dangerous when such a model is ignored. tors. They can be replaced by numerical values, rather than The survival of both humanity as a whole and each state in describe the process of their functioning. If necessary, the particular requires a safe transition to a model of balanced dependence of the values of such indicators on the situa- development and harmonious life. The model of harmonious tion can be presented in the form of tables, graphs or ana- coexistence between humans and nature, as well as achieve- lytical expressions (formulas), for example, by using regres- ment of balanced development of social, economic and eco- sion analysis. logical components, implies the observance of the following The detailed analysis of the results of the research is principles relating to the creation of the model of environ- given below. The need for modelling arises both at the mental safety (Danilishin, Stepanenko, Obikhod, 2008) [1]. stage of the systems design, when analysing the effective- They are as follows: ness of the taken decisions, and exploitation to evaluate 1. Information sufficiency. If complete information on the sys- the consequences of introducing changes into the system. tem unavailable, it is impossible to construct a model; and In this case, the degree of the detailed elaboration of the in the case when information is redundant, the construction process increases with specification of the initial data and of the model is viewed to be irrelevant. discovery of new significant factors at different stages of 2. Expediency. The model assumes the achievement of goals design (technical or work project), which should be reflec that are defined at the initial stage of the formulation of the ted in the model. Consequently, the latter can simulta modelling problem. neously include blocks of detailed elaboration with varying 3. Feasibility. The model promotes the realization of the research degrees, which model the same components. That is, it is goal with allowance for marginal resources with a probability necessary to apply the methodology of the integration mul- which is essentially different from zero within given time. tilevel modelling.

Khvesyk, M., Bystryakov, I., Obykhod, H., & Khvesyk, Yu. / Economic Annals-XXI (2018), 170(3-4), 22-26 23 ECONOMICS AND MANAGEMENT OF NATIONAL ECONOMY

At the same time, due to the lack of the established also for the agents that fill in models. Yet, most models ab- theo retical and methodological basis, modelling of envi- stract from these issues and assume that agents successfully ronmental safety does not meet modern needs. In particu- tackle selection problems. They design an experiment where lar, the impact of the institutions that guarantee safety, the a person who understands selection observes all the data re- role of investment activities on improving the environmen- quired to account for it. tal situation are smoothed over. Time and space factors are B. Kelsey Jack (2017) [11] points out an environmental ignored. crisis observed in the developing world. High levels of air Safety is the basic requirement for the person who cares pollution imply immediate and direct health consequences that any destructive factors do not threaten his/her life, for the exposed population, which may also limit the accu- property and welfare. The need for safety is objective and mulation of human capital for millions of children exposed is realised at both the individual and collective (group) le to poor air quality. Productivity may also be affected: recent vels. It should be emphasised that the need for safety can- evidence suggests impacts both on labour supply and wor not be fully met, for threats are continuously generated. That kers’ output. The situation is unlikely to get better. Most of is why, in the context of the research topic, institutionali- the pollution in the developing world is a by-product of eco- sation of environmental safety is considered as a dynamic nomic activity. Yet the relationship between the pollution and and purposeful process of identifying and systematising the health or productivity remains poorly understood, particular- norms, rules, statuses and roles. This system is based on ly at the level of the pollution recorded recently in cities of the principles of balanced nature management and is able to the developing world. work towards satisfaction of certain social needs, in particu- The specified problems, including the individual aspects lar the sufficient level of environmental safety. of the manifestations of safety, the principles of the model- 2. Brief Literature Review ling processes are described in the works by I. Bystriakov Theoretical studies and practical developments of the (2016) [12], Małgorzata Sej-Kolasa (2009) [13] and others. institutional principles of balanced nature management in An important aspect in the development of conceptual ba the context of environmental and natural-technogenic safe- ses, principles and scenarios of the modelling in sustai ty were conducted within the scientific-applied subject mat- nable development is the study of perspective schemes ter of the Institute for Environmental Management and Sus- of the corresponding design, the theory and methodology tainable Development of the National Academy of Sciences of institutional changes, the fundamental theoretical foun- of Ukraine in the research works: dations considered in the works by T. Veblen (1992) [14], • «Theoretical-methodological and practical basis for techno- J. Campbell (2004) [15], D. North (1990) [16], A. Płachciak logical and ecological safety in the dimensions of sustainable (2009) [17]. In the light of the abovementioned problems development» (SR No. 0111U000330, 2011-2012), where and the established principles of the modern institutional the authors developed institutional and organisational model, we single out nine basic aspects of environmental mechanisms of ensuring safety policy; safety: artificiality, complexity, durability, structural stability, • «Institutionalisation of relations of subjects of using natural quantifiability,tar geting, manageability, thoroughness and resources of Ukraine» (SR No. 0111U000328, 2011-2012), duality, which in different combinations and with the cor- where the authors identified the priority directions of institu- responding priority predetermine its genesis and manage- tionalisation of natural resource relations; ment actions (Danilishin, Stepanenko, Obikhod, (2008) [18]; • «Environmental and natural-technogenic safety of Ukraine in Burkov, Novykov, Scepkyn, (2009) [19]; Yerina, (2001), [20]). the regional dimension»(SR No. 0112U004967, 2013-2014), Symmetrical characteristics of danger complement the where the authors developed strategic directions of the re- concept of safety. Generally, danger corresponds to what gional environmental and natural-technogenic safety of we call insecurity due to different circumstances and condi- Ukraine in the context of sustainable development. tions including the existence of society in the desired state Scientific results, conclusions and recommendations and a certain system or its subsystem (natural, technogenic, based on the authors’ developments were sent to regional fire-explosive danger, dangerous geological and hydrologi- economic agents, state bodies of executive power and local cal phenomena, etc.). The peculiarity is that safety and dan- government bodies of Ukraine in the form of scientific and ger, in contrast to risk, operate in the same functional plane, analytical reports. J. Campbell (2004) [2], M. Heller (2009) [3], the first relates to the desired, the second corresponds to G. Hodgson (2004) [4], D. North (1990) [5], D. Burkaltseva the real state of things. (2012) [6] study the problems of forming institutional princi- 3. The purpose of the study is to model environmental ples of balanced nature management in the context of the safety of sustainable development on the basis of the existing genesis of environmental and natural-technogenic safety. conceptual bases and principles of overcoming threats and Joe Aldy and Alan Krupnick (2008) [7] examine the inter- risks. action between environmental and resource economics. In a 4. Scenario of the modelling of environmental safety in short time, this area of economics has come a long way to es- terms of sustainable development tablish a secure theoretical paradigm and a set of policyrele- 4.1. Research methodology vant research results. The transition to balanced development of nature ma Finn R. Førsund (2008) [8] analyses good examples of nagement is a new political goal for most countries, inclu modelling to avoid poor outcomes. He claims that pollu- ding Ukraine. Good management and effective state gover tion modelling must be of a multipronged. The most flexi- ning bodies are the prerequisites for the implementation of ble transformation function in outputs and inputs, which is this policy. However, in order to be able to implement a new used in textbooks, is too general to make sense in pollution policy of balanced development in compliance with safety modelling. requirements of, it is necessary to establish institutions fo- S. Nakagawa and H. Schielzeth (2013) [9] criticise the cused on this policy. traditionally used coefficient of determinationR 2 (ranging The ambivalence in social, ecological and economic from 0 to 1) as summary statistics to quantify the goodness system is a direct threat to the stability of any system at of fixed effects models such as multiple linear regressions, the national, regional and local levels. Manifestations of anova, ancova and generalised linear models (GLMs). Accor this threat can take various forms (from explicit to impli ding to researchers, the concept of R 2 as variance is intuitive. cit, or latent), but threats intensify and acquire the charac- Since R 2 is varies, it is extremely useful as a summary index ter of direct actions during the financial, economic-financial for statistical models because one can objectively evaluate and economic crises different by the scale and intensity. the fit of models and compare R 2 values across studies in The functional dimension of the danger contains a range of a similar manner as standardised effect size statistics under dangers that differ within the system (object) in which they some circumstances. ope rate, its environment, stimulus, scope and nature of the I. Esponda and E. Vespa (2018) [10] indicate that sample hazard (latent condition, accident, crisis, catastrophe), pre- selection is a challenge not only for empirical researchers, but vention opportunities and so on. In addition, transformation

Khvesyk, M., Bystryakov, I., Obykhod, H., & Khvesyk, Yu. / Economic Annals-XXI (2018), 170(3-4), 22-26 24 ECONOMICS AND MANAGEMENT OF NATIONAL ECONOMY processes started by humans give rise, firstly, to unpredic The choice of an acceptable form of dependence is based table by nature dangers and, secondly, «synergicity» of on the degree of consistency between the type of function dangers, which is a combination of different types of com- and the input data of observance. The adequacy of the model ponents of «output» dangers, including the impact of the can be determined by analysing the residues. environment on the neutral phenomena and processes, Based on the results of the calculations of the ecologi- thus turning them into dangers. Hence, a clear initial clas- cal safety in Ukraine and its regions in 2005, 2008-2010 and sification of dangers is impossible and, moreover, the very 2017 (Khvesyk, Stepanenko, Obikhod, 2014 [24]), economet- identification of the type and content of danger becomes ric modelling of environmental safety is proposed, which is an element of safety management and blocking of corre- based on two separate approaches. sponding threats. Classic threats are related to the unregu- The model of the period determines the impact on envi- lated work of technical systems of the economy and its in- ronmental safety: frastructure and characterised by spontaneous action not combined with the negative purpose. Synergistic threats ES = f (IFAt , SCt , IN&Et , FIAt ) , (1) are defined by synergistic laws of interaction between social and natural universes, the violation of which is accom- where: panied by implicit but real pathologies of organic (natural, ES is ecological safety; social) systems. Threats regarding transformation of hu- IFA is index of level of investment and financial activity; man consciousness arise when the human psyche acquires SC is social security index and fixed capital investment; more and more instrumental and pragmatic properties and IN&E is index of innovation in the national economy; loses organic, creative and critical properties at a growing FIA is index of foreign economic investment activity. human «diving» into functionally inorganic information and 4.2. Research results communication networks. Threats of the so-called techno- The modelling results are based on a modified stochastic humanitarian imbalances arise as a result of the prevalence approach, which in addition to the actual one, includes addi- of new technical possibilities of humans that are rapidly tional (conditional) information that quantitatively reflects the growing over the moral responsibility for their use. peculiarities typical of such processes (Table 1). Taking into account institutional transformations (or responses), we can assume that safety modelling characterises the level of response Tab. 1: Time model of safety to challenges with regard to the analysis of environmental safety issues in terms of sustainable development, the state of legal mechanisms, the fight against threats and risks, etc. However, institutional indicators are difficult to quantify. Thus, D. Burkaltseva (2012) [21] suggests that this ca tegory should consider the level of corruption and the shadow economy, emphasising their signifi- Source: Compiled by the authors cance in the process of qualitative assessment of economic security. According to other definitions (Ivashina (2009) [22]; Ostrom (2005) [23]), institutional indi- The statistical characteristics of the model are within cators reflect the nature of changes in ownership forms in the limits of the relevant probability criteria, the determina- the economic context, as well as the role of small enter- tion coefficient is omfr 0.235 in 2005 (the worst model by the prises in economic development and social change. Con- causative effects) to 0.797 in 2008 (the most effective). sidering the institutional transformations in terms of environ- The model of change in content and structure is based on mental safety and taking into account the peculiarities of the statistical variables over the period under study. The model- study of ecological, natural and anthropogenic safety, it is ling is also based on a modified stochastic approach which is worth emphasising their decisive influence on the ecological combined with an assessment of the impact on the factor of competitiveness of the territory. As already mentioned, this the safety of the risk factors, taking into account their quanti- indicator is vulnerable to any organisational and economic tative effect and the nature of their impact (Table 2). transformation that reflects the level of competition in the environment. In the process of modelling, two aspects of the Tab. 2: Factor model econometric model should be taken into account: theoretical, qualitative analysis of interconnections and empirical information. Theoretical information is reflected in the specification of the model, which is an analytical form of the econometric model. It has one or more functions used to construct mo dels and probability characteristics. We have chosen an econometric model in order to parametrise the effects of external and internal factors on the Source: Compiled by the authors environmental safety of the territory. The choice of the analytical form of the econometric model should take into consideration the list of speci This model consists of three components: fic factors, the selection of which is essential for economet- • The dependence of ES = f(t), where the safety is related to ric modelling. In the course of such research, repeated return the factor of time as a numerical index. It is determined by to the stage of the specification of the model, specification of a very low determination coefficient (0.426), which indicates the list of factors used, and the type of dependence when the practical absence of a condition of ES time, and its levels is function and its components do not correspond to the actual mainly formed by genetic factors (confirmed by the data of processes, which indicates the false specification, may be- the second component). come possible. Their types are as follows: • The dependencies of ES = f(IFAt), ES = f(SCt), ES = f(IN&Et), • ignoring individual factors while developing an economet- ES = f(FIAt), where the state of ES is consistently combined ric model; with the corresponding variable genetic and temporal fac- • the possibility of using a factor that is not important for tors. This component demonstrates the apparent increase measurable connection; in the condition of ES by its factors, primarily genetic. As for • inappropriate forms of dependence. the dependence ES = f(t) with the determination coefficient

Khvesyk, M., Bystryakov, I., Obykhod, H., & Khvesyk, Yu. / Economic Annals-XXI (2018), 170(3-4), 22-26 25 ECONOMICS AND MANAGEMENT OF NATIONAL ECONOMY

0.426, the situation is somewhat different. In the second production. It is important to emphasise that the conceptual component of the model, its minimum value is 0.263, and scheme of the formation of a system of indicators, taking in- the maximum ones are 0.798. It should be noted that IFA is to account the safety factors proposed by the authors, in- a leading factor. cluded ecological, natural, technological indicators and indi- • Parametric (as direct management dependence) model cators of the development of social (in the interaction of the combining ES with its four genetic factors. It most accurate- social environment and the economic environment) and eco- ly reflects the dependence of ES on the latter, quantifying the nomic (capital investments, expenditures on environmental positive impact on the territory of the index of IFA and IN&E. protection measures, GRP, etc.) subsystems. Therefore, it We note the negative influence of other factors (due to the can be argued that time and factor safety models take into specified specificity) and a high level of their causative -ac account all factors of influence as much as possible. tions (determination coefficient is 0.835). Such delsmo are The proposed model of environmental safety, based on open and vulnerable to any external manifestations. The list the principles of information adequacy, feasibility, expe of relevant factors may be changed, and the expansion of diency, aggregation and parametrisation allowed us to ana- the dynamic range will enable the determination coeffi cient lyse the non-standard properties of existing models due to to be specified. its nonlinear behaviour. The econometric model of the pe 5. Conclusion riod and change in the dependence of the ecological safety Thus, the scenario proposed by the authors allowed car- of the territory on the level of indicators (component by com- rying out modelling of environmental safety in terms of sus- ponent: IFA, SC, IN&E, FIA), innovation and investment activi- tainable development. This has become possible due to the ty is aimed at improving the state of the environment. Further methodology developed in previous works on the formation theoretical, methodological and applied studies in this area of ecological competitiveness as part of the transformatio will be carried out within the framework of scientific research nal processes introduced to improve regions’ ability to com- works on the theme «Natural-technogenic and environmen- pete with others in the context of sustainable development tal safety in the conditions of economic transformations in safety and to further assimilate the anthropogenic impact of Ukraine» (SR No. 0116U007938, 2017-2018).

References

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Received 18.04.2018

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Nadezhda Popova UDC 33.65.005.5 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

Vladimir Shynkarenko D.Sc. (Economics), Professor, Kharkiv National Automobile and Highway University 25 Yaroslav Mudry Str., Kharkiv, 61045, Ukraine [email protected] ORCID ID: https://orcid.org/0000-0003-0702-9781

Oksana Kryvoruchko D.Sc. (Economics), Professor, Kharkiv National Automobile and Highway University 25 Yaroslav Mudry Str., Kharkiv, 61045, Ukraine [email protected] ORCID ID: https://orcid.org/0000-0003-0967-7379

Zoltán Zéman PhD (Economics), Professor, Faculty of Economics and Social Science, Szent István University 1 Páter Károly Str., Gödöllő, H-2100, Hungary [email protected] ORCID ID: https://orcid.org/0000-0003-2504-028X Enterprise management in VUCA conditions

Abstract. Today’s world, which is characterised by variability, uncertainty, complexity and ambiguity (VUCA), poses a problem associated with a shift in the business administration paradigm. Therefore, the purpose of this paper is to define the features and develop a conceptual model of business administration in the VUCA world. The article defines the components of the VUCA world and describes their impact on business administration. The research was conducted from September to November 2017 based on a sample of 90 Ukrainian enterprises in Kharkiv city with the involvement of managers of 34 manufacturing, 36 trade and 20 transport enterprises to determine factors affecting the efficiency of management under the conditions of variability, uncertainty, complexity and ambiguity. The authors of the article have developed a conceptual model of business administration in the VUCA world based on the identified factors and characteristics of the modern world. The model includes objectives of entrepreneurial activity from the perspective of marketing approaches and stakeholders’ interests with regard to environmental factors, as well as methods and management tools that ensure competitive growth. Keywords: Management; Company; VUCA; Management Approaches; Adaptability JEL Classіfіcatіon: D21; D80; L20; M11; M19 DOI: https://doi.org/10.21003/ea.V170-05 Попова Н. В. доктор економічних наук, доцент, завідувач кафедри маркетингу та торговельного підприємництва, Харківський торговельно-економічний інститут Київського національного торговельно-економічного університету, Харків, Україна Шинкаренко В. Г. доктор економічних наук, професор, професор кафедри управління та адміністрування, Харківський національний автомобільно-дорожній університет, Харків, Україна Криворучко О. М. доктор економічних наук, професор, завідувач кафедри управління та адміністрування, Харківський національний автомобільно-дорожній університет Земан З. кандидат економічних наук, професор, факультет економіки та суспільних наук, Університет Святого Іштвана, Гьодоло, Угорщина Управління підприємствами в умовах VUCA світу Анотація. У статті надано характеристику складових VUCA світу та розглянуто їх вплив на управління підприємствами. Визначено фактори, що впливають на ефективність управління підприємствами в сучасних умовах з точки зору менеджерів. Запропоновано концептуальну модель управління підприємствами в умовах VUCA світу. Обґрунтовано використання управлінських підходів, які сприяють підвищенню конкурентоспроможності підприємств в сучасних умовах. Ключові слова: управління; підприємство; VUCA; управлінські підходи; адаптивність. Попова Н. В. доктор экономических наук, доцент, заведующая кафедрой маркетинга и торгового предпринимательства, Харьковский торгово-экономический институт Киевского национального торгово-экономического университета, Харьков, Украина Шинкаренко В. Г. доктор экономических наук, профессор, профессор кафедры управления и администрирования, Харьковский национальный автомобильно-дорожный университет, Харьков, Украина Криворучко О. Н. доктор экономических наук, профессор, заведующая кафедрой управления и администрирования, Харьковский национальный автомобильно-дорожный университет, Харьков, Украина Земан З. кандидат экономических наук, профессор, факультет экономики и общественных наук, Университет Святого Иштвана, Гёдоло, Венгрия

Управление предприятиями в условиях VUCA мира Аннотация. В статье дана характеристика составляющих VUCA мира и рассмотрено их влияние на управление предприятиями. Определены факторы, влияющие на эффективность управления предприятиями в современных условиях с точки зрения менеджеров. Предложена концептуальная модель управления предприятиями в условиях VUCA мира. Обосновано использование управленческих подходов, способствующих повышению конкурентоспособности предприятий в современных условиях. Ключевые слова: управление; предприятие; VUCA; управленческие подходы; адаптивность.

1. Introduction organisation. R. Wellborn and V. Casten (2004) [19] note that The momentum of current economic processes, glo it is erroneous to assume that one can predict future with bal competition and globalisation, informatisation of socie- a reasonable probability in a period of uncertainty. Yet, this ty and swift technological changes call for new approaches does not mean that there exists the so called absolute un- to business systems management, including enterprise ma certainty of the ongoing processes, since globally there are nagement. Effective management in the face of constant and steady trends displaying progress in science and technolo- swift changes is a key tool in promoting enterprise compe gy, human development, changes in the economic environ- titiveness and affects business quality standards. To make ment, etc. Effective measuring and monitoring of such trends and implement effective managerial decisions, persons who makes it possible to be competitive in today’s world, provi make relevant decisions should consider volatility, uncer- ded there is flexibility in business and preparedness to cope tainty, complexity and ambiguity, which are the realities of with rapid changes. today’s world. This poses a problem relating to a shift in the E. Beinhocker (2006) [20] links the complexity of the mo paradigm of management, which should consider the above- dern world with the development of science and technologies, mentioned realities. the increasing complexity of relations, defining it as «comple 2. Brief Literature Review xity economics» which is characterised by the fact that there is Scholars, such as B. Johansen (2007) [1], N. Bennett and no division into micro- or macroeconomics, and the behaviour J. Lemoine (2014) [2], S. Abidi and Joshi (2015) [3], J. Bartscht of a system occurs due to a variety of relations at the micro- (2015) [4], P. Hollingworth (2016) [5] and others, focus their level. It is open to the external environment and is unstable in works on problems of enterprise management and the be- view of constant changes. Complexity economics includes a haviour of business systems in VUCA conditions. Meanwhile, number of aspects relating to behavourial economics, the net- changes in management under the conditions of the VUCA work theory, simulation modelling and the chaos theory. Ac- world are reflected in the works by Ch.-E. Bouee (2014) [6] cording to the theory of complex systems, system behaviour and O. Mack (2016) [7]. occurs from interactions between economic agents, therefore In this context, leadership behaviour and the ability of simulating behaviours at an individual level and application of leaders to ensure prosperity and to succeed has been studied complex decision-making rules (both rational and irrational) by R. Elkington (2017) [8], E. Gilman (2017) [9], A. Rodriguez under the conditions of informational incompleteness are con- (2017) [10], J. Bushe and R. Marshak (2016) [11] and others. sidered to be important for a complex system. Issues related to personnel development and training were The modern world is a world of economic, social and po- examined by E. Betof (2014) [12], D. Russell (2017) [13], etc. litical ambiguity. On the one hand, the relevant situations and A. Saleh and R. Watson (2017) [14] have developed a business events may have a destructive impact. On the other hand, concept based on tackling each element of VUCA, as well as they may serve as a stimulus for further change and develop- integrating quality management and risk management. ment. Ambiguity requires consideration of a significant num- V. Garrow (2015) [15] researches changes in the orga ber of possible scenarios relating to different situations and nisation, while R. Raghuramapatruni and Sh. Kosuri (2017) events and their likely consequences because the interpre- [16] consider ways to achieve success by small and big tation of the same factors involves evaluation of available al- businesses. ternatives. Yet, despite a number of theoretical and practical deve To determine factors that impact the effectiveness of lopments in the field of VUCA, problems relating to enterprise enterprise management in today’s environment, as well management under the conditions of volatility, uncertainty, as those that are to be altered in the system of manage- complexity and ambiguity require further research. ment, we conducted an expert survey among managers of 3. The purpose of the article is to determine the features 90 Ukrainian enterprises representing different activityar eas of enterprise management in VUCA conditions in the context including trade (34 representatives), production (36 repre- of the evolution of modern technologies and develop a con- sentatives) and transport (20 representatives). The survey ceptual model of management under such circumstances. was conducted in the period of September-November 2017 4. Results in Kharkiv city. In order to assess the significance of factors, In order to determine the necessary adjustments to the we used a numerical form of the semantic differential, based management model in VUCA conditions, let us define the fea- on a 7-point scale of the degree of consistency of each of tures of the VUCA world as well as peculiarities of manage- the impact parameters relevant to management effective- ment in such conditions. ness. The results of the survey are shown in Table 1, repre- High macroeconomic volatility, rapid technological sented by 15 most significant factors out of 30 factors that change and changes in the business environment, as well as the respondents were to assess. the difference in the rate of the relevant change, constitute The results of the survey show that the management the key attributes of today’s world. Volatility is associated model and the qualification level of management personnel with velocity and turbulence. J. Kotler and A. Caslione (2009) are the most significant factors impacting management ef- [17] explain the latter from the standpoint of turbulence in fectiveness. This means that enterprise competitiveness de- nature, where it is characterised by aggressive and unsus- pends on the progressiveness of the management model tainable behaviour. In this context, it is necessary to moni- and the ability of management personnel to choose an ap- tor rapid changes in different business areas which boost propriate model. Flexibility in management decision-making, business opportunities. This means that a reduction in the which is a response to changes in the external environment, response time to changes is the only way for enterprises to is impossible without sufficient information support. A quick survive in VUCA conditions. response and flexibility I decision-making make it possible Uncertainty, defined as a state of the system in relation for enterprises to adapt to VUCA conditions and provides a to its operating conditions is reflected in scientific works by certain level of innovation. W. Walker, P. Harremoes and J. Rotmans (2003) [18]. They Innovativeness requires proactive actions associated conclude that uncertainty is a gap between the expected with qualification standards, training, personnel motivation state and the actual development of the system of economic and preparedness to change. Furthermore, high volatility and

Popova, N., Shynkarenko, V., Kryvoruchko, O., & Zéman, Z. / Economic Annals-XXI (2018), 170(3-4), 27-31 28 ECONOMICS AND MANAGEMENT OF ENTERPRISES innovativeness need flexible organisational structures to perform different tasks. This, in turn, re- Tab. 1: Factors impacting management effectiveness in VUCA conditions quires personnel to be able to work as a team in order to achieve results. The results of the research prove that mana gement effectiveness depends on a possibility to implement modern marketing strategies. This is due to the essence of marketing activity, which is related to market and consumer behaviour. If consumer behaviour changes in view of new opportunities which emerge owing to progress in science and technology, then it is natural to sup- pose that there occur changes in marketing concepts, aimed at meeting consumer needs. Consideration of stakeholders’ interests and development of logistics are also important in ensuring managerial effectiveness. The factors mentioned above promote social responsibility in Source: Compiled by the authors business and give a clear idea that effectiveness of enterprise performance results from well-planned logis- each of the elements of the business system contributes to tics processes, including feedback from stakeholders. To pro- meeting consumer needs in quality goods and services; or- vide and maintain sustainable development and functioning in ganisation resulting in a structure which promotes the effec- VUCA conditions, enterprises should work out the modalities tive functioning of the system; functionality which manifests of relevant strategies, which will be appropriate in a particular certain features of the business system with regard to its in- situation and cultivate corporate values that will motivate the teraction with the external environment when performing its personnel and promote teamwork. main functions and achieving the goal; emergence which Taking into consideration the results of the research, let means that the whole business system has properties that its us define a conceptual model for enterprise management in parts do not have; resilience which reflects the ability to pre- VUCA conditions (Figure 1). serve balance in the development process under the impact The model includes the purpose of functioning of an enter- of factors relating to the external environment; adaptability prise, factors impacting its external environment, approaches which makes it possible for the business system to change to managing the enterprise under present conditions as well its behaviour or structure in order to maintain, enhance or as appropriate techniques and tools for their implementation. modify the existing features in the external environment. The purpose correlates with both marketing and stakeholder Depending on the situation which results from the impact approaches based on meeting consumer needs and taking in- of the relevant managerial action, the business system conti to consideration of stakeholders’ interests, which leads to the nues on the trajectory which is viewed to be the most effective development of the enterprise. in terms of specified criteria. It is impacted by both endogenous In terms of enterprise management, one can define se and exogenous factors affecting the trajectory of the business veral essential elements that include the system approach, system, which requires correction in terms of decision making. under which an enterprise is considered to be a business The motion of the business system is aimed at the final result system with attributes such as integrity, which suggests that (achievement of the goal) of its functioning (Figure 2).

Fig. 1: Conceptual model for enterprise management in VUCA conditions Source: Compiled by the authors based on [7; 9; 14-17; 20-21]

Popova, N., Shynkarenko, V., Kryvoruchko, O., & Zéman, Z. / Economic Annals-XXI (2018), 170(3-4), 27-31 29 ECONOMICS AND MANAGEMENT OF ENTERPRISES

Fig. 2: Functioning of the enterprise as a business system in VUCA conditions Source: Compiled by the authors based on [2-4; 9; 21]

The purpose of functioning of the enterprise as a business to address particular challenges related to the implementa- system is based on the marketing approach, which, in VUCA tion of a particular project is the basis of the project approach. conditions, requires modern marketing concepts relevant to This very approach adequately reflects another feature of changes in social interaction. Today, the most important mar- contemporary business when flexible behaviour becomes a keting concepts to be implemented are relationship marke strategic competitive advantage in the changing environment. ting, trust-based marketing and stakeholder marketing, which In such conditions, a deviation from stiff organisational struc- have their own specific features that will allow enterprises to tures is inevitable. adapt to the current conditions, basing on the preferences Given the rapid change, uncertainty and complexity of si which they will receive as a result of trust relationships. tuations and relationships, there occur problems associated The application of the stakeholder theory, which is being with forecasting of further development of the business system developed in the framework of value-based management by in the long term based on happenings that took place in the taking into consideration stakeholders’ interests, becomes past. Thus, the volatility of the environment requires a strategic relevant in terms of the development of the network economy. vision and quick response to challenges of the external environ- Also, it is due to the need to look at wider issues regarding ment; uncertainty depends on understanding of the perspec- satisfaction of consumer needs in view of the fact that stake- tives under different variants of the reference scenario; com- holders impact enterprises’ functioning and competitiveness plexity needs an analysis of different factors of the external envi- and focus on business responsibility and corporate values. ronment and their impact on the enterprise, while ambiguity de- The functioning of a business system under the conditions mands clarity in defining different scenarios and their possible of volatility, uncertainty, complexity and ambiguity requires impacts. All this complicates forecasting and reduces the time timely transformations of the management system, which be- the forecast covers. Therefore, management decision-making comes possible due to enterprises’ adequate system of moni- regarding the enterprise’s development should be based on the toring of the external environment that helps enterprises to de- situational and scenario approaches, which requires knowledge tect and assess threats. This means that there is a need to pick of the situation and elaboration of several possible development up signals directly from the environment and respond to them scenarios depending on changes in the external environment, as soon as possible. Those enterprises that cannot improve which will make it possible for the enterprise to adapt to the response time to changes may cease to exist in the future. conditions under which development is foreseen. Responsiveness to changes requires high flexibility of or- Adaptability includes parameters such as the pace of ganisational structures and processes, which can be achieved adaptation (every single business system should be optimal due to the use of modern approaches to organisational activi- in terms of time and match the moment of transition to a ties (logistics processes) and creation of mobile organisational new state), flexibility of the management system (the ability structures (project teams). of the business system to deflect from its initial state to its Logistics processes are part of the logistics approach optimal state with less effort), and the adaptation rate (a re- based on the concept showing that management influence is sult that reflects a change in the level of the competitive- transmitted from the unified logistics system of management ness of the business system occurring from its impacting to sequential activities occurring when satisfying consumer factors). Trends in enterprises’ adaptation to VUCA condi- needs and interacting with stakeholders. The logistics ap- tions are shown in Figure 3. proach to enterprise management system makes it possible Yet, adaptability should not become a key feature of ma to converge stakeholders’ interests due to achieving the most nagement. While impacting the enterprise, rapidness and ineffective use of available resources in the functioning of enter- novativeness of the environment prompt the need for proac- prises and meeting their objectives. Also, it helps enterprises tive actions. Proactive actions in management are based on to optimise the processes of managing material, financial, la- innovation. Innovations act as a catalyst in breaking the sustai bour and information flows with minimum resources and time, nable functioning of the system in terms of bifurcations, due as well as to react flexibly to changes and challenges. to which there occurs a switch to the chaotic regime, which, It is possible to improve responsiveness to changes, to consequently, leads to self-organisation of the business system. coordinate actions as well as to enhance both the use of resources and the functioning of the enterprise, due to the application of the project approach, which is viewed as the most progressive in terms of implementing targeted actions under the conditions of volati lity, uncertainty, complexity and ambiguity. It changes the business model by considering it as a set of interrelated projects which have well-defined goals and objectives, resources, time limits and re- Fig. 3: Trends in enterprises’ adaptation to VUCA conditions sults-based outcomes. Creating teams Source: Compiled by the authors based on [3; 7; 9; 12]

Popova, N., Shynkarenko, V., Kryvoruchko, O., & Zéman, Z. / Economic Annals-XXI (2018), 170(3-4), 27-31 30 ECONOMICS AND MANAGEMENT OF ENTERPRISES

Also, enterprise management in VUCA conditions requires processes) and make the conditions public with regard to the behavioural approach aimed at the promotion of personnel at stakeholders. the enterprise. Competencies needed in the new conditions af- 5. Conclusions fecting development are vastly different from those emphasised Basing on the conducted research, we have determined in the past. Therefore, it is important to elaborate and apply new specific features of enterprise management in VUCA condi- methods and approaches to personnel management including: tions. The authors of the article have developed a conceptual • creativity and innovation methods based on the formation model of management which includes objectives based on of motivational systems focused on the development of the marketing and stakeholder approaches with an integra creative initiatives and proactive activities at all levels of ted use of the relevant approaches including system, situatio management; nal, logistics, scenario, behavioural and project approaches, • methods focused on changes in the behaviour of managers including methods and tools enabling enterprises to be com- at different enterprises based on strategic thinking, flexibi petitive in the modern world. lity and quickness in management decision making, the abi Our research has shown that most managers of the enter- lity to be credible and to communicate with the personnel prises understand the necessity to change the management and external stakeholders, including the ability to motivate model and the fact that realisation of this task strongly de- the personnel to develop, achieve and feel comfortable un- pends from the qualification of the executives. The managers der the conditions of constant changes; have positive attitude for the implementation of the needed • a focus on new qualities of the personnel, based on their approaches and instruments. It is considered as a positive critical thinking, openness to innovation, ability to adapt to notion as far as flexibility of managerial decisions, fast reac- changes, teamwork, as well as their capacity for constant tion to changes, adaptability and proactivity enhance entre- learning. preneurial effectiveness in the VUCA world. However, an ob- The implementation of the management concept in stacle for the modern concept of management introduction VUCA conditions is possible due to the use of new techno in Ukraine is low level of trust between enterprises and stake- logies, modern communications, payment systems, block- holders, in particular, public institutions, as well as legislative chain technology and big data platforms. constrains and slow reaction of state institutions to changes Effective decision-making in management requires a in the external environment. wealth of information. Big data platforms, used by persons Further research on the subject is possible in terms of the who make managerial decisions, cover volumes of informa- essence of each of the abovementioned approaches shifting tion measured in petabytes and exabytes. Such information the paradigm of management. The features of today’s world is collected from different sources, and it needs to be struc- in relation with globalisation, evolution of digital technologies tured with the use of different analytical tools. The speed with in different areas of management, introduction of blockchain which big data are accumulated and processed is an impor- (including payments), logistics and the impact of VUCA on tant factor which is to be synchronized with business pro- management processes require more detailed and profound cesses and decision-making in management. consideration. It is possible to enhance the effectiveness of managerial In our study, we wanted to point out that the digitization decisions and the speed with which they are made by using of the business administrative processes determine the in- a wide range of possibilities given by blockchain techno clusion of financial documentation for financial management logy. It serves to code any enterprise’s transaction, condi- tasks. One of the most important topics of this of a future re- tion it (for example, link it to shipment or any other logistics search may be such a financial innovation process.

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Received 18.01.2018

Popova, N., Shynkarenko, V., Kryvoruchko, O., & Zéman, Z. / Economic Annals-XXI (2018), 170(3-4), 27-31 31 ECONOMICS AND MANAGEMENT OF ENTERPRISES

Štefan Slávik PhD (Management), Professor, University of Economics in Bratislava 1/b Dolnozemska cesta Str., Bratislava 5, 851 02, Slovak Republic [email protected] ORCID ID: https://orcid.org/0000-0002-2890-8091

Insight into start-up, its action and surroundings

Abstract Start-ups are an appealing business form that gives space for self-realisation to enthusiastic, brave and creative people. The start-up progress is conditioned by the development of the business model. Other conditions for start-up viability include monetisation of business effort, effective leadership and teamwork, business strategy and external business support. A survey conducted on a sample of 76, 72 and 53 start-ups in three stages in 2015, 2016 and 2017 examined the development of those beginning and imperfect micro-enterprises in Slovakia. The research results are as follows. Start-ups are relatively closed, and their business model is inadequately connected to the environment. Start-ups know their customers well, but they do not know how to get them. They do not create partnerships in a sufficient range and quality. The monetisation of the examined start-ups is a little sophisticated, too traditional and without experimentation. Just less than a third of start-ups sell their basic product or service for free and generate money by selling premium services only. The most developed blocks are still customer value proposition and customer relationships; the least developed blocks are distribution channels and revenue streams. Start- uppers rely on the simple assumption that a working business model will provide a lucrative earning directly. The founders of the studied start-ups are capable visionaries, but less competent managers. Start-up teams have demonstrated a high degree of internal cohesiveness and support in unpleasant and unpredictable situations, but they lack a greater formalisation of work in a routine operation. Business strategies of start-ups are ambitious and international, but little verified in a competitive battle. The competitive advantage of start-ups is based on differentiation rather than on low cost. Start-ups do not trust the state support for business; they cooperate with large companies just a little, but prefer to work with the start-up scene and private investors. Start-ups must mature entrepreneurially, enthusiasts must become entrepreneurs and managers, and they have to learn how to monetise their business effort. Start-ups will be most aided by the cultural and civilisation development of a society that recognises entrepreneurship as a natural, useful and honourable resource for the development of the national economy. Keywords: Start-up; Business Model; Monetisation; Leadership; Teamwork; Business Strategy; Public Support of Business Making JEL Classification: M13; M21 Acknowledgements: This paper is the output of research project of VEGA MŠ SR a SAV No. VEGA 1/0019/15 Business models and business strategies of start-ups (2015-2017). DOI: https://doi.org/10.21003/ea.V170-06

Славік Ш. кандидат економічних наук, професор, Економічний університет у Братиславі, Братислава, Словацька Республіка Погляд на стартапи: їх функціонування та середовище Анотація Стартапом є перспективна бізнес-модель, яка дає ґрунт для самореалізації ентузіастам, а також креативним і рішучим людям. Те, наскільки успішним буде стартап, залежить від розробки належної бізнес-моделі. Іншими умовами, що визначають життєздатність стартапу, є монетизація бізнес-проекту, ефективне керівництво, спільна робота, наявність бізнес-стратегії та підтримка ділових кіл. Метою опитування, проведеного автором в три етапи на основі вибірки 76, 72 і 53 стартапів у 2015, 2016 та 2017 роках, було визначення шляхів становлення й розвитку стартапів у Словацькій Республіці. Результати опитування показали, що стартапи – це відносно закриті структури, побудовані на основі моделей, які надзвичайно залежать від середовища їх існування. Стартапери добре знають своїх клієнтів, проте не мають уявлення про те, як привернути до себе увагу інших осіб. Створювані ними партнерства не є достатніми ні за кількістю, ні за якістю. Процес монетизації стартапів, що були об’єктом даного дослідження, є складним і значною мірою традиційним, тобто позбавленим можливості варіюватися. У ході проведеного опитування було визначено, що трохи менше третини стартапів постачають свій основний продукт або послугу безкоштовно та генерують кошти лише завдяки продажам супутніх послуг. Найбільш розвиненими аспектами функціонування стартапів є ціннісні пропозиції та взаємини з клієнтами. Удосконалення потребує вихід на канали збуту й джерела доходу. Більшість стартаперів вважає, що робоча бізнес-модель безпосередньо здатна принести істотний дохід. Разом із тим розробниками стартап- проектів найчастіше є творчі візіонери, а не досвідчені менеджери. Команди стартаперів демонструють високий ступінь взаємодії та підтримки своїх представників у випадку, якщо виникають складні або непередбачені обставини, але їм не вистачає формалізації роботи. Розроблені стартаперами бізнес-стратегії є амбітними й передбачають можливість виходу на міжнародну арену, проте одиниці з них витримують конкурентну боротьбу. Конкурентною перевагою стартапів є їхня диференціація, а не їхня низька собівартість. Стартапери не розраховують на підтримку свого бізнесу з боку держави й мало кооперують з великими компаніями, більше розраховуючи на співпрацю на властивому їм рівні та залучення приватних інвестицій. З урахуванням викладеного вище можна зробити висновок, що стартапам необхідно «зміцнити» свою підприємницьку складову. Найбільш сприятливий вплив на стартапи мають культурний і цивілізаційний розвиток суспільства, яке визнає підприємництво природним, корисним і цінним ресурсом, що сприяє розвитку національної економіки. Ключові слова: стартап; бізнес-модель; монетизація; керівництво; командна робота; бізнес-стратегія; громадська підтримка підприємництва.

Slávik Š. / Economic Annals-XXI (2018), 170(3-4), 32-37 © Institute of Society Transformation, 2018 32 ECONOMICS AND MANAGEMENT OF ENTERPRISES

Славик Ш. кандидат экономических наук, профессор, Экономический университет в Братиславе, Братислава, Словацкая Республика Взгляд на стартапы: их функционирование и среда Аннотация Стартапом является перспективная бизнес-модель, которая дает почву для самореализации энтузиастам, а также решительным и креативным людям. То, насколько успешным будет стартап, зависит от разработки соответствующей бизнес-модели. Другими условиями, обеспечивающими жизнеспособность стартапа, является монетизация бизнес- проекта, эффективное руководство, совместная работа, наличие бизнес-стратегии и поддержка деловых кругов. Целью опроса, поведенного автором на основе выборки 76, 72 и 53 стартапов тремя этапами в 2015, 2016 и 2017 годах было определение путей становления и развития стартапов в Словацкой Республике. Результаты опроса показали, что стартапы являют собой относительно закрытые структуры, построенные на основе бизнес-моделей, которые чрезвычайно зависят от среды их существования. Стартаперы хорошо знают своих клиентов, однако не имеют представления о том, как привлечь к себе внимание других лиц. Создаваемые ими партнерства не являются достаточными ни по количеству, ни по качеству. Процесс монетизации стартапов, которые стали объектом данного исследования, является сложным и в значительной мере традиционным, то есть лишенным возможности варьироваться. В ходе проведенного опроса было определено, что немногим меньше трети стартапов поставляют свой основной продукт или услугу бесплатно и генерируют средства лишь благодаря продаже сопутствующих услуг. Наиболее развитыми аспектами функционирования стартапов являются ценностные предложения и взаимоотношения с клиентами. Усовершенствования требует выход на каналы сбыта и источники дохода. Большинство стартаперов полагает, что работающая бизнес-модель напрямую способна принести существенный доход. Вместе с тем разработчиками стартап-проектов чаще всего являются творческие визионеры, а не опытные менеджеры. Команды стартаперов демонстрируют высокую степень взаимодействия и поддержки своих представителей в случае, если возникают сложные или непредвиденные обстоятельства, но им не хватает формализации работы. Разработанные стартаперами бизнес-стратегии преследуют честолюбивые цели и предполагают выход на мировую арену, однако единицы из них выдерживают конкурентную борьбу. Конкурентное преимущество стартапов основано скорее на их дифференциации, нежели на их низкой стоимости. Стартаперы не рассчитывают на поддержку своего бизнеса со стороны государства и мало кооперируют с крупными компаниями, больше полагаясь на сотрудничество на свойственном им уровне и привлечение частных инвестиций. С учетом сказанного выше можно сделать вывод, что стартапам необходимо «окрепнуть» с точки зрения предпринимательства. Наиболее благотворное влияние на стартапы имеет культурное и цивилизационное развитие общества, которое признает предпринимательство естественным, полезным и ценным ресурсом, способствующим развитию национальной экономики. Ключевые слова: стартап; бизнес-модель; монетизация; руководство; командная работа; бизнес-стратегия; общественная поддержка предпринимательства.

1. Introduction organisation and processes. Lööf and Nabavi (2014) dealt Start-ups attract the attention of both professional and lay with the impact of localisation on survival, productivity and public, as they are not only a place of attractive business sto- the growth of new enterprise. Mata and Portugal (2002) di- ries, an opportunity for brilliant business growth, a space for rectly analysed the determinants of the survival of newly es- self-realisation but also a service to the public. Start-ups can tablished enterprises and the differences in the viability of do- afford to develop business ideas that would be too risky for mestic and foreign enterprises. However, the research of busi- ordinary companies, maybe fantastic, poorly verified, untrust- ness strategy as a tool for achieving more long-term goals is worthy or uninteresting only. Start-ups hide inside the poten- still limited to issues of cooperation of start-ups in R&D and its tial of enormous growth, stormy change, success, mistakes, determinants (Okamuro et al., 2011). returns and repeated rises. They are a live laboratory to ex- Public support for start-ups focuses in particular on plore metamorphoses of a start-up to a viable company. colla boration with universities and building an appropriate Start-ups are also a source of job opportunities for young ecosystem. Leyden and Link (2013) claim that universities people and school graduates who have decided to take their must offer an attractive program, so that start-up earnings life plans in their own hands, they do not want to be regu- could grow faster than their R&D costs. Published studies lar employees, and see in business how to secure their own on ecosystem come mainly from the US environment, e. g. lives by meeting the needs of others. Start-ups are expected Moore (2006), Insenberg (2010). Their findings correspond to to play a social role when they create jobs, when they can ef- the conditions of an advanced market economy and a long- ficiently valorise input resources and play an entrepreneurial standing tradition of business culture. and progressive role when they meet unsatisfied needs or im- The previous cognition of start-ups is relatively superfi- prove the quality of life by creating, exploring and satisfying cial and incomplete. The aim of the research is to deepen the needs. the knowledge of start-ups in order to fulfil their business Start-ups also attract the attention of researchers. and social role. Start-ups as a research object are perceived Research reports of the European Start-up Monitor (Kollmann through a business model, monetisation of business effort, et al., 2015; 2016) provide formal data on leaders, teams and team features, business strategy and public support. This business models of start-ups, but do not deal with their inter- multidimensional view should contribute to a deeper insight nal structure based on soft data nor explicitly investigate their into the start-up’s interior, its behaviour and the environment impact on start-up performance. They consider them impor- in which it operates. The source of new knowledge is field re- tant, but without further findings and conclusions. search carried out in the form of an empirical study. The business model and, in particular, the start-up team 2. Brief Literature Review and its leader are important investment criteria for angel inves- A start-up is a very small beginning enterprise, the origin of tors and venture capitalists. According to Sipola (2015, p. 72), which is linked to the emergence of a business idea. According investment readiness increases the hope that the start-up will to Thiel (2014, pp. 10-11), it can be assumed that a start-up is become an enduring enterprise. Miloud et al. (2012) state that a modern cultural and entrepreneurial phenomenon that is less the criteria of venture capitalists evaluating start-ups are, for formal than a normal enterprise. The co-ordinating and ce- example, a solo founder/founder team, an entrepreneur/top menting binder of the start-up is an individual self-realisation. management team, team completeness, etc. Blank and Dorf (2012, p. XVII) describe the start-up in a more For the time being, the business strategy of start-ups is formal way: «Start-up is a temporary organisation looking for studied to a very limited extent. Research studies address is- a scalable, repeatable and profitable business model». Sca sues of start-up survival. In this regard, Gartner (1985) iden- ling requires investment of external venture capital in tens of tified four conditions, which are individuals, environment, millions to saturate rapid expansion. Ries (2011, p. 27), who

Slávik Š. / Economic Annals-XXI (2018), 170(3-4), 32-37 33 ECONOMICS AND MANAGEMENT OF ENTERPRISES introduced himself to the world of business with the concept stabilised companies. This is confirmed by Kets DeVries and of lean start-up, defines: «Start-up is a human institution de- Miller (1986). According to them, «the individual characteris- signed to create a new product or service under conditions of tics and behaviour of these leaders influence the development extreme uncertainty». Start-ups as an institution hire creative and long-term sustainability of the start-up». people, coordinate their activities and shape a company cul- When a start-up is successful, considerable merits are at- ture that delivers results. Paul Graham (cit. by: Robehmed, N. tributed to the founder as an individual who leads the enter- 2013, December 16, Forbes), a representative of Y Combina- prise (Klotz et al., 2014). According to Timmons and Spinelli tor, says that after three years of business making most start- (2008), besides the strong leadership of the founder, it is im- ups are no longer start-ups, the completion of the start-up portant for a successful start-up to build a team whose mem- phase is linked to the acquisition by larger companies, reve bers have complementary skills, talents and the ability to work nues of more than USD 20 million and personnel of more than as a team. Klotz et al. (2014) report that most new companies 80 employees. Start-ups can arise in any industry, but most are founded and led by teams, not by individuals. Pearce and often they are technology or internet companies that offer va Sims (2002) found that «applying team leadership allows com- rious mobile apps. They create or discover completely new panies to achieve better results than vertical leadership, espe- needs or meet original needs with a completely different, more cially in change management and virtual teams». efficient or cheaper solution. Their identification marks are low Business strategy is an essential expression of the com- initial costs, greater business risk compared to normal compa- pany’s action. The business strategy solves the task and an- nies, potentially higher returns if a start-up becomes a regular swers mainly the question of how to surpass competitors in company. Kiska Jr. (2014) of Credo Ventures writes that any meeting the needs of the same customers. It is evident, that start-up in the «seed» phase must have a great potential and a an advance can be achieved by dissimilarity only. According globally unique product, in such a case a 20 times recoverabi to Porter’s typology (1980, p. 254), companies choose a cost lity is expected. The reasons for exceptional claims for invest- leadership strategy or differentiation strategy across all the ment valorisation in a start-up are the high rate of failure and market or focus on one or a small number of market segments exceptionally unique success. again through low costs or differentiation. Business strategy is A start-up as an incomplete and imperfect enterprise must then the result of a decision on differentiation, costs and seg- build a business model to implement its business idea. The mentation. model should contain all the components and conditions that Start-ups are placed and developing in an external environ- are necessary for business making. An effective business mo ment, and its impact cannot be ignored. Motoyama and Wat- del provides the customer with a value that the customer ac- kins (2014) called it an ecosystem with four basic relationships. cepts and pays for; on the other hand, the company will co 1. The relationship between entrepreneurs who can learn from ver all its costs and earn profit. Michal Truban (2016) is a Slo- mistakes or successes of other entrepreneurs. vak IT entrepreneur who writes that the idea is of little value and 2. The relationship between supportive organisations that is never unique. The true value of the company resides in the coordinate their activities to avoid useless overlap. business model. The business model is usually visualised for 3. The relationship between entrepreneurs and key suppor clarity and simplicity of use. The business model from John- tive organisations providing mentoring, business contacts son, Christensen and Kagerman (2008) consists of four inter- and finance. connected elements that make up and provide value. Its main 4. The relationship between entrepreneurs and other forms of parts are customer value proposition, a profitable formula, key support, e. g. business acquaintance events. resources and key processes. Glassman et al. (2014, p. 7) have A survey of external environment of Slovak start-ups constructed a simple visualisation with four dimensions that are elaborated by KPMG (2014) states that it consists of business arranged in a triangle (three vertexes and the centre): customer, sector, public sector, organisations supporting start-ups and value proposition, value chain, profitable mechanism. The most investors. widespread visualisation of the business model is the canvas 3. Purpose concept by Osterwalder and Pigneur (2009, pp. 15-44). Their The purpose of the research is to find out how the busi- nine-box model is abundantly quoted and described in the ob- ness model of a start-up is changing and maturing, because a jectives and methods of the paper. The meaning and useful- malfunctioning business model is considered one of the most ness of the business model are confirmed by Blank and Dorf serious causes of start-up failures (CB Insights, 2018). Chan (2012, pp. 8-18) write «... the only goal of the start-up is to find a ges of business model are captured on the basis of the busi- repeatable and scalable business model». While existing com- ness idea cycle and the funding cycle over the three phases panies pursue a business model, start-ups are looking for it. of the research (October - December 2015, June - July 2016, The result of business model operation will be reflected in January - March 2017). Other research objectives that con- the monetisation of business efforts. Monetisation answers dition the viability of start-ups are monetisation, leader/foun two questions (Bednár & Tarišková, 2017, p. 72): der and the team, business strategy, and external support 1. What value for money start-up provides, to whom and for of start-ups. Knowledge of these topics usually comes from how much? the last phase of the research. In the first, second and third 2. What is the source of revenue at start-up? phases of the survey, the sample contained 76, 72 and 53 A successful investor Dave McClure (2017) introduces start-ups. The research sample consists of start-ups opera five key determinants of investment in a start-up, which are ting in Bratislava, where the largest start-up community in the market, the product, the team, the customers, and the Slovakia is concentrated. revenue. He claims that 99% of start-ups need a reliable Estimates of some governmental material indicate that and efficient way to make money, otherwise they will end there are about 600 start-ups in Slovakia (The Government up. An efficient revenue model simply cannot be substitu of the Slovak Republic, 2016). The Startitup Portal (2018) ted by either a perfect product, or a functioning team, or the displays 301 start-ups. However, these data are not based right market and a lot of users. on official statistics, which does not record start-ups as a Leadership focuses on the role of founder/leader in deve special category. According to an estimate of the author lopment of a new company (Klotz et al., 2014). Baum, Locke of the article, about one half of all start-ups in Slovakia and Kirkpatrick (1998) found that «the inspiration and vi- are concentrated in Bratislava and its suburbs. However, sion of the founder are the driving force of a start-up». Simi- roughly one-third of all start-ups do not develop any ob larly, according to Timmons and Spinelli (2008), it is impor- vious preparatory or business activity. For a comparison, in tant for the start-up success that the start-up founder is a Germany (Cassala, n.d.) there is about 6,000 start-ups and good leader. At a start-up, almost all key strategic and tacti- in the Czech Republic (Benešovská, 2017) there are cur- cal decisions are made by its founder, and these decisions are rently recorded about 1,300 start-ups, some of them are in based largely on his/her intuition (Vendetti, 2010). The beha the seed phase and may not even be established. viour of leaders/founders therefore has a bigger and direct im- The business model is structured according to the visuali- pact on start-up performance compared to other bigger and sation of the canvas (Osterwalder & Pigneur, 2009, pp. 15-44)

Slávik Š. / Economic Annals-XXI (2018), 170(3-4), 32-37 34 ECONOMICS AND MANAGEMENT OF ENTERPRISES into nine blocks: customer value proposition, customer rela- Business model blocks that have statistically significant tionships, customer segments, distribution channels, key re- impact on start-up performance vary between research sta sources, key activities, key partners, cost structure and reve- ges; only the customer relationships block has a relatively sta- nue streams. The gauge of business model development (in- ble impact, affecting all the three performance indicators in dividual blocks) is a five-point scale that measures a degree of the second stage of the research, and influencing a number development (quality) of particular blocks. of customers and revenues at the 3rd stage. This block, there- The sources of knowledge about the examined start-ups fore, has a significant impact on the performance indicators are the statements of the start-up founders based on a ma over time (from 2nd to 3rd stage). The largest number of blocks naged face-to-face interview and a structured questionnaire, affect the indicator of number of users. additional interviews as needed, publicly available information The conversion from users through customers to revenues from start-up websites, other websites and professional jour- has a declining trend, but during the research from 1st stage nals and books. to 3rd stage this decreasing trend is on a higher starting le 4. Results vel. The start-ups with higher conversion and higher revenues 4.1. Structure of the business model have more advanced business models. Many of the start-ups For the studied start-ups, there is typical youth and entre- make a sale, yet only few of them make some earnings. preneurial inexperience. Their production is insufficiently ori The span between the most and the least developed blocks ginal; they provide little evidence regarding the proclaimed in the period from 1st to 3rd stage of the research is shortened. ori ginality. The assessment of originality is more of a guess, The most developed blocks are still customer value proposi- desire or ambition. tion and customer relationships; the least developed blocks The start-ups unequally perceive the development of en- are distribution channels and revenue sources. The greatest trepreneurial ideas. The development of an idea according to improvement between the first and third stage of the research the entrepreneurial cycle is significantly overtaking the deve is recorded at partners and revenue sources, customer seg- lopment of an idea according to the investment cycle. Evalua ments, and key processes have been changed the least, but ting the level of development from external providers of capital partners are still under-average developed block. The blocks is clearly more demanding and shifts start-ups to earlier sta of the business model are improving approximately directly ges of development. Product development is slightly ahead of in proportion to time, with no signs of growth accelerating. knowledge of the satisfied needs and solved problems. The business model is gradually homogenised. The individual The market of investigated start-ups is territorially defined quality of the business model blocks increases, but the tight- between Central European and European markets. In the third ness of the links between them weakens, and the improve- stage of the survey, the research sample is dominated by ment of the model slows down at the last stage of research. business action in the world market; the share of the Euro 4.2. Monetization of business effort pean market declined very slightly; the orientation towards The source of income for most of the start-ups is the the Central European market increased slightly, and the na- sale of their service (40%) or product (20%). Approximately tional market was significantly reduced. Customer and mar- 20% of the start-ups earn on the intermediation of sale of a ket knowledge has been remarkably high since the start of the service or product and about 20% of the start-ups have not study and has not changed dramatically during the research. yet found an appropriate source of revenues. Some of the Entry to foreign markets takes place mainly in the form of di- start-ups are not deliberately looking for revenue streams rect export, hence independently, i.e. without intermediaries. and are devoting to proliferation of the number of users to Customer relations have gone through a considerable monetise them later. transformation. Partial contact accounts for more than one- Almost one half of the start-ups receive an income by third of customer contacts at the end of the survey, while standard payment when selling a product or service. Less shares of self-service, personal and extraordinary assistance than a third of the start-ups sell basic product or service for slightly decreased and the role of co-creation increased. free, whereas money is generated only through the sale of People are regarded to be the most important source. premium services or from other subject than the user of the They have a 50% share of all start-up resources, whereby re- service. Premium payments have been required only by 4% sources are slightly more advanced than processes. The most of the start-ups so far. About 20% of the start-ups have not important processes are the realisation of the idea, hence the yet decided on the type of payment. conversion of the idea to a real product or service, and then Most of the start-ups (41.3%) prefer instant payment at the sale of the finished product. the moment of sale, but subscription payment is growing The most important partners are the investor, the mer- steadily (29.3%). It is a repeated sale of services that will give chant and the manufacturer. At the end of the research, the start-ups a smaller, but stable revenue stream compared to manufacturer was replaced by the component supplier. A de- a one-time sale. A smaller share of the start-ups (12.0%) will cline happened in the share of other suppliers and makers and get paid only after the service has been executed and billed. the share of merchants has grown significantly. The rest of the start-ups (17.3%) have not yet chosen a pay- The largest cost items of the operation of start-ups are ment timing. wages, co-operation and materials. These items remained The start-ups with the highest profit offer products, sell for the largest in the next stages of the research and slightly in- money and take the payment directly at the point of sale. The creased. The largest source of funding in the first stage of start-ups with the highest losses offer services, sell them for the research is own savings, then own resources (retained money and the payment is made in the form of a subscription. earnings and depreciations), strategic investors, venture 4.3. Leadership and teams capital and business angels. In the second and especially The leaders of the studied start-ups are competent visio in the third stage, the largest source of financing is own re- naries, they achieve to create above the average original and sources (retained earnings and depreciations) followed by attractive vision. However, it does not reach the level of the ab- strategic investors, own savings and venture capital, with a solute peak. They manifest a slightly lower quality of leadership significant decrease in own savings. in the ability to inspire, excite and motivate their co-workers to Revenue streams measured by the number of users, the acquire a defined vision. The leaders are also slightly less skil- number of paying users (customers) and revenues, are under- ful in encouraging other team members in case of problems, developed compared to other business model blocks, but the complications and failure. A relatively weak er trait of leaders is start-up performance from the first to the third stage of the the development of co-workers’ competence through further research has risen continuously. The reason for non-revenue education, coaching and mentoring. The role of the leader as generation is the product or service itself, as its operation or a visionary during the development of a start-up is gradual- production implementation and distribution are in the state of ly decreasing, although the reminding of the main joint goal is preparation. The share of this cause is gradually decreasing needed constantly. The quality of the leader’s encouragement and the share of other causes, especially the distribution fai is less expressive and declines during the research, yet it rises lure and team failure, is growing. again at the last stage of research.

Slávik Š. / Economic Annals-XXI (2018), 170(3-4), 32-37 35 ECONOMICS AND MANAGEMENT OF ENTERPRISES

The teams have demonstrated a high degree of internal about start-up business and start-ups themselves is relied to cohesiveness, mutual support and trust in unpleasant, un- a greater extent than the government and large companies. predictable and crisis situations. Such situations are a lack The assistance of the start-up scene resides in consulting, of money for workaday operation, no payment of wages, ex- mentoring, lectures, events, providing premises for business traordinary work effort and personnel changes in the team. making and creative activities, cohabitation in a communica The formal division of job responsibilities and roles in the ting and cooperating start-up community. team reaches the lowest rating amongst parameters of team The most appreciated is the support from investors, which work. The start-up teams consist mostly of versatile and is expressed in helping with the business model, marketing, self-confident individuals who submit to the authority of a intermediation of contacts, consulting, team building and, ul- chief with displeasure. On the other hand, the leaders lack timately, providing finance. The investor is expected to be managerial skills. The quality of team work recorded a slight smart and, besides some finance, he/she delivers advice, ex- decrease from the 1st to the 2nd stage of the research, howe perience and networking. ver all the parameters of the team work increased at the 3rd In addition to start-ups which expect some help from the stage. On the path to their success, the start-ups have to outside, there are also start-ups that avoid it because they overcome a number of different obstacles and, they will fail want to maintain their independence and their original con- without cohesive and cooperative teams. cept, or they look for support only later in their development, 4.4. Business strategy or commitments following from the external assistance are Most of the start-ups serve several market segments with too costly for them. a tendency to reduce their number. The differentiation of pro 4.6. Discussion about research results ducts is noticeable, as far as 90% of the start-ups are diffe The business model of start-ups is formally arranged and rent in originality at the international level (from Central Euro- functional. A key start-up asset is a business idea that is being pean to Worldwide). The differentiation has a very slight ten- developed on the basis of a business model. A start-up is an dency to decline. A significant share of the start-ups (78%) enterprise with extremely limited resources, and therefore it have costs at the same and lower levels as competitors, has to open its business model and replenish it with com- slightly declining during the stages of the survey. The product plementary external assets. However, a closer look suggests prices category has a similar tendency. The exceptional capa- that start-ups are relatively closed and their model is inade- bility of the start-ups lies primarily in a substantial difference quately interconnected with the environment. Start-ups know of competitors, since they try to do things differently and offer their customers well, but they do not know how to get towards diffe rent values, while they are only slightly different in costs, them. They do not create partnerships in a sufficient range prices and market segments. and quality. They work with relatively high-quality resources, More than 70% of the start-ups operate in foreign mar- yet they cannot fully exploit them due to less functional in- kets, at least in Central Europe. The share of internationally ternal linkages, and therefore it is also obviously unclear bin operating start-ups increases during the survey. ding of the model to the performance of a start-up. It may The reasons for entering international business are the be thought that it is a consequence of the youth and inexpe size and the rate of growth of the foreign market, the proximity rience of founders with the company’s internal operation and to the local customer (after the establishment of a branch), the lack of knowledge of the business making rules. cooperation with foreign investors and attractive, but usually The monetisation of the studied start-ups is a little so- small, acquisitions abroad. phisticated, too traditional and without experimentation. The vision/ambition of start-ups is to become apparent Start-uppers rely on a simple assumption that a success- at least at the European level. They are placed in industries ful business model will directly guarantee successful mone where the life cycle is between the phase of growth and the tisation too. However, the transformation of the produced phase of maturing. The business environment has average and delivered value into money is a special business task dynamics and complexity, relatively good predictability over a and invention. Firstly, investors require getting huge masses period of three to five years, and the average intensity of com- of users from some start-ups and then some part of them petition. The competitive position of most start-ups is also will be monetised. The database of a large number of users ave rage. Quality/added value of production is considered to helps the later at conversion on customers or at selling a be comparable to competitors at the European level, yet the start-up for a high price. key technology and competitive advantage are evaluated at a The founders are characterised by visionarity and enthu- le vel approaching European one only. siasm, which is gradually exhausted and not supplemented The action/strategising of the studied start-ups is de- or replaced by managing. The founders are not prepared for fensive with a tendency to offensive. They follow pioneers a change of the content of managerial work, which is a shift in their industries and adapt to them. Their dynamics and from leadership to managing, from informal relationships to speed of action, sensitivity and perception to external im- formal division of labour, from friendly relations to at least pulses are average with a tendency to increase dynamism moderate hierarchy, from volunteering to punctual and accu- and sensitivity. Their action or real strategies differ from rate fulfilment of duties. competitors’ strategies to a greater extent, but it is not a big In the business strategy, there is a discrepancy between or a complete difference. the declared originality, considerable distinctiveness, high 4.5. External support aspirations (subjective perception) of a start-up and indus- Start-ups receive minimal or low support from the go try conditions/parameters (objective reality), which is more vernment and public institutions and, at the same time, do not typical of less original and ambitious entrepreneurship. The trust the public support. They expect simple and transparent differentiation and originality of start-ups are not overly proven business conditions for companies of any size. They appre by the market and feedback from the customer, and therefore ciate, however, the assistance from the government agency a surprising corrections of the business strategy can be ex- for the development of SMEs, which encourages participation pected during the maturity of industry and increase of com- of start-ups in foreign events, makes foreign contacts availa- petition intensity. Most start-ups have too many ambitions at ble and offers consulting. the beginning of business making, e. g. targeting/addressing Collaboration of start-ups and larger companies is eva on too many segments. luated more positively, yet it is labelled by concerns about Public support should bridge the inexperience of start- non-equivalent relationship and possible misuse of trade sec ups and the lack/absence of money. Easy access to invest- ret. The simplest is trade cooperation, which is a purchase ments will do more harm than good, and therefore invest- of a number of products and offer of distribution. Larger and ments should come from private sources only, otherwise they more experienced companies offer consulting, contacts, are the cause of irresponsible actions. Start-ups that receive premises, financing, partnership and repurchase at exit. support, however, must count on the loss of independence to A start-up scene, which consists of co-working spaces, some extent. Solving the discrepancy between support and accelerators, incubators, start-up competitions, websites independence is the key to the progress of start-ups on the

Slávik Š. / Economic Annals-XXI (2018), 170(3-4), 32-37 36 ECONOMICS AND MANAGEMENT OF ENTERPRISES basis of public interest. Any support is effective only if there is fades and must be replaced with more cold professionalism. mutual trust between the provider and the recipient. An increase in entrepreneurial professionalism is the most The most successful and ambitious start-ups change and significant challenge for the surveyed start-ups. This, howe transform their business and become exponential organisa- ver, means that the founders will have to share the manage- tions (ExOs). Start-ups that have participated in the research rial and proprietary control of the enterprise with experienced are three to four years old, their growth is for now slow but they managers and investors, because the acquisition of own ex- can potentially become (ExOs), e. g. Vectary, Ixworx, Mente- periences and capital is a long-term issue. Loss of manage gram and Eyerim. Esset (antivirus software) that has been in- rial, and in particular, proprietary independence, is frustra ternationally recognized and has become a globally known and ting, and it is another challenge for start-uppers. active enterprise is the most significant Slovak ex-start-up with Start-ups are thinking about business strategy, yet so far ExOs features, and Sygic (mobile navigation) approaches it. it is rather an idealised idea than real action, and therefore Pixel Federation, ColosseoEAS, DECENT, Exponea, Sli.do and they should reinforce realistic perception of their position in GA Drilling are also approaching exponential organisations. The the business environment through continuous feedback, car- main constraint to the progress of start-ups is the lack of the ry out entrepreneurial experimentation, creatively and persis- capital they need, which amounts to tens of millions of euros. tently develop and implement ideas. If start-ups want to get 5. Conclusion external support, they will have to demonstrate an viability on A start-up is a very small enterprise that has to deal not the base of their own efforts, verified results and their own fi- only with the variability and unpredictability of the business nancial resources. environment, but also with its own imperfection. Imperfec- Further research will probably be focused on turning tion is not a deficiency; it is a natural trait of start-ups. It re- start-ups into a standard small or medium enterprises. Key sides in the contradiction between a business idea and ex- themes include completing the business model, distribution tremely limited resources. The solution is in opening and channels, routine operation, determination of start-up value, complementing the business model with external comple- sale of the owner’s shares, conditions of exit and business mentary assets. A start-up is driven enthusiasm that later strategy in growing competition in the mature industry. 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Slávik Š. / Economic Annals-XXI (2018), 170(3-4), 32-37 37 ECONOMICS AND MANAGEMENT OF ENTERPRISES

UDC 339.3:338 (330.3)

Nataliia Ilchenko Anna Kulik Róbert Magda D.Sc. (Economics), Associate Professor, PhD (Economics), PhD (Economics), Head of the Department of Associate Professor of the Department of Associate Professor, Trade Entrepreneurship and Logistics, Trade Entrepreneurship and Logistics, Faculty of Economics and Social Science, Kyiv National University of Trade and Kyiv National University of Trade and Szent István University Economics Economics 1 Páter Károly Str., Gödöllő, 19 Kyoto Str., Kyiv, 02156, Ukraine 19 Kyoto Str., Kyiv, 02156, Ukraine H-2100, Hungary [email protected] [email protected] [email protected] ORCID ID: ORCID ID: ORCID ID: https://orcid.org/0000-0003-4052-571X https://orcid.org/0000-0002-2601-3833 https://orcid.org/0000-0001-9350-6673 Trends in development of wholesale trade in Ukraine

Abstract. The article focuses on the problems of the development of wholesale trade in Ukraine. Adapting the activities of wholesalers to the changes taking place in the wholesale market and the development of e-commerce in the conditions of globalisation and the integration of economic processes require the formation of new ways of interaction in supply chains and optimisation of business processes. The purpose of the research is to develop proposals regarding the development of wholesale trade in Ukraine, taking into account the experience of European countries. To do the study, the authors applied comparative analysis and empirical research (in 2017, thirty enterprises of wholesale trade were investigated). Basing on the conducted research and taking into account the experience of the leading countries of the world, the following scenario of the development of wholesale trade in Ukraine is proposed. 1. On the basis of the conducted research it is proved that the wholesale turnover in Ukraine tends to decrease - 61.1% of the answers, however 52.8% of the respondents claim through that the wholesale turnover at wholesale enterprises where the respondents work will increase in the next three years. They foresee the development of the horizontal integration of wholesalers, since wholesale trade enterprises have advantages and fundamental differences associated with the period of turnover of funds. Also, such is the respondents’ opinion regarding the vertical integration of wholesale enterprises in retail trade. Only a small number of the respondents agreed that wholesale companies would merge with retailers. Therefore, we can assume that this trend is decreasing, and there will be no significant changes in this area in the coming years. 2. The most effective way is the development of wholesale trade as a result of focusing on one of the functions (for example, specialisation in providing logistics services, provision of warehouse services or services to ensure the organisation of goods, the development of 3 PL (PL - provider of logistics services), provision of logistic services by 4 PL-providers with regard to storage, transportation and processing of orders). Such functions are often assumed by the former distribution companies. We consider this direction of wholesale trade to be the most possible. However, this can be achieved only in the presence of warehouses. 3. We have provided a conceptual framework for the development of wholesale trade in accordance with the implementation of the omni-channel strategy. The application of e-commerce in the activities by wholesalers (for B2B businesses) increases the level of customer service in the modern environment. The respondents acknowledge the tendency to create their own online stores at wholesale enterprises - 89%, which correlates with 97% of the respondents who will increase wholesale trade in e-commerce in the next three years. The introduction of e-commerce in the activities of wholesalers (for B2B businesses) will contribute to the enhanced level of customer service in the modern environment. Yet, the effective use of the omni-channel strategy is a complex process that requires integration of advanced technology and transformation of outdated organisational structures and business processes. Keywords: Wholesale Trade; E-commerce; Multi-channel; Omni-channel; Fulfillment JEL Classification: F10; М21 DOI: https://doi.org/10.21003/ea.V170-07

Ільченко Н. Б. доктор економічних наук, доцент, завідувач кафедри торговельного підприємництва та логістики, Київський національний торговельно-економічний університет, Київ, Україна Кулік А. В. кандидат економічних наук, доцент кафедри торговельного підприємництва та логістики, Київський національний торговельно-економічний університет, Київ, Україна Магда Р. кандидат економічних наук, доцент, факультет економіки та суспільних наук, Університет Святого Іштвана, Гьодоло, Угорщина Тенденції розвитку оптової торгівлі в Україні Анотація. У статті приділено увагу проблемам розвитку оптової торгівлі в Україні. Проведено дослідження сучасних методів організації оптової торгівлі на вітчизняних підприємствах. Авторами запропоновано шляхи розвитку оптової торгівлі на основі проведення анкетного дослідження діяльності підприємств оптової торгівлі. Визначено концептуальні положення розвитку оптової торгівлі відповідно до впровадження омніканальної стратегії. Ключові слова: оптова торгівля; електронна комерція; мультиканальність; омніканальнальність; фулфілмент.

Ilchenko, N., Kulik, A., & Magda, R. / Economic Annals-XXI (2018), 170(3-4), 38-42 © Institute of Society Transformation, 2018 38 ECONOMICS AND MANAGEMENT OF ENTERPRISES

Ильченко Н. Б. доктор экономических наук, доцент, заведующая кафедрой торгового предпринимательства и логистики, Киевский национальный торгово-экономический университет, Киев, Украина Кулик А. В. кандидат экономических наук, доцент кафедры торгового предпринимательства и логистики, Киевский национальный торгово-экономический университет, Киев, Украина Магда Р. кандидат экономических наук, доцент, факультет экономики и общественных наук, Университет Святого Иштвана, Гёдоло, Венгрия Тенденции развития оптовой торговли в Украине Аннотация. В статье рассмотрены проблемы развития оптовой торговли в Украине. Проведено исследование современных методов организации оптовой торговли на отечественных предприятиях. Авторами предложены пути развития оптовой торговли на основе проведенного анкетного исследования деятельности предприятий оптовой торговли. Определены концептуальные положения развития оптовой торговли в контексте внедрения омниканальной стратегии. Ключевые слова: оптовая торговля; электронная коммерция; мультиканальнисть; омниканальнальнисть; фулфилмент.

1. Introduction the wholesale market and the peculiarities of the implementa- Wholesale trade is one of the driving forces behind tion of business processes at the investigated enterprises. Ukraine’s integration into the European Union market, thus it As already mentioned, there are several different scientific is vital to promote the development of Ukrainian enterprises approaches to the definition of the functions of wholesale trade - and to bring them in line with the standards of the European the transformation of large batches of goods into small ones. wholesale trade industry. Wholesale trade is a connecting element between the produ 2. Brief Literature Review cer and the consumer within the distribution channel between The formation and development of the wholesale market in the manufacturer and the retail consumer enterprises, between Ukraine require intensive formation of its infrastructure, creation the manufacturer and a group of consumers and even individual of a new information base, and provision of credit, financial and consumers. In nowadays conditions, there is another channel regulatory support. The formation of new business models cor- which is carried out on the basis of «indirect transmission», that is relates with scientific research of modern aspects of enterprise the transfer of goods directly from the supplier to consumers, by- management and is in the vision of foreign and domestic scien- passing warehouse storage. The process ends with the delivery tists. However, some theoretical and practical issues relating to of goods by own means of a wholesaler or under the conditions the development of wholesale trade remain understudied. of outsourcing, while providing appropriate customer service. Ukrainian scientist T. Dubobyk has identified a set of fac- In accordance with the functional features of the activities tors that impact consumer decisions concerning the purchase of wholesale trade enterprises, it is possible to divide them of items online, chances to shop online, use of social networks into two groups: those providing a wide range of services and for communication, data privacy controls, consumer aware- those providing a limited range of services. ness of the value of personal data with regard to their segmen- These two groups of wholesale companies are the subject tation. The basic target segments of consumers are price hun of the empirical research. The sampling method was random; ters, stakeholders, finders, observers and others. The conclu- interviews were conducted using data collection methods, in- sions have been made concerning the possible use of Inter- depth interviews using a questionnaire survey, an online sur- net marketing communication components for the abovemen- vey and a direct interview. tioned segments of consumers (T. Dubovyk, 2014). Yet, their The authors have analysed the data of the State Statistics research is focused only on the B2C market and they don’t Service of Ukraine on the activity of the wholesale trade enter- consider consumer behaviour in the B2B market. prises by the type of economic activity «Wholesale and retail A. Mosquera, C. O. Pascual and E. J. Ayensa, 2017 con- trade; repair of motor vehicles and motorcycles», which were sider that the omni-channel is one of the most important retail relevant at the time of the research (2017). In order to obtain in- events of recent years. New technologies allow retailers to integral valid information, we conducted an analysis of the existing tegrate all the information that today’s emerging channels and practice of providing services by wholesale enterprises, which touch-points provide. was done on the basis of medium-sized and large enterprises. Polish colleagues, Sz. Strojny and M. Chromińska, claim In total, 30 enterprises of wholesale trade are investigated. that a trend towards the transformation of supply chains has re- The largest share in the overall structure of the sample is taken cently been observed in Poland (Strojny, Szymon; Chromińska, by wholesale trade enterprises specialising in the sale of food Maria, 2016). Due to constant changes in wholesale trade, it is products - 22%, construction materials - 6.7% and household necessary to continue conducting research in this market seg- chemicals - 11.1% (Figure 1). ment. We agree with those authors who state that there is only The structure of the enterprises by the sample group, a limited amount of research available on wholesale trade. Addi- namely the wholesale enterprises involved in the organisation tionally, the quantity of such studies is much smaller than in the of the supply chain of goods equals 15% and independent case of retail trade. However, wholesale trade is an important wholesale enterprises comprise 86.1%. part of the supply chain, which significantly affects its effective- The first part of the research is to determine the concen- ness. The authors assume that multichannel sales is one of pos- tration of processes occurring in the manufacturing sector, the sible solutions which should be implemented by wholesalers. However, the issues which enterprises are facing while introducing the new form organization of wholesale trade to require further investigation. 3. Purpose The purpose of the article is to work-out proposals on how to develop the wholesale trade in Ukraine. 4. Results As wholesale trade remains an important element in the supply chain and influences the effectiveness of its creation, it is necessary to conduct research on the features of management and optimisation of business processes. The results of the empirical study cover both the analysis of the activities of independent wholesalers, as well as those involved in the organisation of the supply chain of goods in the Ukrainian market. The Fig. 1: Branch structure of the sample of enterprises, % research is aimed at the integration processes taking place in Source: Compiled by the authors

Ilchenko, N., Kulik, A., & Magda, R. / Economic Annals-XXI (2018), 170(3-4), 38-42 39 ECONOMICS AND MANAGEMENT OF ENTERPRISES relationship between producers and traders. Accordingly, the first group of processes under study is the process of concentration at the level of production enterprises, that is the horizontal concentration of production. This problem is an important part of Porter’s five forces model. It is assumed that there is a relationship between the supplier and the consumer, the higher the level of concentration is, the greater their relevance to the tender procedure is, which manifests itself in the ability to establish special conditions during the negotiation process. Thus, the research of the activity of manufacturing enterprises affects the organisation of the wholesale enterprise. The data of the surveys of managers of wholesale enterprises the trend of development of the industrial sector is shown in Figure 2. Fig. 2: The structure of responses of the respondents about the According to the conducted research, 55.6% of the trend of development of horizontal concentration of production, % respondents believe that in the future manufacturers Source: Compiled by the authors will create distribution centres and carry out the function of wholesale trade, while 40.1% of the respondents state that they do not notice the process of merger of producers. In this way, this phenomenon is positive for wholesale enterprises. The experience of European countries regarding the development of hori zontal and vertical marketing systems deserves attention because the combination of such enterprises is achieving a significant economic effect. According to foreign experience, the growth of vo lumes of wholesale trade of world companies is also due to the intensive development of Internet commerce, which promotes the search for new partners in other countries, the conclusion of con- Fig. 3: The structure of responses of the respondents concerning tracts for the supply of goods with them, retail development, % as well as conducting marketing research Source: Compiled by the authors and research of business processes by leading enterprises from the countries of the world. respondents acknowledge the horizontal concentration in the However, by investing in distribution channels and deve wholesale market in Ukraine, which is a combination of whole- loping their own distribution centres, manufacturing compa- sale enterprises (Figure 4). We asked the respondents about nies will in some ways compete with wholesale enterprises. the prospects for the development of the wholesale trade. The process of reducing the distribution channels is deter- We can assume that such a merger is an answer to the mined by the decrease in the level of wholesale trade turnover, current situation in this area. The process of the horizontal in- as well as the development of direct relations between pro- tegration in wholesale trade can take different forms and ran ducers and retail trade networks, which has been observed in ges, from the purchase of a group of enterprises to the full in- recent years. This trend is due to the fact that manufacturers tegration of businesses. have full control over the sales channels. Reducing distribu- However, there is no unambiguous opinion among the re- tion channels is a positive moment for end users in the supply spondents regarding the vertical integration in retail trade. On- chain of goods. Reducing the functional costs of the business ly a small number of respondents agree that wholesale compa- process is the result of the distribution channels reducing. nies would merge with retailers. Such a process has been taking We have analysed the respondents’ responses to the place over the last 10 years and has influenced the formation of threats of wholesale trade development through the growth of several retail chains in Ukraine, consisting mostly of small retail the number of retail outlets (Figure 3). According to our research, 45.4% of the respondents believe that the main threat to wholesale enterprises is the direct connection of manufacturers with retail trade, 40.1% indicated that the horizontal integration of retail enterprises could be another threat, and 36.1% of respondents noted that the number of supermarkets and hypermarkets in the next three years will increase. This trend will have a negative impact on the development of wholesale trade in Ukraine. At the same time, respon dents do not expect that new supermarket chains will appear in the Ukrainian market and the majority of respon dents believe the number of supermarkets will decrease. Accordingly, 45.1% of the respondents indicate that the number of wholesale enterprises will decrease; 42.3% of the respondents consider that the horizontal integration of wholesale enterprises will take place in the near future, and 35.2% of the respondents note that retail trade networks will fulfil the wholesale trade function in the future. Thus, 71% of the respondents con- Fig. 4: The structure of responses to prospects for the development firmed this idea of reducing the number of wholesale of wholesale trade enterprises, where respondents work, % enterprises. At the same time, more than 60% of the Source: Compiled by the authors

Ilchenko, N., Kulik, A., & Magda, R. / Economic Annals-XXI (2018), 170(3-4), 38-42 40 ECONOMICS AND MANAGEMENT OF ENTERPRISES outlets. We can assume that this trend is decreasing, and there will be no significant changes in this area in the coming years. According to respondents, the wholesale turnover in Ukraine tends to decrease - 61.1% of the respondents, ho wever 52.8% of the respondents claim that the wholesale turnover at wholesale enterprises where respondents work will increase in the next three years. Respondents acknowledge the tendency to create their own online stores at wholesale enterprises - 89%, which is closely related to the response of 97% of the respondents who will increase wholesale trade in Internet commerce in the next three years (Figure 5). Accordingly, this creates new challenges for wholesalers, since retail enterprises have the same trends. At the same time, online commerce allows Internet stores to compete with retailers Fig. 5: The structure of responses of respondents about the in line with the established flexible pricing policy, due to a reduc- prospects of Internet commerce development, % tion in the price depending on the supply of goods and the de- Source: Compiled by the authors velopment of the bonus system for consumers. But this requires wholesale companies to acquire new skills and to change the enterprises (for B2B business) promotes the level of customer entire structure of business processes of the enterprise. service, but the use of omni-channel strategy is a complex pro- The research of the peculiarities of the introduction of cess and requires the integration of world class technologies the latest technologies in the organisation of sales of goods and the transformation of outdated organisational structures is based on the multi-channel and omni-channel strategies, and business processes, as well as the transformation of supply which contributes to the increasing level of customer service of chains. As a result of the many channels used today (social me- wholesale enterprises using information platforms. In modern dia, physical store and mobile applications), companies have a conditions, there are several areas for research on the use of lot of consumer information. They must use it to customise and tools for omni-channel marketing, among which: the construc- ensure the consistency of each customer relationship. tion of conceptual models of multi-channel and omni-chan- However, for those wholesale enterprises that have begun nel marketing using the experience of leading enterprises and implementing omni-channel strategy, it is possible to create experience of the countries of the world; the impact of multi- a powerful competitive advantage among others. For exam- channel and omni-channel marketing on the financial and eco- ple, the experience of enterprises from European countries nomic indicators and the effectiveness of the wholesale enter- that implement the omni-channel strategy has shown that it is prise; management of the supply chain of goods and distribu- possible to carry out the process of purchasing goods in the tion systems during the transition to multi-channel sales (espe- on-line and off-line mode with a possibility of delivering goods cially for wholesale enterprises that do not have warehouses); on the day of the order or the next day. introduction of e-commerce at wholesale enterprises; the pos- We have conducted a research on the criteria for the im- sibility of combining traditional and e-commerce during the or- portance of implementing this strategy when purchasing ganisation of commercial activity. goods through online orders provided by B2B business repre- Ukrainian companies can learn a lot from the experience sentatives (Figure 6). of both Alibaba and Amazon, if it is about the quality of cus- The wholesale enterprises (80%) believe that the important tomer service. Both sites have set a very high bar; the same is criteria for the purchase of goods by consumers is the delivery expected today from B2B suppliers. Cloud B2B e-commerce of goods the next day, providing of up-to-date information on platforms have a potential close to that of Amazon in terms of the available stock of goods in real time - 78%, the possibility ensuring the omniscience of the trading process and the pos- of self-service of account and order - 76%, the relevance of in- sibility of interacting with the buyer from various devices and formation about the availability of goods and price lists - 73%, through different channels, but few of them can afford to in- as well as a convenient delivery schedule - 65%. vest enough money in personnel and competencies to enter Further, we researched of the criteria of importance when such a same level of service. This factor is so significant that purchasing goods through the Internet order, indicated by Gartner predicts a shift of the e-commerce market by 70% by consumers, namely: clear information about the time of de- the year 2019 from the models B2C and B2B towards indivi livery of goods - 84%, the relevance of information about the dual interaction schemes with the client. availability of stock in real time - 79%, the possibility of self- The Internet occupies the basic position among all informa- service of account and ordering - 74%, the relevance of the tion technologies, which leads to the need to promote products order and the ability to track the shipment of goods from the and services of trade companies, to search for information, cus- warehouse - 69%, the ability to view their own profile and in- tomers and partners, and also to take advantage of the appli- formation on past purchases - 65% (Figure 7). cation of Internet technologies. B2B sellers are investing more Thus, B2B consumers are no longer satisfied with frag- and more in e-commerce technology, so that they can provide mented, ineffective orders on the Internet and expect that the the same easy ordering and customer experience that online re- implementation of the omni-channel strategy will continue to tailers enjoy. In 2018, wholesalers will be able to create stronger evolve. Accordingly, B2B consumers will be able to receive re- commerce ecosystems. Online wholesale stores will become liable product information, analyse the history of orders, pay- increasingly discoverable through search engines; price nego- ment of bills and information on the volume and cost of deli tiations could happen in real time, and the ordering process will very of goods, as well as return and exchange on all channels. take place virtually using online catalogues and payment gate- 5. Conclusions ways. As B2B businesses evolve to a more traditional retail ap- Basing on the conducted research and taking into ac- proach, they will be able to offer wholesale customers the same count the experience of the leading countries of the world, the sophisticated level of services that retailers have been taking following scenario of the development of the wholesale trade advantage of for years. However, while multi-channel refers to in Ukraine is proposed: having a presence on several channels that then work separate- 1. The development of the horizontal integration of wholesa ly, in an omni-channel environment; the channels work toge lers, since wholesale trade enterprises have advantages ther so that customers can use digital channels to research and and fundamental differences associated with the period of experience the physical store in a single transaction process. turnover of funds. Therefore, the omni-channel strategy refers to an ideal stra 2. Specialisation in a separate product niche or market seg- tegy that offers several channels in accordance with the latest ment including the geographic ones: servicing corpo- technological developments and current consumer behaviour. rate clients (or service stations), exclusive distribution of The introduction of e-commerce in the activities of wholesale original goods. The benefits of narrow specialisation are

Ilchenko, N., Kulik, A., & Magda, R. / Economic Annals-XXI (2018), 170(3-4), 38-42 41 ECONOMICS AND MANAGEMENT OF ENTERPRISES

Note: Fulfillment is a complete complex of operational and warehouse processing of goods in the Internet trade: acceptance and address storage of goods in the warehouse, selection of goods according to the order, their complete set, shipment of the order for further delivery. Fig. 6: The structure of responses of respondents regarding the criteria for according importance when purchasing goods via online orders, which were provided by respondents-representatives of business B2B, % Source: Compiled by the authors

Fig. 7: The structure of responses of respondents-consumers regarding the criteria of importance when purchasing goods through an online order, % Source: Compiled by the authors

insignificant competition and, consequently, increased 3. The conceptual position for the development of wholesale profits. At the same time, the same advantages pose po- trade in accordance with the implementation of the omni- tential threats to the development of wholesale trade, channel strategy is determined. The introduction of e-com- since the narrow segment of the market leads to the fact merce in the activities of wholesalers (for B2B businesses) that wholesale companies will have to make titanic ef- contributes to the increasing level of customer service in forts to confront competitors who own branded products the modern environment. Effective use of the omni-chan- (brands). Therefore, in terms of the stability of the enter- nel strategy is a complex process that requires integration prise, long-term targeting on one narrow segment of the of advanced technology and transformation of outdated or- market can be dangerous. ganisational structures and business processes.

References

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Ilchenko, N., Kulik, A., & Magda, R. / Economic Annals-XXI (2018), 170(3-4), 38-42 42 ECONOMICS AND MANAGEMENT OF ENTERPRISES

UDC 657.42

Natalia Kostyshyn Lida Semchyshyn Tatiana Yakovets PhD (Economics), Associate Professor, PhD (Physical and Mathematical Sciences), Ph.D. (Economics), Associate Professor, Chortkiv Education and Research Institute of Associate Professor, Chortkiv Education and Research Institute of Entrepreneurship and Business of Chortkiv Education and Research Institute of Entrepreneurship and Business of Ternopil National Economic University Entrepreneurship and Business of Ternopil Ternopil National Economic University 46 Bandera Str., National Economic University 46 Bandera Str., Chortkiv, Ternopil region, 48500, Ukraine 46 Bandera Str., Chortkiv, Ternopil region, 48500, Ukraine [email protected] Chortkiv, Ternopil region, 48500, Ukraine [email protected] ORCID ID: [email protected] ORCID ID: https://orcid.org/0000-0003-2736-4843 ORCID ID: https://orcid.org/0000-0003-3746-4821 https://orcid.org/0000-0002-1708-0874 Modeling of an effective strategy of the process of product implementation with reference to seasonality

Abstract. Introduction. It is impossible to solve actual economic problems of enterprises without building strategies and forecasting the results of their functioning. A well-established implementation process increases product demand, competitiveness, as well as improves the image of the company and financial stability in general. Particular attention should be paid to studying the impact of seasonality. In this context, special attention should be paid to the activity of enterprises that sell light industry products, such as blankets and plaids, because this industry is also impacted by seasonal fluctuations that a specific nature, which is a consequence of both changes in nature and human needs. Therefore, when considering the variability of consumer demand, the presence of a large number of enterprises of different forms of ownership, increasing uncertainty and the existence of many risks, it is important to form an effective implementation strategy, which is a general plan for achieving the aims. The purpose of the article is to analyse the impact of factors relating to the process of selling light industry products and propose a model of strategy to increase its efficiency, taking into account seasonality. Results. The authors of the research have formed an algorithmic model of construction of the implementation process with the consideration of the factors increasing its efficiency. The practical aspect of its application is given on the example of the enterprise with foreign capital, which sells products of light industry with regard to seasonality. The conducted analysis made it possible to determine the forecast amount of proceeds from sales of production for each quarter of 2019, as well as to define the lower and upper limits of the forecast. Conclusions. The application of the proposed model in order to forecast revenue from sales of enterprise products with regard to seasonality will make it possible to increase the efficiency of the implementation process, eliminate existing risks and streamline management of the specified process in certain quarters in the context of seasonal fluctuations. Keywords: Process of Implementation; Products; Factor of Seasonality; Algorithmic Model; Strategy; Forecast Indicators JEL Classification: С53; С61; М40; R34 DOI: https://doi.org/10.21003/ea.V170-08

Костишин Н. С. кандидат економічних наук, доцент кафедри фундаментальних та спеціальних дисциплін, Чортківський навчально-науковий інститут підприємництва і бізнесу ТНЕУ, Чортків, Україна Семчишин Л. М. кандидат фізико-математичних наук, доцент кафедри фундаментальних та спеціальних дисциплін, Чортківський навчально-науковий інститут підприємництва і бізнесу ТНЕУ, Чортків, Україна Яковець Т. А. кандидат економічних наук, доцент кафедри фундаментальних та спеціальних дисциплін, Чортківський навчально-науковий інститут підприємництва і бізнесу ТНЕУ, Чортків, Україна Моделювання ефективної стратегії процесу реалізації продукції з урахуванням фактору сезонності Анотація. У статті досліджено чинники впливу на ефективність реалізації в контексті процесно-орієнтованої системи ведення діяльності на підприємстві. Особливу увагу приділено визначенню впливвів фактору сезонності на прикладі підприємств, які реалізують продукцію легкої промисловості (ковдри та пледи). Ця галузь обрана об’єктом дослідження, оскільки їй притаманний вплив сезонних коливань, який є наслідком як змін природних умов, так і людських потреб. Визначено індекси сезонності на прикладі підприємства з іноземним капіталом для здійснення прогнозу виручки від реалізації продукції з урахуванням сезонних коливань. Використано метод аналітичного вирівнювання за рівнянням прямої. Результатом проведеного аналізу є побудова моделей для прогнозу виручки від реалізації продукції в розрізі кварталів. Визначено прогнозний обсяг виручки від реалізації продукції підприємства для кожного кварталу 2019 р., а також нижню і верхню межі прогнозу. Проведені розрахунки показують, що найменшу виручку у сумі 3671 тис. грн. (111,99 тис. євро, за курсом станом на 28.08.2018 р.: 1 EUR – 32,78 UAH) підприємство отримає у другому кварталі, що підтверджують значення нижньої та верхньої меж прогнозу, які цього кварталу є найвищими – 20119 тис. грн. (613,76 тис. євро, за курсом станом на 28.08.2018 р.: 1 EUR – 32,78 UAH) та 27462 тис. грн. (837,77 тис. євро, за курсом станом на 28.08.2018 р.: 1 EUR – 32,78 UAH) відповідно. Найбільший дохід слід очікувати у четвертому кварталі у розмірі 6627 тис. грн. (202,16 тис. євро, за курсом станом на 28.08.2018 р.: 1 EUR – 32,78 UAH). Усі використанні методи та елементи сформовано у алгоритмічну модель побудови процесу реалізації в напрямку збільшення його ефективності. Ключові слова: процес реалізації; продукція; фактор сезонності; алгоритмічна модель; стратегія; прогнозні показники.

Костышин Н. С. кандидат экономических наук, доцент кафедры фундаментальных и специальных дисциплин, Чертковский учебно-научный институт предпринимательства и бизнеса ТНЭУ, Чертков, Украина Семчишин Л. М. кандидат физико-математических наук, доцент кафедры фундаментальных и специальных дисциплин, Чертковский учебно-научный институт предпринимательства и бизнеса ТНЭУ, Чертков, Украина Яковец Т. А. кандидат экономических наук, доцент кафедры фундаментальных и специальных дисциплин, Чертковский учебно-научный институт предпринимательства и бизнеса ТНЭУ, Чертков, Украина Моделирование эффективной стратегии процесса реализации продукции с учетом фактора сезонности Аннотация. В статье исследованы факторы влияния на эффективность реализации в контексте процессно- ориентированной системы ведения деятельности на предприятии. Особое внимание уделено определению влияния фактора сезонности на примере предприятий, реализующих продукцию легкой промышленности (одеяла и пледы). Данная отрасль выбрана объектом исследования, поскольку ей также присуще влияние сезонных колебаний, которое является следствием изменений как природных условий, так и человеческих потребностей. Определены индексы сезонности на примере предприятия с иностранным капиталом для осуществления прогноза выручки от реализации продукции с учетом сезонных колебаний. Использован метод аналитического выравнивания по уравнению прямой. Результатом проведенного анализа является построение моделей для прогноза выручки от реализации продукции в разрезе кварталов. Определены прогнозный объем выручки от реализации продукции предприятия для каждого квартала 2019, а также нижний и верхний пределы прогноза. Проведенные расчеты показывают, что наименьшее выручку в сумме 3671 тыс. грн. (111,99 тыс. евро, по курсу на 28.08.2018 г.: 1 EUR – 32,78 UAH) предприятие получит во втором квартале, подтверждающие значение нижней и верхней границ прогноза, которые этого квартала являются самыми высокими − 20119 тыс. грн. (613,76 тыс. евро, по курсу на 28.08.2018 г.: 1 EUR – 32,78 UAH) и 27462 тыс. грн. (837,77 тыс. евро, по курсу на 28.08.2018 г.: 1 EUR – 32,78 UAH) в соответствии. Наибольший доход следует ожидать в четвертом квартале в размере 6627 тыс. грн. (202,16 тыс. евро, по курсу на 28.08.2018 г.: 1 EUR – 32,78 UAH). Все использованные методы и элементы преобразованы в алгоритмическую модель построения процесса реализации в направлении увеличения его эффективности. Ключевые слова: процесс реализации; продукция; фактор сезонности; алгоритмическая модель; стратегия; прогнозные показатели.

1. Introduction Despite the large number of scientific works, the issue of The purpose of any enterprise’s activity is the sale of fi improving the effectiveness of the implementation process, as nished products, execution of works, provision of services the basis of the company’s activities in the direction of pro and, eventually, generation of profits. The transformation profit, remain poorly developed. According to Cater and Pucko cesses of the economic system require continuous develop- (2010) [6], the implementation of strategies was a key factor ment and improvement of the enterprise management system, in the emergence of strategic management at the end of the search for and application of the latest advanced methods and twentieth century. Therefore, it is important to study the pro tools aimed at ensuring the negative impact of various fac- perties of an effective implementation strategy. The problem tors on the performance of the enterprise. It is impossible to of modeling sales strategies using a combination of analytical solve actual economic problems of enterprises without buil and economic and mathematical methods of forecasting the ding strategies and forecasting the results of its functioning. outcome of the sales process, by taking into account impact A well-established implementation process ensures increasing factors of different levels, deserve detailed justification. demand for products, competitiveness and image of both the 3. The purpose of the article is to analyse the impact of company and the overall financial stability. Therefore, when factors relating to the process of selling light industry pro considering the variability of consumer demand, a large num- ducts and propose a strategy model to increase its efficiency ber of enterprises of different forms of ownership, increasing with regard to seasonality. uncertainty and the existence of many risks, it is important to 4. Results form an effective implementation strategy, which is a general For a production enterprise, the receipt of a finished pro plan aimed at achieving the goals. duct usually has a cyclic continuous character. The cycle of 2. Brief literature review obtaining the result of entrepreneurial activity is characterised In economic literature, there are many scientific works by by three main processes: supply, production and sales itself. domestic experts who investigate the implementation of fi The process approach to the company’s activities is a theo- nished products at enterprises. Special attention is paid to the retical basis to identify business process perspectives as part issue of accounting for and selling finished products, substan- of the strategic development of the enterprise. Economic pro- tiation of expences relating to their storage, marketing strate- cesses taking place in entrepreneurial activity are a set of simi- gies, formation of pricing, etc. lar types of operations that are aimed at fulfilling a certain eco- Among the foreign scientists who researched issues rela nomic task. That is, the interaction of material, technical, lating to the sale of products, including problems of sales mana bour and financial resources, which results in the creation of gement and decision analysis, we should mention T. N. Ingram, products, performed work or provided services. R. W. La Forge, M. R. Williams and C. H. Schwepker Jr. (2015) [1]. However, in scientific and educational literature, every- T. T. Nagle and G. Müller (2017) [2] are investigating the choice of thing is limited, mainly, to the selection of the three main eco- pricing methods in the direction of profitability growth. F. M. Belz nomic processes - supply, production, implementation. (2017) [3] focuses on sales growth in the context of increased All means of enterprises are aimed at ensuring the pro product productivity, S. Malininas, V. Docienė, J. Daubarienė fitability of the implementation process as the basis of acti and A. Vaitiekus put forward recommendations for improving vity. A group of scientists at the German Technical Universi- the management of product sales (2017) [4]. However, the above ty, namely A. Myrodia, K. Kristjansdottir and L. Hvam (2017) listed works, in general, have a marketing character. [7], analysed the impact of the implementation of thde pro A. Kumar, A. Adlakha and K. Mukherjee (2016) [5] conduc duct configuration system (PCS) on improving the accuracy ted a study that provides valuable information on how to use of cost calculations and improving product profitability. Com- real time sales data to develop a dynamic automated model panies that have implemented the PCS have made signifi- to stimulate product sales and strategies for lowering prices cant advances in order to better control their products range, using fuzzy logic for retail. However, the article does not con- make the right decisions at the stage of sales, and increase tain relevant empirical data for testing models. Considering the sales of the best products. research approach, the research findings can only be valid for Thus, it is necessary to form a reasonable range of pro the selected product category. ducts for each activity, which can positively affect overall

Kostyshyn, N., Semchyshyn, L., & Yakovets, T. / Economic Annals-XXI (2018), 170(3-4), 43-48 44 ECONOMICS AND MANAGEMENT OF ENTERPRISES profitability. We consider the level of profitability by type of economic activity in Ukraine. Tab. 1: Cost-effectiveness of the sales process of enterprises The data in Table 1 indicate ambiguous fluc- by types of economic activity for 2012-2017 tuations in the profitability level of the implementation of activities. This fact is explained by the impact of various features that accompany the functioning of enterprises of various sectors of the economy. J. Pollack and D. Adler (2016) [9] prove the existence of a relationship between the effectiveness of project management, the use of information technology and profitability of sales. P. Tu- ryakira, E. Venter and E. Smith (2014) [10] tested the correlation between factors that affect the level of competitiveness of small and medium-sized enterprises in the long run, such as increased sales volumes, growth rates and shares market, on the basis of which they formed recommendations on Source: Compiled by the authors based on [8] how to improve the profitability of the enterprise. Thus, the construction of an effective sales process in the long run is ensured by taking into account the • 6301 10: Electric blankets; factors impacting the volume of sales and, as a consequence, • 6301 90: Other blankets and road plaids, of which other fi the size of sales proceeds. To build an effective strategy in bers may include other fibers of animal origin (for example, terms of the sales process, it is necessary to take into account silk), other fibers of vegetable origin (for xamplee flax, hemp, a number of factors. They are listed below. eucalyptus fibers) and artificial fibers (for example, bamboo, 1. Exogenous factors (the state of commodity and market condi- viscose) [18]. tions, fluctuations in demand and supply, changes in demand In 2015, Ukraine ranked 34th among exporters of blankets elasticity, market price movement, changes in the intensity of and plaids and exported USD 6.2 million worth of these goods, competition, transformation of the institutional segment). which is 0.1% of the total exports of blankets and plaids in the 2. Endogenous factors (the amount of production costs; sales world. The dynamics of export deliveries of blankets and plaids volume; the market share of a certain enterprise; the quality to the world market by Ukraine is positive. In particular, in 2001, and competitiveness of goods; human capital (competence on the world market, Ukraine supplied blankets and rugs to the of personnel, labour productivity); strategy and pricing po amount of USD 34 thousand. In 2002, the amount was USD licy at the enterprise; the technical and organisational level 36 thousand, whereas in 2015, the figure reached USD 6.2 mil- of production). lion. In 2017, the export of blankets and plaids amounted to At the same time, innovation and social development USD 8,195.2 thousand, which is 18.2% more than in 2016 [8]. have caused the emergence of new factors affecting the company’s operations, such as inter- mediary online sales orientation (N. Hu, N. S. Koh and S. K. Reddy, 2014; K. Cao, J. Wang, G. Dou Tab. 2: Comparative characteristics of products of the largest producers and Q. Zhang, 2018) [11-12], corporate health of sub-industry (C. C. Ngwakwe, 2017) [13], product exclusivity and its design presentation (V. Mirabi, H. Akba riyeh and H. Tahmasebifard, 2015) [14]. One of the important factors that can lead to fluctuations in the effectiveness of the sales process is the factor of seasonality. From a managerial point of view, seasonal models carry valuable information for enterprise executives. This information can be used to answer short-term demand issues as well as inventory management issues. Most often, this factor takes into account enterprises of such types of economic activity, where seasonality occurs only due to natural conditions (agriculture and forestry). However, there are industries where seasonality can not be accurately predicted, since its occurrence is unpredictable. For example, predicting sales, the researchers determined the seasonal index of the print media industry (A. M. Garcia, G. Pak, F. Oduro, D. Thompson, K. Erazo and J. Gilkey Jr, 2017) [15], sales of vehicles (M. Sivak and B. Schoettle, 2017; L. Yang and B. Li, 2017) [16-17]. We think that the factor of seasonality has a significant impact on the process of sales of products in light industry. This assumption will be considered on an example of the implementation of blankets and plaids classified within the Harmonized Commodity Description and Coding System (HS). In the world and in Ukraine the follo wing HS codes are used as indicators of road plaids and blankets trade: • 6301 20: Blankets and road plaids of wool or fine animal hair; Note: * - converted to EUR according to the exchange rate on 28/08/2018: • 6301 30: Blankets and road plaids of cotton; EUR 1 - UAH 32.78. • 6301 40: Blankets and road plaids of synthetic fibers; Source: Authors’ own research

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The production of this type of products is carried out by more than a dozen of Tab. 3: Calculation of the seasonality indices of proceeds from sales Ukrainian enterprises, the largest of which of the enterprise «Billerbeck Ukraine Feather and Down Factory» for 2014-2017 are listed in Table 2. According to Table 2, we can conclude that the German family company, the Billerbeck feather and down factory, takes a significant place among manufacturers and exporters of blankets and rugs. Today TM Billerbeck products are sold in Germany, Switzerland, Hungary and Ukraine. Representations of the company are open all over the world. Note: * - converted to EUR according to the exchange rates: Since the company Billerbeck Ukraine EUR 1- UAH 10.93 (2014); EUR 1- UAH 18.64 (2015); EUR 1- UAH 25.57 (2016); manufactures not only pillows and mat- EUR 1- UAH 28.72 (2017). tress covers, but also has a large share in manufacturing of blankets of different Source: Calculated by the authors based on the financial statements of Billerbeck grades, which are most often sold in the Ukraine autumn and winter period, it can be argued that its activity is affected by seasonality. Therefore, when analysing the results of the factory, and especially when planning production and sales indicators, one should take into account not only the markеt conditions, the presence of factors of production, but also the seasonal nature of the production itself. This will allow the optimal use of labour and other enterprise resources. The analysis of seasonal fluctuations, as a rule, is carried out by calculating the seasonal indexes based on the average values of the investigated in- Fig. 1: Seasonal wave of proceeds from the sales dicator. However, in addition to seasonal fluctua- of Billerbeck Ukraine products in 2014-2017 tions, the results of Billerbeck Ukraine have a cer- Source: Compiled by the authors tain tendency to changes. Therefore, when analy sing them, it is necessary to neutralise the trend change. This t = 22632.51 + 228.61t . (3) will allow us to forecast the performance of the feather and down factory for the future, taking into account seasonal fluc- If we substitute the t value in equation (3), we obtain the tuations, and contribute to more efficient nagementma of the theo retical series of the indicators of revenue from sales of pro enterprise. ducts ( t ). The results of calculations are given in Column 2 The methodology of analysis of seasonal fluctuations and of Table 4. Seasonal (seasonal wave) indices are defined as forecasting consists of several stages of work. Firstly, we will the percentage of actual (empirical) and theoretical (calculated calculate the seasonal Billerbeck Ukraine indexes based on on the basis of the trend equation) indicators of revenue from quarterly sales revenue for the period of 2014-2017, using the sales of products. The calculation results are given in Column 3 method of the ratio of simple average values by the formula (1): of Table 4). The seasonal wave will help to predict the activity of the enterprise. After all, the possibility of timely consideration of (1) the factor of seasonality provides favourable conditions for the future effective functioning of the entity. To calculate the forecast values, we use the following forecast model [19, 210]: where:

i - the average indicators of sales revenue, which we calcu- t = Ik t , (4) late for each quarter according to the data of the last 4 years; total - the average indicator of sales revenue, which we will where: calculate for all the initial data. t - the forecast value of sales proceeds at time t ;

The results of the calculations of seasonal indices based Ik - the average seasonal index of k quarter; on formula (1) are presented in Table 3. t - the estimation of value of proceeds from sales of pro The results of the calculations in Table 3 show the highest ducts at time t . values of the seasonal index in the 4th quarter - 31.5%, which Calculated on the basis of this model, the forecast value of means that in the autumn and winter period, which is asso proceeds from sales of products, with a certain probability, will ciated with high demand for feather and down products, as differ from actual values by the value, which represents the width well as in the first and third quarters the indicators are almost of the interval of the predicted values of the analysed index: identical. In the summer (II) quarter we see the lowest index of seasonality - 17.2%. If we consider the calculations carried out by us graphically, then we will see the so-called seasonal (5) wave of the analysed index (Figure 1). To carry out further forecast of proceeds from product sales in terms of seasonal fluctuations, we use the method of where: analytical equalization by the equation of the line: t is the given coefficient of confidence, which rgua antees with a certain probability the prognosis boundary;

= a0 + a1t , (2) n - the number of years in the sample; The mean square deviation of the random component is where t is the serial number of each quarter (time factor) calculated by the following formula: for the four consecutive years.

The parameters a0 and a1 of the model (2) are the least squares method. After calculations we obtained the following (6) trend equation:

Kostyshyn, N., Semchyshyn, L., & Yakovets, T. / Economic Annals-XXI (2018), 170(3-4), 43-48 46 ECONOMICS AND MANAGEMENT OF ENTERPRISES

The width of the interval of the forecasted values of sales proceeds by formula (6) for each quarter will Tab. 4: Calculation of the seasonality indices of proceeds from sales of the be determined with a probability of 0.954 (t = 2), which Billerbeck Ukraine Company for 2014-2017 on the basis of a linear trend (3) is optimal for such calculations. In addition, we define the average (for each quarter) seasonal indexes as simple average arithmetic of the seasonal indices given in column 3 of Table 4. The results of calculations are given in Table 5. The calculation of dispersions was carried out according to the data of Table 4, and we subsequently summed up the quarterly fi gures. The results of these calculations are given in Column 2 of Table 5. Having calculated the average quarterly seasonal indicators (Column 1 of Table 5), we obtained the models to forecast sales proceeds from sales of the quarters:

Model for the first quarter: Ŷt І = 0.242 (22632.51 + 228.61t );

Model for the second quarter: Ŷt ІІ = 0.159 (22632.51 + 228.61t ); Note: * - converted to Euros according to the exchange rate: (7) EUR 1- UAH 10.93 (2014); EUR 1- UAH 18.64 (2015); EUR 1- UAH 25.57 (2016); Model for the third quarter: EUR 1- UAH 28.72 (2017). Ŷt ІІІ = 0.234 (22632.51 + 228.61t ); Source: Calculated by the authors

Model for the fourth quarter: Ŷt ІV = 0.242 (22632.51 + 228.61t ). Tab. 5: Culculation of a random variable We calculate the limits of the predicted values of the analysed index by using the following formula:

(8)

We determine the forecast amount of proceeds from sales of the enterprise for each quarter of Source: Calculated by the authors 2019 by the formulas (7), as well as the lower and upper limits of the forecast by the formula (8). The results of the calculations are given in Table 6. Tab. 6: Forecast of revenue from sales of enterprise Billerbeck Ukraine in The actual figures of proceeds from sales of 2019, UAH thousand (EUR thousand *) the company Bilberbek Ukraine for 2014-2017 and the forecast for 2019 are provided in Figure 2. The method used to calculate the forecast performance of the enterprise with regard to seasonal fluctuations can be calculated for a period of two to three years. To do this, it is required to have sufficient amount of information that covers 5-6 previous years. Note: * - converted to Euros according to the exchange rate on 28/08/2018: The methods used have allowed us to pre- EUR 1- UAH 32.78. dict the lower and upper limit of the proceeds from Source: Calculated by the authors sales. According to the data, management decisions made to either eliminate or diminish the impact, as well as the application of measures to level the factor, will increase the efficiency of the sales process and, consequently, improve the financial position of the enterprise. Forecasting diagnostic indicators, carried out by using analytical methods, allows us to construct models that provide more accurate predictions and flexibility of planning. C. Dibrell, J. B. Craig and D. O. Neubaum (2014) have proven that the formal processes of strategic planning of enterprises and the flexibility of planning are positively related, and each of them is positively associated with innovation. In addition, innovation completely mediat es the relationship between enterprise productivity and the formal process of strategic planning and planning flexibility [19]. Therefore, our method is formed within a model, the algorithm of which can be used to formulate strategies for product sales taking into account the impact factors with regard Fig. 2: Revenues from sales of the Billerbeck Ukraine products to the activity of any enterprise. In our case, the for the period 2014-2017 and the forecast for 2019 model focuses on the seasonality factor (Figure 3). Source: Compiled by the authors

Kostyshyn, N., Semchyshyn, L., & Yakovets, T. / Economic Annals-XXI (2018), 170(3-4), 43-48 47 ECONOMICS AND MANAGEMENT OF ENTERPRISES

of competition, despite the presence of a re liable process of strategy formation, it is important to use a reliable algorithm for its implementation. The proposed algorithmic model of the sales processwith regard to the seasonal factor will enable us to minimise risks and increase the profitability of the enterprise. 5. Conclusions In order to provide effective operation of an enterprise under modern economic conditions, it is required to develop and implement a specific model of strategic development. Such a model should determine enterprises’ activities, formulate the objectives and ensure the efficient use of available resources. The seasonal character inherent in the enterprises of many branches of the economy greatly complicates the analysis of their activities, and therefore hin- ders planning and construction of a strategic model for effective future work. This is why we have considered the methodology for analysing the activity of enterprises in terms of the impact of seasonal factors and constructed an effective strategy model for the implementation at those entities which, seemingly, are not seasonal. The use of the above methodology makes it possible to forecast the performance of Fig. 3: Algorithmic model of strategy implementation process such enterprises, to promote a more efficient Source: Compiled by the authors use of all available resources and to try to reduce the impact of seasonality by conducting other types of work at a time when the seaso This algorithmic model, constructed with the use of analy nal wave tends to decrease. The proposed algorithmic model tical methods with respect to seasonality, allows us to formu- for constructing a strategy for the sales process with regard late plans for the sales of products of the enterprise, evaluate to the factor of seasonality can be used to enhance enterprise the sales and adjustments and choose the most effective func- activity and support managerial decisions. tional strategy for enterprise development. J. Rajasekar (2014) The aim of further research is to identify other economic believes that successful implementation of the strategy is the factors (indicators or factors) that impact the construction and key to the survival of any company [20]. Taking into account selection of a business strategy to ensure effective functio the fact that many enterprises cannot withstand rapid growth ning of enterprises.

References

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Received 14.05.2018

Kostyshyn, N., Semchyshyn, L., & Yakovets, T. / Economic Annals-XXI (2018), 170(3-4), 43-48 48 ECONOMICS AND MANAGEMENT OF ENTERPRISES

UDC 635.07:339.13

James Dunn Thomas Brunner Darya Legeza PhD (Economics), PhD (Economics), D.Sc. (Economics), Professor of Agricultural Economics, Professor of Consumer Behavior, Associate Professor, Pennsylvania State University Bern University of Applied Sciences Tavria State Agrotechnological University 203 Armsby Building, 85 Länggasse, Zollikofen, CH-3052, 18 Bohdan Khmelnitsky Ave., University Park, PA 16802, USA Switzerland Melitopol, 72312, Ukraine [email protected] [email protected] [email protected] ORCID ID: ORCID ID: https://orcid.org/0000-0002-6770-6548 https://orcid.org/0000-0003-4545-0366

Anastasia Konovalenko PhD (Economics), Senior Lecturer, Tavria State Agrotechnological University 18 Bohdan Khmelnitsky Ave., Melitopol, 72312, Ukraine [email protected] ORCID ID: https://orcid.org/0000-0001-9061-5989

Olena Demchuk PhD (Economics), Associate Professor, Tavria State Agrotechnological University 18 Bohdan Khmelnitsky Ave., Melitopol, 72312, Ukraine [email protected] ORCID ID: https://orcid.org/0000-0002-9587-3562

Factors of the marketing macro system effecting children’s food production

Abstract. The article reveals unsettled reasons of changing in the children’s food market. Various political, economic, demographic, sociological, natural, and technological forces are extensively used in the paper to examine the external influence on the market. The aim of the research is a consequent evaluation of children’s food production factors on the macro level of the vegetable market. The novelty of the study explains the research methodology which is based on a factor analysis of a marketing system influence on the macro level. The study presents a quantitative expert evaluation of the main factors in the vegetable market. We use the total integer indicator to study a degree of influence both in complex and separately. An improved methodology is outlined in three sections. The first section gives an overview of marketing forces at the macro level. The second section examines the most significant negative and positive factors in the complex. Finally, our propositions for market development are drawn in the final section. It is suggested that economic, demographic and socio-geographic factors affect mostly at the macro level. Calculation of total threats and opportunities in factor groups proves a negative tendency in the development of enterprises which offer vegetable products for children. Based on the factors grouping results, the authors propose further alternative strategies for marketing development in vegetable enterprises such as Internet purchasing and upgraded food canal chain management. Keywords: Marketing Macro System; Marketing Factors; Vegetables Producers; Children’s Food; A Total Integer Indicator JEL Classification: L16; Q13; M 21; M31 Acknowledgements: The article is related to Ukrainian State scientific and technical program No. 0116U002738, dealing with «Marketing strategy development of agrarian enterprises». DOI: https://doi.org/10.21003/ea.V170-09

Данн Дж. доктор філософії, професор, Пенсильванський державний університет, Юніверсіті-Парк, США Бруннер Т. доктор філософії, професор, Бернський університет прикладних наук, Золлікофен, Швейцарія Легеза Д. Г. доктор економічних наук, доцент, Таврійський державний агротехнологічний університет, Мелітополь, Україна Коноваленко А. С. кандидат економічних наук, старший викладач, Таврійський державний агротехнологічний університет, Мелітополь, Україна Демчук О. М. кандидат економічних наук, доцент, Таврійський державний агротехнологічний університет, Мелітополь, Україна

Фактори маркетингового зовнішнього середовища, що впливають на виробництво продуктів дитячого харчування Анотація. У статті розкриваються неврегульовані причини зміни маркетингового середовища на ринку продуктів дитячого харчування. Мета дослідження – послідовна оцінка факторів зовнішнього маркетингового середовища ринку овочів, які пропонуються для дитячого харчування. Обґрунтовується, що на макрорівні основними факторами є економічні, демографічні та соціально-географічні. Обчислення загроз і можливостей у групах факторів свідчить про негативну ринкову ситуацію для розвитку підприємств із виробництва овочевої продукції для дітей. Ґрунтуючись на результатах групування чинників, автори пропонують додаткові альтернативні стратегії розвитку маркетингу на овочевих підприємствах, такі як Інтернет-закупки й модернізація логістики продуктів харчування. Ключові слова: маркетингове макросередовище; маркетингові чинники; виробники овочевої продукції; дитяче харчування; загальний інтегральний показник.

Данн Дж. доктор философии, профессор, Пенсильванский государственный университет, Юниверсити-Парк, США Бруннер Т. доктор философии, профессор, Бернский университет прикладных наук, Золликофен, Швейцария Легеза Д. Г. доктор экономических наук, доцент, Таврический государственный агротехнологический университет, Мелитополь, Украина Коноваленко А. С. кандидат экономических наук, старший преподаватель, Таврический государственный агротехнологический университет, Мелитополь, Украина Демчук О. М. кандидат экономических наук, доцент, Таврический государственный агротехнологический университет (Мелитополь, Украина) Факторы маркетинговой внешней среды, влияющие на производство продуктов детского питания Аннотация. В статье раскрываются неурегулированные причины изменения маркетинговой среды на рынке продуктов детского питания. Цель исследования – последовательная оценка факторов маркетинговой внешней среды рынка овощей, которые предлагаются для детского питания. Обосновывается, что на макроуровне основополагающими факторами являются экономические, демографические и социально-географические. Вычисление угроз и возможностей в группах факторов свидетельствует о негативной рыночной ситуации для развития предприятий по производству овощной продукции для детей. Основываясь на результатах группировки факторов, авторы предлагают дополнительные альтернативные стратегии развития маркетинга на овощных предприятиях, такие как Интернет-закупка и модернизация логистики продуктов питания. Ключевые слова: маркетинговая макросреда; маркетинговые факторы; производители овощной продукции; детское питание; общий интегральный показатель

1. Introduction Globalization of marketing forces enterprises to wide Demographic and economic crises cause a negative ef- their distribution area and develop new business relations. fect on consumer behavior in Ukraine, especially in the mar- From this point of view, Birnleitner (2013) further developed ket of children’s food. Low product quality, high prices, sea- Kotler’s forces according to cross-cultural differences and in- sonality of demand and unbalanced provision are consi fluences on the multinational integration process [5]. It led dered to be the major problems of inefficiency in marketing. him to select the political and legal forces to explain their in- In Ukraine, the five-year social program of product deve fluence on the marketing environment. Birnleitner’s conclu- lopment of children’s food has been effective only till 2016 sions seem to be reasonable in order to include the political (The Cabinet Decree of Ukraine, 2011) [1]. It means that the environment of new countries in multicultural market integra- government does not support any strategy of financial in- tion. Samnani (2014), an expert in fast food marketing, men- vestments, technology updates and improving quality, which tions that law enforcement plays an important role in politi- were the core objectives of previous programs. It forces do- cal pressure on certain companies and holdings [6]. There- mestic companies to conduct business in an unpredictable fore, political factors have to be analyzed in further research market environment. However, a directive of the European of the food marketing environment. Moreover, Samnani’s in- Commission on the primary food for infants and young chil- vestigation of the cultural forces focused on «views of one- dren creates a framework of quality detection and strategies self and the Universe». He claims that today’s people are for supporting entrepreneurship. This makes entry to the concerned about their health and religions of others. These European vegetable market quite attractive for Ukrainian en- for ces create a new societies’ basic value when stores of- trepreneurs (Commission Directive 2006, 2009) [2, 3]. Since fer a choice of nutrition and organic food, halal, kosher and vegetables are an important source of vitamins and other nu- vegetarian products. A variety of factors has contributed to trients, they are indispensable for children’s nutrition. Com- the increase in organic food consumption. A group of resear panies in a vegetable market, as in any market, are influen chers (Baker, Thompson & Engelken, 2002) has conducted ced by factor groups at both the micro and macro levels. interviews to develop a value map of organic vegetable and Notwithstanding that each of the factors can have both ne fruit consumption [7]. They came to the conclusion that the gative and positive impacts, the problem is to quantify such main reasons why people buy the organic version are related an influence and find possible choices for effective marke to health and enjoyment of life. However, when more counting. Food consumption is attracting widespread interest due tries are covered by the research more social factors appear. to increase in the birth rate in Ukraine. Because of the ab- Research of the attitudes of organic consumers by Aertsens sence of a governmental program for supporting children’s et al. (2009) shows that style of life may play no important role food quality, marketing forces are set to become an impor- in one country, whereas it is more relevant in others [8]. Ne tant component affecting children’s food markets. vertheless, there is a particular consumer in every region and 2. Brief literature review country. Squire’s group (2001) comes to the conclusion that The great majority of researchers based their results on females are the main consumers of organic food because determining the influence according to the Kotler’s marke of their interest in diet [9]. This suggests that future mothers ting environment (1967), which contains the macro and mi- would choose nutrition products for infants based on their cro levels [4]. It is noticed that the macro level includes de- comparing various types of products. When consumers buy mographic, economic, natural, technological, political and a meal at a supermarket they chose ostensibly between cultural forces. fresh fruits and sweet snacks (Wansink & Sobal, 2007) [10].

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In contrast, children’s food has to contain a nutritious com- The novelty of the article is explaining improved metho plex of vitamins and to be sugar-free. For example, green dology of the macro marketing environment study using the leafy vegetables are a relatively affordable product to reple example of the vegetable food market for children’s con- nish vitamin A and trace minerals for children (Block et al., sumption. 2004) [11]. Developing next-generation nutrition products for 4. Methods children’s food should be part of a lifestyle. The analysis of factors is based on the methodology of Numerous academic researchers detect today’s huge Starostina (2012); however, it further develops a compari- influence of Internet websites and online commercials in son and evaluation of factor groups which made alternatives marketing communications. Keller (2001, 2009) claims that more applicable [18]. Political, economic, demographic, so- changing Internet environment significantly influences bran ciological, natural, and technological forces are considered ding of any company [12-13]. If a company is not known on- to be the main parameters of the macro environment. For the line, it does not have a strong brand and it could lose poten- limited space reason, the microenvironment is not evalua tial customers, as he says. From this point, Hughner’s group ted in the paper, and will be considered in further research. (2007) comes to the conclusion that people do not know the In order to evaluate an influence rate of groups of macro en- main advantages of organic food because of insufficient In- vironment, we examine both the macro and the micro level ternet marketing [14]. Constantinides (2006) traces the ad- as a whole. vances in the evolution of a marketing system since Internet We conducted a survey of twelve marketing experts from market was developed [15]. In order to define an impact of a leading Ukrainian enterprises and research services in order new domain marketing factor, he draws options of E-marke to explore the marketing environment in a more reasonable ting and web public companies. way. We conducted survey in May, 2018 using e-mail and These studies tend to focus on positive and negative dis- phone conversation. We have asked professionals from va tribution factors which could be implied by a company rather rious firms: Ukrainian Horticulture Development Project (a pro- than the full influence of groups. This presents a disadvantage ject manager), Melitopol Consulting Center «Agro-Tavria» (two in researching the marketing environment. The papers might advisors), National Scientific Center «Institute of Agrarian Eco- have been more convincing if they described the relationship nomics» (two senior scientists), farmers who produce vegeta- between factors more widely. bles in the South part of Ukraine (two farmers), Tavria State Previous studies only focused on the explanation of va Agrotechnological Universitiy (two professors), a local pro- rious groups of marketing forces such as economic, demo- ducer of vegetables for children in Zaporizhzhya region (one graphic and natural factors. But the results of these studies producer), national supermarket net «Silpo» (two categories of could not be implemented entirely because these patterns managers). They were asked to fill an interview form and eva of factors do not take into account the features of a pro luate all factors on a scale from 1 to 10 points ranging from a duct. Unfortunately, it does not explain specific conditions of weak (1 point) to strong (10 points) influence. At the first step, the vegetable market. For instance, perishable and seasonal we proposed experts to evaluate the ratings of each group qualities of vegetables are supposed to be the main attitudes both at the macro and micro levels. Secondly, they should of natural factors, while vitamin content is considered to be have completed a list of factors of other necessary determi- a relevant requirement for consumers. One more question nants that were not included in a draft. Finally, interviewed ex- that needs to be raised is how the marketing environment perts examined each factor separ ately to crea_te their indivi influences the behavior of mothers to buy children’s food. dual factor influence. There is still considerable uncertainty with regard to particu- We designed an adapted equation of factors investiga- lar properties of vegetable consumption by children. Howe tion, which included an influence rate of each factor group ver, despite this gap in our knowledge, no studies addressing and average estimation of each factor. The graduate change factors influencing the vegetable market of children’s food in factors was observed in order to compare a measure of have been conducted to date. enterprise opportunities and threats at the macro and mic A key problem with most of the methodology of the fac- ro level: tor analysis is that authors develop a list of factors and do not study the interaction between them. This had led resear chers such as Moroz & Lebid (2009), Levkiv & Leskiv (2010) (1) to review marketing forces qualitatively without any mathematical evidence [16-17]. The scientific approach to these studies is not suitable. In contrast, Starostina’s methodo logy (2012) of macro and micro analysis is fully justified by practice [18]. It is tested on a marketing research of domes- (2) tic and international markets. Further research is conducted by Kulish (2016) who uses this approach to analyze marke ting effects on the dairy market [19]. The minor deficiency of her study is that it does not entail a total evaluation of factor (3) complex on a macro or micro level. Therefore, the research presented in our article will be based on the Starostina’s research methodology with modification (2012) [18]. where: 3. Purpose i is a factor of macro environment; This paper is reporting the results of a study of the vege- n is quantity of factors; table market. We improved the methodology using an exam- f is a group of factors; ple of children’s food consumption factors. The aim of the re- IerM is an indicator of n factors influence in macro environ- search is a consequent evaluation of children’s food produc- ment according to rate of factors’ group; tion factors on the macro level of the vegetable market. An Ierm is an indicator of n factors influence in micro environ- improved methodology is outlined in three sections. The first ment according to rate of factors’ group; th section gives an overview of marketing forces at the macro Rf is a rate of f group of factors; th level. The second section examines the most significant ne Eoi is opportunity estimation of i factor in macro envi- gative and positive factors as a complex. Finally, our propo- ronment; th sitions and alternatives for market development are drawn in Eti is treat estimation of i factor in macro environment. the final section. The equations (1) demonstrate the level of total indicators The subject of the research is a theoretical approach to a of macro and microenvironments, equations (2) explain the to- marketing environment study. The objects of the study are the tal positive and negative effect on food production in the mac- conditions of entrepreneurs marketing activity on the infant ro environment. To sum it up, a total integer indicator should vegetable food market. strive for a maximum.

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5. Results All things considered emphasize that nutritious chil- Tab. 1: Impact level of factors at Macro and Micro environment dren’s food contributes to the nation’s health in the future, while environmental pollution causes a negative healthy children’s development. Nutrients, safe packaging, high quality fresh fruits and vegetables, standardized proces sing, and storage are supposed to be the main options for a perfect product for a child if these options meet all ne cessary market requirements. From this point of view, not only a consumer makes a decision, because he or she is forced by producers through advertisement, by healthcare professionals through consulting, and by a government through legal regulations. Unless enterprises do not propose various children’s product, mothers cannot select a health and nutrition type or sort for her child. Nowadays, only two canneries offer fruit and vegetable juices and canned products in Ukraine, Source: Compiled by the authors according to the expert survey such as Odessa Baby Food Factory and Association of Baby Food «Karapuz». Association of Baby Food «Karapuz» because competitive development of any market is claimed to produces 16 fruit and vegetable purees, 9 fruit and vegeta- generate without total government regulation. ble juices and 5 fruit nectars. Odessa Baby Food Factory To compare with other aspects of market determinants, specializes on 25 fruit and vegetable purees and 18 fruit and the groups of some factors are not actually valid for con- vegetable juices. Their structure of distribution sales consumption of children’s food. From this point of view, groups sists of 85 and 45% of products for children [20]. Moreover, of the following factors: socio-demographic, natural, sup different local enterprises produce foods for children to suppliers, and public have the lowest estimation. On account of ply it in a region. Unfortunately, such companies do not have the expert’s opinions, we made an assumption that the eco- competitive forces and volume of production to distribute it nomic and demographic situation plays an essential role in in the national trade nets and develop their own brand. Such any children’s market, not only a food market. companies depend financially to maintain modern technolo- We have obtained comprehensive results showing the le- gies and meet world standards of quality production. gal pressure on production of children’s food (Table 2). In Ukraine in 2017 canned products and juices had 8.2% Support of consumers regulated by Ukrainian laws is and 12.8% in consumption structure. Actually, in 2017 to- considered to be the main advantage from regulated fac- tal Ukrainian production of fruit and vegetable canned pro tors. For instance, the Law of Ukraine «About the consu ducts for children was 29.3 thousand tones and 5.7 thou- mer’s right protection» ensures consumers right with regard sand tons of juices. During the last five years, the volume of to quality and product safety, while suppliers can get essen- production went up for 5.0 and 3.3 thousand tons respec- tial information about quality, quantity, assortment, and a tively. However, the share of export of children product in- place of production (The Law of Ukraine, 1991) [24]. creased for 20% during 2013-2017 and reached 79.5% [21]. Moreover, the law guarantees that producers and sup- Export of baby food to Ukraine is largely based on propo- pliers have to meet requirements of necessary supply chain sition of world famous brand Nestle which makes Ukrainian management. An average estimation of this factor is 5. The producers not competitive by price and technologies. For influence on children’s market by this law would be evalua example, the prime world producer of children production ted higher by experts if this law included some regulations Nestle offers its products using various brands such as Or- for children’s food production. ganic Big Gerber and Gerber. Reducing of market share for The most influenced positive state regulation, evalua Ukrainian factories means the lack of the part of their con- ted by experts at 8 points, occurs under the Law of Ukraine sumers and rising of price competition. Nevertheless, wide «About the main principles and requirements for safety and ning of the global marketing opens opportunities to expand quality of food» (The Law of Ukraine, 1997) [22]. The law pre- marketing domain using the Internet and social nets. sents theoretical basics about safety of food products, food It is unfair not to mention that in the global world, the In- components, nutritional supplements, and ingredients. This ternet swiftly complements a group with an opinion of so- law is claimed to conform to norms and standards of the cial networks. Internet usage leads to changes of consumer European Union; so Ukrainian producers have the potential behavior because they can get new knowledge about food value, its composition, and prefe rable ways of using the product. Moreover, pro- Tab. 2: A group of political factors in Macro environment ducers of children food benefit additional inter- (influence rateR = 0.05) national suppliers and customers, surfing the Internet. In such a way, they can get a more favorable position in the children’s food market through activating extra advantages from social and international factors. For simplicity, we did not consider the dependence of other factor groups (ecological, behavioral, etc.) because they are parts of the na tural or social-geographic complex. Only a complex evaluation gives an opportunity to develop a ground strategy based on benefits from opportunities and alternatives from threats. We combine the influence of all market players in groups of factors, and examine their influence ater using pair comparison of all groups (Table 1). In spite of huge political and legal pressure on economic activity in Ukraine, it was estimated as one with a low influence rate by interviewers. The group of political factors equals only 0.05 points Source: Compiled by the authors according to the expert survey

Dunn, J., Brunner, T., Legeza, D., Konovalenko, A., Demchuk, O. / Economic Annals-XXI (2018), 170(3-4), 49-56 52 ECONOMICS AND MANAGEMENT OF ENTERPRISES to export and expand their market share. Moreover , the law explains the requirements for children’s Tab. 3: A group of economic factors in Macro environment food production in Ukraine. Taking part in the in- (influence rateR = 0.15) terview, experts emphasized a vital role of food security of Ukraine because of European integration and import of European products. It is important to mention that Ukrainian producers of vegetable pro ducts for children do not have such a strong market position as European brands have. From this side, the Law of Ukraine «About food security of Ukraine» (The Law of Ukraine, n.d.) [23], which was not ap- proved in 2012, might have strengthened the positions of domestic brands. Nevertheless, while external producers have an opportunity to offer their products in Ukraine, a lot of Ukrainian producers have barriers in European markets because their food products do not meet the requirements of Codex Alimentarius and HACCP. Lack of international certificate centers and audit companies, unsigned agreements with Ministries of Commerce and Trades are supposed to be impor- Source: Compiled by the authors according to the expert survey tant reasons why Ukrainian producers of vegetable food for children do not have a current opportunity Nevertheless, there are some positive forces which re- to be presented at European supermarkets. Moreover, ex- sult in the further favorable development of the production perts point out that the Law of Ukraine «About quality and of vegetable products for children. The conducted inter- safety of food» influences economic relations between en- views show that customers search for a wide assortment of trepreneurs in supply chains negatively (The Law of Ukraine, vegetables which they cannot produce, but need to buy for 2005) [25]. On the one hand, this law limits opportunities of children, such as nutritious baby puree, rare vegetables for suppliers of fresh vegetables since they have to follow rigid the region where a customer lives, purified spring water to rules for storage and transportation. On the other hand, con- be used for processing, etc. Some technological stages of sumers of vegetables are not protected from unsafe ingre these products might not be conducted in home conditions. dients in products for children, allowed in another assort- These requirements make demand subject to changes of ment of vegetable products. price and quantity. A group of economic factors has the biggest influences on It is unfair not to mention that the global market, estimated vegetable children’s food production (Table 3). at 8 points, opens new opportunities for customers because The majority of experts assert that nowadays the Ukrai it destroys barriers of geographical location. As hypothesized, nian market of children’s food has more economical cons in the literature review, the crucial advantage of globalization than pros. High bank interests, the unstable financial si is the usage of the Internet recourses in order to buy necessity tuation, low levels of imports and external investments are food, even for children. Plenty of women surf the Internet to re- supposed to be the main reasons why producers of chil- search products at producer’s websites, consolidate purchase dren’s vegetable food restrain production. About 80% of through social networks, and order products online. To sup- interviewed experts pointed out these factors as most es- port interviewed experts and the influence of the Internet re- sential and estimated this group from 8 to 10 points. Accor sources we used the serpstat.com website. We evaluated the ding to the Ukrainian statistical review, imports of proces karapuz.dp.ua website, which represents the Ukrainian brand sing vegetables was 110.8 billion USD in 2016 (State sta- Karapuz (karapuz.dp.ua, 2018) [34]. In February 2018 month- tistics service of Ukraine, 2017a) and 45.9% of the results ly total traffic is 2708 viewers since the site has 22 citing do- in 2013 (State statistics service of Ukraine, 2014) [26-27]. mains and 62 unique key phrases. The Internet provides the Producers reduced their abroad trade two-fold and sold brand with additional benefits to inform customers, and to of- an average 69.8 million USD of processing vegetables on fer its vegetable products. What we were unable to account the domestic market in 2016. This year marketing share of for, is that in the near future producers are ready to enter the Ukrainian producers was 63.9% (State statistics service of European markets. Their opportunities are estimated to grow Ukraine, 2017b, p. 8) [28]. While foreign direct investments because producers need only time to update technologies and were limited in food branches, total credits were more meet standard requirements. than $4 billion in 2016 (State statistics service of Ukraine, We present the results of determined demographic fac- 2017c, p. 27) [29]. tors in Table 4. A rapid decline of purchasing power of mothers with children enhances a negative force for the foresaid factors. The government’s one-time sup- Tab. 4: A group of demographic factors in Macro environment port of mothers for having a child a birth, for exam (influence rateR = 0.15) ple, was 2989.8 USD (30*1176 UAH (living wage in 2014 [30])/11.8 per 1 USD [31]), 5979.7 USD (60*1176 UAH (living wage in 2014 [30])/11.8 per 1 USD [31]) and 11959.3 USD (120*1176 UAH (li ving wage in 2014 [30])/11.8 per 1 USD [31]) respectively for the first, second and each subsequent child until June of 2014. Currently, the one- time compensation for a woman is 1581.6 USD (41280 UAH/26.1 per 1 USD [32]) for every child (The Cabinet Decree, 2001 with amendments) [33]. This situation led to a reduction of a number of children born in Ukraine and a limitation of women’s purchasing power. Traditionally, a lot of Ukrainian women make frozen, canned and dried vegetables by themselves at home, reducing demand for ve getable products from domestic producers. Source: Compiled by the authors according to the expert survey

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As of today, Ukrainians live in a quickly changing environment where urban territories are growing while Tab. 5: A group of socio-geographic factors in Macro environment villages are disappearing. According to Ukrainian po (influence rateR = 0.05) pulation yearbook of 2016, only one new city has been created and 73 villages have been abandoned since 2012 (State statistics service of Ukraine, 2017d, p.13) [35]. Moreover, a ratio of urban and village population rose in the last five years and equals 2.08 in 2012 and 2.25 in 2016 (State statistics service of Ukraine, 2017d, p.15) [35]. Interviewed experts emphasize that this data represent a positive benefit for producers to increase their volume of foods because urban women tend to buy end-products in supermarkets, while rural women usual ly produce necessary vegetables themselves. Strong evidence is found in the interviews that gen- der structure results in an advantage changing the children’s food market. Women are believed to make a decision about a brand or a product which should be Source: Compiled by the authors according to the expert survey chosen for their children’s nutrition. Statistical research shows that there are 1159 females per 1000 males in Ukraine; so further communicative policy should be con- chain system and principles of health nutrition. Furthermore, nected with women behavior (State statistics service of after the revolution in 2013 the prestige of domestic produc- Ukraine, 2017d, p.16) [35]. tion has increased, and plenty of mothers buy only domes- Interviewed experts consider the reducing population tic products in order to support their communities. If they and birth rate are essential demographic negative factors pay for a product of a local producer, the taxes are directed and estimate them at 8 and 9 points. We can support this to development of a community where this producer has re idea, using statistical data. A birth rate is 397 thousand chil- gistered his or her enterprise. Ukraine is a multicultural coun- dren in 2016 which is less than in 2012 by 124 thousand chil- try where a lot of groups of different religions coexist. This dren (State statistics service of Ukraine, 2017d, p.41) [35]. implies that producers should pay attention to consumer Moreover, average 11.4 children were born to one thousand preferences such as children pure. It is important to men- people in 2012, but in 2016 10.3 children were born to one tion, that Muslims do not eat pork, while Jews do not mix thousand people. It makes the market share compress for milk and meat, and do not prepare vegetables that are con- production of vegetable foods for children. Further ques- taminated with insects. It is very likely that these consumers tions show that the other adverse factor is external migration might have completely refused consumption of all products when big families with children leave the country for a betof some brand, and this might have brought about changes ter life. For example, an annual rate of external migration has in their preferences to this brand. The reason for this rather been 519 thousand people for the last three years (State sta- contradictory result is still not entirely clear; so, experts esti- tistics service of Ukraine, 2017d, p.115) [35]. The interview mate religious impact at 7 points. revealed that uneven location of a population requires pro- Therefore, careful attention must be exercised in peop ducers to pay attention to the distribution system and sup- le’s variation by social classes and living standards. The in- ply chain management. But this factor, evaluated in 8 points, terviewed experts point out that the higher wage a consu does not have significant influence. This confirms another mer has, the more valued products he or she selects. In con- negative factor that the demographic age of the Ukrainian trast, consumers with lower wages prefer to buy food with population constantly increases. To sum it up, an analysis of lower price than higher quality. There is evidence to estimate demographic factors shows that since potential buyers and these two factors at 8 points. consumers of vegetable children’s food is decreasing con- It is plausible that a few natural factors may have inf tinually, and this market Ukrainian share will not widen in the luenced the today development of the market for vegeta- next decade. ble foods for children. We present the most significant im- Further questions carried out with socio-geographic pacts in Table 6. factors confirm our initial ideas. We present the factors in The group of natural factors has a low total integer in- Table 5. dicator as a socio-geographic factor because the influence As influence rate of the socio-geographic group has rate of this group is only 0.05 points, even though some the lowest level, the total integer indicator is 3.95 points. We suggest that both positive and negative changes in the social environment will Tab. 6: A group of natural factors in Macro environment not lead to a significant advance on the market of (influence rateR = 0.05) vegetable food for children. Advocates of health lifestyle claim that health should be grown from childhood. Therefore, a lot of followers among young mothers facilitate this idea, especially in Ukraine. They select product according to nut rient consistency, lack of harmful chemicals, and safe packaging. This factor has a maximal integer indicator in 0.45 points. The same estimation has other factors such as a desire to supply domestic products, traditional and cultural values of children’s food and social support of women with children. These social approaches are strongly supported by Ukrainian horticulture business development project. And 6 from 8 experts highlight a significant role of the project in horticulture development in the southern regions of Ukraine. Rural women are claimed to be consulted about requirements of organic production, a cold Source: Compiled by the authors according to the expert survey

Dunn, J., Brunner, T., Legeza, D., Konovalenko, A., Demchuk, O. / Economic Annals-XXI (2018), 170(3-4), 49-56 54 ECONOMICS AND MANAGEMENT OF ENTERPRISES factors have a great impact on vegetable food production and its market. Today, renewable resour Tab. 7: A group of technological factors in Macro environment ces such as hydropower, biofuels, wind and so- (influence rateR = 0.1) lar energy are extremely important for various entrepreneurs and make production costs decrease. A usage of such types of energy will allow pro- ducing organic vegetable foods with an affordable price in the future. But the interviewed experts assert that renewable energy is not at the level of mass production, and takes only 3% of the total energy supply in Ukraine in 2016 (State statistics service of Ukraine, 2017e) [36]. Considering the high environmental pollution in Ukraine, approaches of the «Green economy» and sustainable production play a crucial role. From this side, a few producers of children’s food use techno logies of sustainable production. As indicated by experts, the factor we explained leads to decreasing costs of maintenance and, consequently, costs of production. We highlight that mi- Source: Compiled by the authors according to the expert survey nor part of entrepreneurs, who produce vegetables for children, have an opportunity to use renewable resources and technologies for sustainable production. This to these aspects, experts suggest that the factors of logis- finding confirms the usefulness of the factor not only for to- tic monitoring and innovative packaging should not be more day, but for the future. than 8 points. Nowadays people’s preferences to health and Critically, the natural group has a lot of weak factors nutrition create a new share for an organic food market. which cause debasement of end-products. Experts claim Mothers search for fresh vegetables, processed food, and that producers should meet requirements to standards du juices without chemicals. Affordable land costs and cheap ring all processes of production from delivery of fresh food labor attract foreign investments to fund and grow fresh or- to the end product displayed at supermarket shelves. To fol- ganic vegetables. There was 410,6 thousand hectares of ag- low such rule of supply-chain management producers can- ricultural organic area in 2105 in Ukraine, so usage of fresh not use a list of chemical elements, adjuvant, and flavors organic products is a crucial advance of the Ukrainian mar- when they offer foods for children. So, all experts estimate ket in the near future (FAO, 2018) [37]. Consumers, produ both factors as follows: «A limited number of fresh fruits cers, and investors will benefit from it. This explanation sup- and vegetables that meet standards to children’s food pro- ports the consideration of experts to evaluate opportunities duction», and «The usage of adjuvant and flavors in proof organic production in 10 points. duction and storage» at 9 points, and they examine «Speci We grouped examined factors, their integer indicators of fic hygiene requirements to production and processing» at threats and opportunities in order to evaluate a total indicator 8 points. The majority of the interviewed experts affirm that of factors influencing the macro environment (Table 8). natural factors limit enterprises attempting to widen their assortment of children’s food in overlying standard requirements. Experts who produce products for children claim Tab. 8: An integer indicator of the groups that Ukrainian standards do not cover a variety of products of the Macro environment which are presented at the global market. While some producers are guided by standards, others benefit from advancing technological factors. We present the estimation of these factors in Table 7. The group of technological factors has a significant impact on the children’s vegetable food market, which is mostly negative. The threats of the group have 4.4 points of a total integer indicator while opportunities have only 3.5 points. The main reason is lack of renovated and modern facilities which Ukrainian producers may use in their technological process. The government does not fund and support any Source: Compiled by the authors according to the expert survey special scientific designs which are directed to production improvement in the children’s food market. The interviewed 6. Conclusions and discussions experts emphasized as crucial implementing freezing in pro- According to the data, economic, demographic and so- cessing technology in order to meet the needs of consumers cio-geographic factors are supposed to be the main for during out of season production periods. There is a signifi- ces influencing the vegetable children’s food market of mo cant positive result from freezing at the market because chil- dern-day Ukraine. An absolute value of their total integer dren benefit from consuming vitamins and other nutrients all integrators is 6.45, 2.55 and 1.65. Our work has led us to year round, the demand for which is not satisfied, especially conclude that only the socio-geographic factor has a po in winter. Probably, freezing technologies are claimed to be sitive effect among the others; so, to support the develop- used by some producers, but this process requires additio ment of vegetables for children’s food consumption, pro- nal chemicals, are not used for children’s food. To sum it up, ducers and government should accumulate forces and fol- experts examined all said threats are present and evaluate low a new marketing strategy. In general, these results sug- them at 9 or 10 points. gest that new alternatives will strengthen relations between Even though producers use obsolete maintenance, tech- producers and consumers. The findings of the study indi- nological implementation has been improved in recent de cate that the main part of positive and negative factors, cades in some supply chains. Automatic quality control, load which have the integer indicator more than 1.0 point, locate cells, and packaging are considered to be valuable internal in the economic group; so, crucial changes should be di- elements of final product quality. Producers are extremely rected to this group. There is a strong probability that posi- likely to use it in the main process to control a product’s tive economic forces will drive to improvement of the Inter- composition, measure packaging, and improve the marke net opportunities, even in villages where a lot of Ukrainians table condition. As consumers do not pay a lot of attention still do not make online purchases. If producers combined

Dunn, J., Brunner, T., Legeza, D., Konovalenko, A., Demchuk, O. / Economic Annals-XXI (2018), 170(3-4), 49-56 55 ECONOMICS AND MANAGEMENT OF ENTERPRISES opportunities of timely food logistics (a positive force of the Our research has underlined the importance of govern- technological group) and online sales of vegetables for chil- ment support of vegetable food enterprises. An implication dren, they would increase purchasing power of rural con- of this is a possibility to change the tax system for children’s sumers. By using alternative energy sources, producers can food production and support young mothers financially that decrease their costs and compete with prices in the global do not have the possibility to consume a sufficient quantity of market; so they will raise their export rate and stabilize their food. It is unfair not to mention that the state funding of engi- financial incomes. neering science will lead to renovated technological process.

References

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Received 2.06.2018

Research Journal The «Economic Аnnals-ХХІ» read at the web-portal http://www.soskin.info/ea

Dunn, J., Brunner, T., Legeza, D., Konovalenko, A., Demchuk, O. / Economic Annals-XXI (2018), 170(3-4), 49-56 56 MONEY, FINANCE AND CREDIT

Safwan Mohd Nor PhD (Finance), RHB Islamic Endowed Scholar in Finance, UMT Fund Manager, University of Malaysia Terengganu 21030 Kuala Nerus, Terengganu, Malaysia; Research Associate, Victoria Institute of Strategic Economic Studies, Victoria University Melbourne, Victoria 3000, Australia [email protected]; [email protected] ORCID ID: https://orcid.org/0000-0003-0791-2363 Nur Haiza Muhammad Zawawi PhD (Accounting), Senior Lecturer, University of Malaysia Terengganu 21030 Kuala Nerus, Terengganu, Malaysia [email protected] ORCID ID: https://orcid.org/0000-0002-9894-643X

Optimal portfolios vis-à-vis corporate governance ratings: some UK evidence

Abstract Socially responsible investments may offer investors higher returns because of the perceived lower risk and thus associated cost (monitoring, litigation, etc.), although it might also be less profitable as posited by proponents of the Efficient Market Hypothesis where higher risk is compensated with higher returns. Corporate governance (CG) - one of the key components in socially responsible investing - has been extensively studied for evaluating its relationship with firm performance. In this paper, we extend prior literature by exploring the investment performances of two distinct portfolios built using strong versus weak corporate governance firms. We contribute by investigating the value of corporate governance (or lack thereof) in formulating portfolios. Using London Stock Exchange data for the period January 2012 through June 2018 and both ends of the quartile spectrum from 2017 Good Governance Report, we optimize each portfolio based on their Sharpe criterion. Our findings offer some practical and theoretical implications. Investors who are conscious about CG and attempt to maximize Sharpe measure by investing in strong governance firms may face lower portfolio risk by foregoing higher returns. Whereas reduction in value-at-risk midway onwards appears to suggest investment in companies with strong CG would less likely to fail in the long run. Volatility and downside volatility results tell similar story. Indeed, from the agency theoretical perspective, companies with strong CG would lead to lower agency cost (and risk) and better firm performance. We find profitable outcomes for both portfolios, although out-of-sample, weak governance portfolio dominates in terms of several key performance metrics. Keywords: Portfolio Optimization; Corporate Governance; Sharpe Ratio; Information Ratio; Maximum Drawdown; Sortino Ratio; Value-at-Risk JEL Classifications: G3; G11; C60 Acknowledgment: Dr. Safwan Mohd Nor has been awarded as RHB Islamic Endowed Scholar in Finance at University of Malaysia Terengganu, which is the first industry-sponsored endowed academic position at the university. The author would like to thank RHB Islamic Bank Berhad for the financial support in publishing this paper (Grant Number: 53276). DOI: https://doi.org/10.21003/ea.V170-10

Нор С. М. кандидат економічних наук, дослідник гранту для ісламських yчених у галузі фінансів RHB, керівник фонду UMT, Малайзійський університет Теренґґану, Куала Нерус, Малайзія; науковий співробітник, Інститут стратегічних економічних досліджень, Університет Вікторія, Мельбурн, Австралія Зававі Н. Х. М. кандидат економічних наук, старший викладач, Малайзійський університет Теренґґану, Куала Нерус, Малайзія Зіставлення оптимальності портфелів з рейтингами корпоративного управління: практика Сполученого Королівства Анотація Соціально відповідальні інвестиції можуть бути більш вигідними, що обумовлено меншими ризиками й передбачуваними витратами. Разом із тим такі інвестиції можуть бути менш прибутковими, оскільки, на думку прихильників гіпотези ефективного ринку, високий ступінь ризику компенсується більш високою прибутковістю. Корпоративному управлінню як одному з ключових компонентів соціально відповідального інвестування представниками наукових кіл було приділено достатньо уваги для оцінки його впливу на роботу фірм. Дана робота також є внеском у вивчення досліджуваного питання з огляду на те, що автори статті визначили дієвість двох різних видів портфелів, побудованих на принципах роботи фірм, що практикують різний ступінь корпоративного управління. Автори статті врахували цінність корпоративного управління, а також можливість його незастосування в процесі розробки портфелів. Використавши дані Лондонської фондової біржі, а також квартальні показники доповіді про ефективне управління за 2017 рік, автори дослідження оптимізували кожен із двох видів портфелів, узявши за основу критерій Шарпа. Результати дослідження показують, що обидва види портфелів можуть приносити прибуток. Слід, однак, відзначити, що в цілому портфель зі «слабким» корпоративним управлінням є пріоритетним з урахуванням деяких ключових характеристик. Ключові слова: оптимізація портфеля; корпоративне управління; коефіцієнт Шарпа; інформаційне співвідношення; максимальний дроудаун; коефіцієнт Сортіно; управління ризиками.

Нор С. М. кандидат экономических наук, исследователь гранта для исламских ученых в области финансов RHB, руководитель фонда UMT, Малазийский университет Теренггану, Куала Нерус, Малайзия; научный сотрудник, Институт стратегических экономических исследований, Университет Виктория, Мельбурн, Австралия Завави Н. Х. М. кандидат экономических наук, старший преподаватель, Малазийский университет Теренггану, Куала Нерус, Малайзия; Сопоставление оптимальности портфелей с рейтингами корпоративного управления: практика Соединенного Королевства Аннотация. Социально ответственные инвестиции могут быть более выгодными, что обусловлено меньшими рисками и более прогнозируемыми издержками. Вместе с тем такие инвестиции могут быть менее прибыльными, поскольку, по мнению сторонников гипотезы эффективного рынка, высокая степень риска компенсируется более высокой доходностью. Корпоративному управлению как одному из ключевых компонентов социально ответственного инвестирования представителями научных кругов было уделено достаточное внимание в контексте оценки его влияния на работу фирм. Данная работа также является вкладом в изучение исследуемого вопроса, так как авторы статьи определили действенность двух различных видов портфелей, построенных на принципах работы фирм, практикующих различную степень корпоративного управления. Авторы статьи учли ценность корпоративного управления, а также возможность его отсутствия в процессе разработки портфелей. Используя данные Лондонской фондовой биржи за период с января 2012 года по июнь 2018 года, а также крайние квартальные показатели доклада об эффективном управлении за 2017 год, авторы исследования оптимизировали каждый из двух видов портфелей, взяв за основу критерий Шарпа. Результаты исследования показывают, что оба вида портфелей могут приносить прибыль. Следует, однако, отметить, что в целом портфель со «слабым» корпоративным управлением является приоритетным с учетом некоторых ключевых характеристик. Ключевые слова: оптимизация портфеля; корпоративное управление; коэффициент Шарпа; информационное соотношение; максимальный дроудаун; коэффициент Сортино; управление рисками.

1. Introduction risk and return, other qualitative or quantitative factors for Demand for socially responsible investment (SRI) has building an investment portfolio can likewise be considered seen a tremendous growth. It is a big business. As reported important. In 1972, Moskowitz highlights the need for selec in Forbes and The Edge Markets, such funds account for over ting socially responsible investment [12]. While theoretically USD 23 trillion in global assets under management [1-2]. Nu- CG is considered to drive good firm performance, stock or merous mutual funds have been developed with socially re- portfolio returns and optimal weights, as shown from seve sponsible objectives. In this connection, indices have been ral studies [13-15], some argue otherwise [16-17]. According- built for gauging such quality among companies, including ly, there is no consensus for such linkages, with existing em- the KLD Global Sustainability Index, the FTSE4Good Index for pirical research remains inconclusive. The value of CG within Global Portfolios and the ASEAN CG Scorecard. Key to the portfolio management context is thus debatable and explored SRI principle is the use of environmental, social and gover in this paper. nance (ESG) factors in making investment decisions. The em- 3. The purpose of this article is to compare the invest- phasis of our paper is on corporate governance (CG), which ment performance of two distinct portfolios, each built on the is the most significant area of the three (as extrapolated from basis of either good or bad CG rated firms. Because the idea Scopus database based on abstract, keyword and title on of portfolio diversification chiefly depends on market efficien- each relationship with firm performance and/or stock returns). cy and the best asset allocation along the Pareto optimal front However, debate continues about the benefits of incorpora that can yield highest return for a given level of risk (or lowest ting these non-financial factors in stock selection or portfo- risk given return), we formulate our portfolios of stocks in the lio formation process. Moreover, existing literature focuses on London Stock Exchange i.e. a developed stock market and simple firm performance measures (e.g. Tobin’s Q, return on thus deemed efficient, and explore their merits using a variety equity, earnings per share, etc.) and pays little attention to the of performance metrics. We utilize CG quartiles as described use of sophisticated evaluation metrics. in the recent 2017 Good Governance Report (GGR) by the In- In this article, we provide evidence on the effect (or lack stitute of Directors (2017) [18] to discriminate between top (Q1) thereof) of good CG practice on investment performance and bottom (Q4) CG companies. Accordingly, we optimize using portfolio optimization approach. A considerable number each portfolio from both ends of the spectrum by maximizing of previous studies documented a positive relationship bet its Sharpe ratio in-sample for out-of-sample analysis. ween CG and investment performance. This generally sug- 4. Results gests that strong CG practice leads to sound investment and The GGR ranks 103 largest companies listed on the Lon- financing decisions among firms and thus considered favou don Stock Exchange as of 31 March 2017. The top quartile rable by investors. With this in mind, we develop two distinct consists of 25 companies although the bottom one comprises portfolios based on strong CG-rated firms and weak ones, of 28. To alleviate disparity and potential outperformance of both optimized on the basis of their reward to variability as one portfolio over another due to higher N and greater diver- denoted by the Sharpe ratio. sification benefit (rather than because of better governance in Rather than testing CG as an optimization criterion, e.g. the sample), we eliminate three firms and only include the lo objective function or decision variable in finding a capital al- west 25 firms in Q4. Accordingly, we form two distinct equal- location plane, we attempt to evaluate and validate if portfo- ly-sized portfolios: Top 25 (Q1) and Bottom 25 (Q4). lio based on strong governance firms can outperform that of In exploring out-of-sample investment outcome between weak ones. This has direct implication for Modern Portfolio Top 25 (T25) and Bottom 25 (B25) portfolios, we partition the Theory and investors who wish to gain acceptable risk-return whole sample into two non-overlapping subperiods. We re- trade-off but is also concerned with SRI based on firm-level serve 90% for training i.e. optimizing the distinct sample port- CG practice. While prior studies in CG and firm performance folios while the remaining data is maintained for testing. As focus on standard firm performance measures, we contribute such, in-sample period spans 1 January 2012 to 31 October by exploring more sophisticated portfolio metrics, including 2017, while out-of-sample period is from 1 November 2017 downside volatility, value-at-risk, Sharpe ratio, Sortino ratio, to 30 June 2018. The in-/out-of-sample window reflects an- information ratio and maximum drawdown. nouncement date of the 2017 GGR in October, allowing our 2. Brief Literature Review simulation to realistically incorporate such event while mitiga Modern Portfolio Theory introduced by Markowitz in ting look-ahead bias. Weekly stock prices are extracted from 1952 [3] has revolutionized the investment management land- Thomson Reuters Eikon database. Figure 1 shows the best scape and propagates multitudinous studies on portfolio di- and worst CG portfolios during the in-sample period. As can versification, for example [4-11]. While it is based solely on be seen, the log returns for weak CG constituents are more

Nor, S. M., & Zawawi, N. H. M. / Economic Annals-XXI (2018), 170(3-4), 57-63 58 MONEY, FINANCE AND CREDIT dispersed which generally suggests higher uncertainty among rature documents that estimation error can present itself when them. Table 1 and 2 show the correlation matrices for T25 and dealing with portfolio optimization problem [6-7]. One way to al- B25 portfolios, respectively. lay such error is by setting upper and lower bound constraints As computed from Table 1 and Table 2, average correla- when optimizing the allocation of each asset or stock [6], and tions of only 0.23 (0.29) for the T25 (B25) portfolio indicate that we apply this for each individual stock in both quartile portfo overall component stocks are weakly correlated and thus in- lios. From the practical viewpoint too, it is unwise to allocate ex- vestment pool of these firms provide diversification benefit in cessively small (large) portion of capital into an individual stock. reducing non-systematic risk. Nonetheless, although these fi This can have negative implications towards portfolio structure, gures show potential advantage for asset allocation, prior lite risk exposure, trading (monitoring) cost, etc. Hence, similar

Note: Top (bottom) chart denotes the log returns of the T25 (B25) portfolio during the in-sample period.

Fig. 1: Portfolio returns Source: Computed and elaborated by the authors

Nor, S. M., & Zawawi, N. H. M. / Economic Annals-XXI (2018), 170(3-4), 57-63 59 MONEY, FINANCE AND CREDIT

to [6-8], we set a limit of 1% floor and 10% ceiling constraints. where: Our portfolio optimization problem can be described as: SR denotes the Sharpe ratio; is mean return of the portfolio; indicates risk free rate; (1) represents portfolio volatility; is the weight of stock i; li is the lower bound of 1%; ui is the upper bound of 10% for each stock. We assume zero risk free rate since our portfolios are ful- (2) ly invested in stocks and no attempt is made to allocate excess cash elsewhere. Our portfolios are dynamic. Weights

Tab. 1: T25 portfolio correlation matrix

Source: Compiled by the authors

Tab. 2: B25 portfolio correlation matrix

Source: Compiled by the authors

Nor, S. M., & Zawawi, N. H. M. / Economic Annals-XXI (2018), 170(3-4), 57-63 60 MONEY, FINANCE AND CREDIT are continuously rebalanced at each interval (weekly) to return to their optimal proportions. By maximizing the risk-return trade-off in Equation 1, we generate the efficient frontiers as exhibited in Figure 2. It is obvious that portfolio of firms with strong CG outperforms that with weak CG. Put another way, T25-based sets of portfolios would yield higher returns for any level of risk (and lower risk for any given return) as compared to those constructed from B25 firms. Because risk in this context is defined as standard deviation, i.e. total risk, we also explore value-at-risk via block bootstrapping of the portfolio log returns to increase precision, by running over 20,000 simula- tions based on empirical distribution. The result is shown in Figure 3. Briefly stated, we expect greater value-at-risk for B25 portfolio as time and confidence level increase. However, the outcome for T25 portfolio is quite striking; lower risk is expected over longer period. There are two possible explanations. First, such outcome may suggest strong properties of CG in mitigating risk and thus potential losses for long-term investment, consistent with the timeframe for CG-based funda- Fig. 2: Efficient frontiers mental analysis. Second (and an alternative) viewpoint might Source: Computed and elaborated by the authors

Note: Top (bottom) chart represents the T25 (B25) portfolio. The three axes for each chart portray VaR, period and confidence level, respectively. Fig. 3: Portfolio value-at-risk Source: Elaborated by the authors

Nor, S. M., & Zawawi, N. H. M. / Economic Annals-XXI (2018), 170(3-4), 57-63 61 MONEY, FINANCE AND CREDIT

suggest that the results are based on the empirical distribu- Figure 4 shows both portfolio drawdowns during the tion which does not consider fat tails and asymmetry in return holdout sample phase. The greatest peak to valley de- distribution and thus does not accurately reflect value-at-risks clines for both portfolios occurs in the year 2018. Although of the portfolios. In any event, expected value-at-risk for T25 the largest declines happen during different months, local is noticeably lower as compared to B25 portfolio. For exam- peakedness (not in the statistical sense) appears some- ple, based on the whole simulation period and at 0.01 signifi- what positively correlated and concentrated throughout the cance level, T25 (B25) portfolio is exposed to 4.54% (9.01%) January-May period. This observation is not shocking. Asia, value-at-risk. Europe and United States markets saw episodes of mas- Table 3 displays the in-sample and out-of-sample out- sive plunges during this time - including USD 4 trillion los come for both portfolios. It is apparent that T25 outperforms ses in the world stock markets in just few days. Such losses B25 portfolio in-sample, while out-of-sample analysis favours were caused by US-China trade war, trade disputes, Brexit, the latter despite some outperformance from the good go among others, and these led to some damaging conse- vernance-based portfolio. In the holdout period, the strong quences on the performance of global equity markets, in- CG portfolio is exposed to lower volatility (12.26%), down- cluding London Stock Exchange. With such concerns, her side volatility (12.84%) and value-at-risk (3.23%). For the re- ding behaviour and behavioural bias of overreaction may maining metrics however, the weak CG portfolio produces also played parts in the selling pressure, further pushing better performance with higher Sharpe (0.58), Sortino (0.51) prices (and therefore returns) down. and information (0.52) ratios, although maximum drawdowns In a nutshell, our findings suggest that while the opti- (around 7%) are very similar (identical figures in the table are mized strong CG portfolio underperforms its weak CG coun- due to rounding). terpart in many of the performance metrics, most of its dis- crete risks are slightly lower. Remar kably, when both returns and risk-re- Tab. 3: Portfolio performance turn trade-off are considered, investment portfolio constructed from weak CG-rated components is actually su- perior with over 3% in return diffe rences and better reward to variability across all key metrics. 5. Conclusion In this article, we have construc ted two distinct optimal portfolios (in-sample) based on either strong or weak CG. We have compared and con- trasted their performances du ring in- Note: The table depicts in-sample (1 January 2012 to 31 October 2017) and and out-of-sample periods. In short, out-of-sample (1 November 2017 to 30 June 2018) performance for the T25 and B25 the strong CG portfolio outperforms portfolios. the weak one in-sample, although it ge * (**) indicates better in-sample (out-of-sample) performance. nerally underperforms out-of-sample. Source: Computed and elaborated by the authors Despite better results from risk-based

Note: Overlaid chart represents the T25 (green) and B25 (red) portfolios during the out-of-sample period.

Fig. 4: Portfolio drawdowns Source: Analysed and described by the authors

Nor, S. M., & Zawawi, N. H. M. / Economic Annals-XXI (2018), 170(3-4), 57-63 62 MONEY, FINANCE AND CREDIT measures in isolation, T25 portfolio yields lower return while Our research has thrown up many areas in need of fur- higher risk per unit is needed to produce a unit of return, in ther investigation. First, there is no «one size fits all» concept contrast to B25 portfolio. whether in the current context or other fields of research. Our findings offer some practical and theoretical impli- Therefore, future studies can explore different CG aspects or cations. Investors who are conscious about CG and attempt index in formulating optimal portfolios and comparison can to maximize Sharpe measure by investing in strong gover be made accordingly. Indeed, as argued in [22], CG itself is nance firms may face lower portfolio risk by foregoing higher abstract so incorporating construct validity in building indi- returns. Whereas reduction in value-at-risk midway onwards ces can perhaps alleviate associated biases. Second, rather appears to suggest investment in companies with strong CG than using a single in-/out-of-sample window, further re- would less likely to fail in the long run. Volatility and down- search can explore walk-forward optimization to ensure the side volatility results tell similar story. Indeed, from the agen- most recent data and portfolio dynamics are incorporated cy theoretical perspective, companies with strong CG would in generating the efficient frontier. Third, we ignore trading lead to lower agency cost (and risk) and better firm perfor- costs in this paper which can affect our individual portfolio mance. and/or relative outcomes. As argued by [10-11], disregarding There are several theoretical explanations for our fin costs is harmful to portfolio diversification. Future studies in dings. A comparison of the two results suggests that the this area can incorporate trading cost during the training and London Stock Exchange might not be weak-form efficient testing stages. Fourth, we simulate value-at-risk based on thereby refutes Modern Portfolio Theory in this market, be- the empirical distribution. Further investigation can be made cause of the inconsistencies between risk-return trade-off. using other techniques, for example Cornish-Fisher expan- In other word, if the market is efficient, higher return is at- sion to account for both skewness and kurtosis in the re- tributed to higher risk, but this is not the case in-sample (al- turns. Finally, we employ popular yet simple Sharpe criterion though the argument is valid out-of-sample). One possibi to optimize our portfolios. More sophisticated methods such lity is such risk is not properly captured by market partici- as Black-Litterman model [23-24] can thus be utilized. pants. While the developed markets have traditionally been Overall, our empirical findings using Sharpe measure do considered efficient, some studies show that the Australian not suggest optimal portfolio based on strong CG consti and the US markets might not be fully efficient [19-20], and tuents is more profitable in relation to its weak CG counter- similar is the case with the UK market [21]. This is in line part. This is not to say CG is not important; in fact it might be with prior findings related to CG [16-17]. Though, focusing for socially responsible and conscious investors who look on a specific case study and with a relatively small sample upon good CG practice itself as their investment goal. Ho size, caution must be applied in interpreting the theoretical wever, from the monetary perspective, one cannot expect inference. Our findings might not be extrapolated to other good CG guarantees good return. Future studies can reas- firms, CG items and specifications, portfolio selection prob- sess its use in asset allocation by incorporating suggestions lem, stock markets or time periods. discussed earlier.

References

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Received 1.07.2018

Nor, S. M., & Zawawi, N. H. M. / Economic Annals-XXI (2018), 170(3-4), 57-63 63 MONEY, FINANCE AND CREDIT

Areeba Khan Research Scholar (Finance), Department of Business Administration, Aligarh Muslim University AMU Campus, Aligarh, 202002, India [email protected] ORCID ID: https://orcid.org/0000-0002-5115-6094

Mosab I Tabash PhD (Finance), College of Business, Al Ain University of Science and Technology Al Ain Campus, Al Ain, P.O. Box: 64141, UAE [email protected] ORCID ID: https://orcid.org/0000-0003-3688-7224

Mohd Sarim Research Scholar (Finance), Department of Business Administration, Aligarh Muslim University AMU Campus, Aligarh, 202002, India [email protected] ORCID ID: https://orcid.org/0000-0001-5760-1171 Asif Akhtar PhD (Finance), Assistant Professor, Department of Business Administration, Aligarh Muslim University AMU Campus, Aligarh, 202002, India [email protected] ORCID ID: https://orcid.org/0000-0002-5739-4464 Examining anomalies in Islamic equity market of the emerging economies

Abstract. The purpose of this study is to evaluate the performance of Islamic stock indices in the presence of Islamic calendar anomaly in the context of emerging economies. The current study has considered daily data from 1 January 2010 to 1 September 2017. Standard & Poor’s (S&P) Shariah index, which comprises funds from 22 emerging economies, is used for the study. Descriptive statistics are applied to check the behaviour of the index. The Generalised Auto Regressive Conditional Heteroscedasticity Model (GARCH) model is applied to capture the seasonality in the returns and the volatility of the Islamic equity market. It has been found out that the effect of Ramadan, the holy month of Muslims, can be both significant and insignificant depending on different years. The Islamic indices during the earlier years of their establishment were performing poorly, if compared to the market benchmarks. But during the latter years, the markets have performed well or maintained a good place, as compared to market benchmarks. The results of Jensen’s alpha show that the returns during Ramadan improve significantly. This study will help the investors to efficiently time their trading. Based on the authors’ best knowledge, this is the first paper describing an investigation on Ramadan effect on the emerging Shariah index, which has also included the Ramadan period of 2017. Keywords: Islamic Equity; Shariah Index; Emerging Economies; Anomalies; GARCH; Ramadan JEL Classification: G41; D63; O50 DOI: https://doi.org/10.21003/ea.V170-11

Хан А. науковий співробітник, кафедра бізнес-адміністрування, Аліґархський мусульманський університет, Аліґарх, Індія Табаш М. кандидат економічних наук, коледж бізнесу, Університет науки й технологій Аль-Айн, Аль-Айн, Об’єднані Арабські Емірати Сарім М. науковий співробітник, кафедра бізнес-адміністрування, Аліґархський мусульманський університет, Аліґарх, Індія Ахтар А. кандидат економічних наук, доцент, кафедра бізнес-адміністрування, Аліґархський мусульманський університет, Аліґарх, Індія Дослідження аномалій на фондових ринках в ісламських країнах з економікою, що розвивається Анотація. Метою цього дослідження є оцінка ефективності фондових ринків в ісламських країнах з економікою, що розвивається, з урахуванням ісламського календаря. В основу дослідження покладено дані, що охоплюють період з 1-го січня 2010 року до 1-го вересня 2017 року. В ході дослідження було використано індекс шаріату агентства Standard & Poor’s (S&P), що включає дані 22-х країн з економікою, що розвивається. Для визначення динаміки індексу авторами дослідження було задіяно метод описової статистики. Узагальнену модель авторегресійної умовної гетероскедастичності (GARCH) було застосовано для визначення впливу сезонності на прибутковість, а також волатильності ринку цінних паперів в ісламських країнах. Було визначено, що ефект Рамадану, священного для мусульман місяця, може мати як істотний, так і несуттєвий вплив залежно від року. У перші роки від свого створення показники індексів ісламських ринків були далекі від еталонних ринкових показників. Однак у наступні роки ситуація вирівнялася. Показник альфи Йенсена показує, що в період Рамадану прибутковість істотно зростає. Дане дослідження допоможе інвесторам визначити найбільш сприятливі для інвестування періоди. Ґрунтуючись на накопиченому досвіді, автори статті вперше вивчили вплив Рамадану на індекс шаріату, дослідивши в даному контексті й період 2017 року. Ключові слова: ісламські акції; індекс шаріату; країни з економікою, що розвивається; аномалії; GARCH; Рамадан.

Khan, A., Tabash, M. I., Sarim, M., & Akhtar, A. / Economic Annals-XXI (2018), 170(3-4), 64-68 © Institute of Society Transformation, 2018 64 MONEY, FINANCE AND CREDIT

Хан А. научный сотрудник, кафедра бизнес-администрирования, Алигархский мусульманский университет, Алигарх, Индия Табаш М. кандидат экономических наук, колледж бизнеса, Университет науки и технологий Аль-Айн, Аль-Айн, Объединенные Арабские Эмираты Сарим М. научный сотрудник, кафедра бизнес-администрирования, Алигархский мусульманский университет, Алигарх, Индия Ахтар А. кандидат экономических наук, доцент, кафедра бизнес-администрирования, Алигархский мусульманский университет, Алигарх, Индия Исследование аномалий на фондовых рынках в исламских странах с развивающейся экономикой Аннотация. Целью данного исследования является оценка эффективности фондовых рынков в исламских странах с развивающейся экономикой с учетом исламского календаря. В основу исследования положены данные, охватывающие период с 1-го января 2010 года до 1-го сентября 2017 года. В ходе исследования был использован индекс шариата агентства Standard & Poor’s (S&P), включающий данные 22-х стран с развивающейся экономикой. Для определения динамики индекса авторами исследования был задействован метод описательной статистики. Обобщенная модель авторегрессионной условной гетероскедастичности (GARCH) была применена для определения влияния сезонности на доходность и волатильности рынка ценных бумаг в исламских странах. Было определено, что эффект Рамадана, священного для мусульман месяца, может иметь как существенное, так и несущественное влияние в зависимости от года. В первые годы от своего создания показатели индексов исламских рынков были далеки от эталонных рыночных показателей. Однако в последующие годы ситуация выровнялась. Показатель альфы Йенсена показывает, что в период Рамадана доходность существенно возрастает. Данное исследование поможет инвесторам определить наиболее благоприятные для инвестирования периоды. Основываясь на накопленном опыте, авторы статьи впервые изучили влияние Рамадана на индекс шариата, исследовав в данном контексте и период 2017 года. Ключевые слова: исламские акции; индекс шариата; страны с развивающейся экономикой; аномалии; GARCH; Рамадан.

1. Introduction applied in this paper. The fourth section interprets the results The efficiency of the market is questioned during the pre and the fifth section concludes the paper. sence of the anomaly. Yet irregularities and anomalies are not ex- 2. Brief Literature Review plained properly in any of the existing finance theories. Khan and The systematic patterns in the returns of the indices during Jebran (2014) said that an efficient market is a market in which in- a specific period of time, which indicate the inefficiency of the vestors earn no excessive profits, or they do not earn the highest market, are known as calendar anomalies (Brooks, 2004). Yet, returns above average market returns. The returns of stock mar- these patterns do not stay long; they fade away or disappear kets can be predicted because of the seasonality factor (Jensen, (Schwert, 2001). The calendar anomalies do not mean that the 1978). Seasonality is also known as the anomaly. This, in turn, stock market is inefficient. In fact, during this period the returns affects the basic concept of efficient market hypothesis (EMH). are less and the difference in returns is mainly because of the time An irregularity in the financial market is known as «anomaly». varying risks (Brooks, 2004). Religious beliefs have an impact on When an anomaly occurs, financial markets behave differently. stock markets (Weber, 1930). Numerous studies explain the cal- Efficient markets are those in which investors do not have any endar anomaly phenomenon with the help of the tax system of possibility of earning the highest returns. The EMH states that a country, the structure of the market, the trading mechanism by using trend analysis, investors will not be able to get exces- and the cultural factors (Dbouk, Jamali & Kryzanowski, 2013; sive profits. The only feature of the market which is against this Dyl, 1977; Roll 1983; Hepsen, 2012; Fama & Blume, 1966; Bley & hypothesis is calendar anomalies. Many studies have been con- Saad, 2010; Chan, Khanthavit & Hugh, 1996). ducted on the Gregorian’s calendar anomalies; however different Seasonal patterns are also identified when they are measu regions have different anomalies. They include all those men- red on a weekly basis. The returns on S&P 500 were analysed tioned in the Hindu, Chinese, Hebrew and Hijri Calendar. The Hijri by Levy and Yagil (2012) to find the 44th week of the year effect. calendar has the same number of months as the Gregorian ca The robustness of the findings was not checked on the emer lendar, though the number of average days is fewer in it than in ging markets but 19 developed markets showed robust results. the latter. The months in the Hijri calendar depend on the appea The growing share of the global markets comprises the rance of the new moon. The ninth month of the Hijri calendar is emerging markets. The analysis of these markets helps inves- known as Ramadan, in which Muslims fast from Dusk to Dawn. tors to decide where they should invest. The emerging markets In this month, people are motivated towards religious ac- are integrated with the developed markets, yet there are a few tivities. Ramadan is one of the five pillars of Islam. Muslims of them which are not. Therefore, they constitute a separate try to refrain themselves from ‘Haram’ doings. They avoid get- asset class (Bekaert & Harvey, 1995, 2000; Bekaert, Harvey, ting involved into gambling and speculation. Since these are Lundblad, & Siegel, 2011). Investors find it difficult to invest an essential part of the stock market system, the theory of be- in the emerging markets as they lack hedging instruments, havioural finance suggests that optimism biases and outcome which, in turn, causes risk to international investors. This leads biases depend on increased uncertainty. During the beginning to a situation when developed markets are more efficient than and ending of Ramadan, high level of volatility is reported by emerging markets (Bekaert & Harvey, 2002). many researchers (Bialkowski et al., 2010). According to behavioural finance, the market is also run by Ramadan is observed with great passion and enthusiasm. the emotions, religious beliefs and investors’ behaviour. Spiritual There are changes in the socio-economic lifestyle of indivi beliefs can cause irregularity in the markets (Bialkowski et al., duals, so it is interesting to examine how the Islamic stock in- 2010). The stock returns are affected by the religious events dex performs during this month of the year, as compared to mentioned in the calendars (Lakonishok & Smidth, 1988). Va the other months. rious studies have been conducted on the effect of calendar The present study uses the Standard & Poors Emer anomalies on bond markets, foreign exchange markets, future ging Shariah Index as this index includes stocks from all the markets and mutual fund markets (Carl & Jacob, 2010). emerging economies which qualify as Shariah complaint Earlier studies were restricted to Muslim countries only. Fur- stocks. The S&P Emerging Shariah Index is a subset of the ther, it was found out that Muslim investors not only invest in S&P Global Index. The objective of this paper is to analyse the Muslim countries but they also do so globally. Therefore, there performance of the stock market during the Ramadan period are no more country-specific aspects. Calendar anomalies and the effect of Ramadan on the returns of the stock index. are present in the Islamic indices where there is a significant The paper is divided into five sections, the second section number of Muslim investors. Most of the Muslim countries re- deals with the review of literature followed by the methodology late to emerging economies, which is why this study has been

Khan, A., Tabash, M. I., Sarim, M., & Akhtar, A. / Economic Annals-XXI (2018), 170(3-4), 64-68 65 MONEY, FINANCE AND CREDIT conducted based on the Islamic emerging markets. Most of the was conducted basing on the Malaysian markets by Carl and Islamic countries are using the Islamic banking system in their Jakob (2010) by using the regression (OLS) technique. The transactions, and it is confirmed that Islamic banking has con- Malaysian markets had a significant Christmas effect, but not tributed to the growth of the economies in the relevant coun- the Eid ul Fitr effect (Wong and Lim, 2016). tries (Tabash, 2013; 2014). This study shows the performance 3. Data and Methodology and the impact of Ramadan on the Islamic emerging markets. In this study, we have collected the daily data for the S&P During Ramadan, Muslims are involved in religious activities Emerging Shariah Index for the years between 2010 and 2017. like fasting, reciting prayers and the Holy Quran, social welfare This index includes securities from 22 countries, as shown in and Itikaf (during the last ten days of Ramadan). Muslims spend Table 1. The countries included in this index comprise stocks most of their time performing religious activities, which, in turn, which are Shariah compliant by either choice or by chance. leads to slowing down activities related to investing in stock Those stocks which are Shariah compliant by have no signifi- markets. At the same time, the month also attracts investors by cant effect on this index. The total number of securities inclu generating new business opportunities. In this period, the re- ded in this index are 1,126. turns become abnormal. In the emerging markets, there exists We have evaluated the performance of the index du a higher serial correlation (Harvey, 1995), leakage of informa- ring both the Ramadan period and the overall period. Jen tion prior to announcements (Bhattacharya, Daouk, Jorgenson, sen’s alpha is calculated with the help of regression. GARCH & Kehr, 2000), and higher returns are generated through cross test is used to check the impact of Ramadan on the mar- sectional trading (Rouwenhorst, 1999). ket. To examine the anomaly OLS, regression is used by ta Investors’ decisions are strongly influenced by their social king Ramadan period as a dummy (0, 1) (Kouser et al., 2013; mood, which impacts the stock price (Edmans et al., 2007). Is- Seyyed et al., 2005) lamic stocks represent a developing investment category which The model used for calculating Jensen’s alpha is: is screened on the basis of Islamic principles (Masih et al., 2016). Ramadan being the holy month of the Hijri Calendar, the Mus- lims try not to get involved in Haram doings. They are less involved in social and economic activities. Such behaviour leads to a reduction in returns and volatili- where: ty (Husain 1998; Seyyed et al., 2005). Basing on studies of the Rit is the daily returns of the portfolios; Indian market, Mehta (2004) reports that Hindu festivals have RFt is the risk free rate; an impact on the daily returns of the indices operating in In- RMt is the daily return on the market index; dia. Before a public holiday, the returns of the stock markets is Jensen’s alpha; tend to increase. Thus, it leaves a significant impact on the is the systematic risk; stock markets (Noland, 2003). The Islamic month impacts the it is the error term. economic and financial activities, which can make it fluctuate The risk free rate in this study is the US Treasury bill rate. The at different times of the calendar, thus impacting the share re- daily beta is calculated by taking one-month lag time period. turns (Halari et al., 2015). When studying Saudi Arabia, it was The volatility among different markets is checked with the found out that religious beliefs have an impact on investors’ help of the threshold GARCH (TGARCH) (Halari et al., 2015; portfolio decisions (Canepa & Ibnrubbian, 2014). Kenourgios et al., 2016). The GARCH model is divided into Numerous studies have been conducted on the impact of two parts: the mean equation and the variance equation: Islamic months on the stock markets. Khalid Mustafa studied the Islamic calendar months like Muharram, Shahban, Rama- dan, Shawwal, Ziqad and Zilhajj’s effect on the Karachi stock (1) markets. He found that the effect of Ziqad and Shawwal has an impact on the stock markets, and that during Ramadan the market is less risky as compared to the other months. A study was also conducted on the Indian and Pakistani markets for the pe (2) riod between 1997 and 2003. It was found that the markets in Pakistan were less volatile during Ramadan and Rabi ul Awwal period, whereas they were highly volatile in the Indian market du Equation 1 is the mean equation, and Equation 2 is the va ring Muharram and Shawaal. Kouser et al (2013) found that there riance equation. In the mean equation, Rjt represents the return was a significant impact of Ramadan on the markets due to the usage of the OLS technique. In the study conducted with regard to the Turkish markets, it was found that the funds gained posi- Tab. 1: List of countries and number of constituents in the tive returns during the Ramadan period (Bialkowski et al., 2013). S&P Emerging Shariah Index, 2010-2017 In their study, Oguzsoy and Guyen (2004) showed that the impact of Ramadan on the Istanbul Stock Exchange had significant positive returns. Some studies were conducted on the markets which purely deal with Islamic finance, like in the case of Saudi Arabia. It was found that there were negative returns du ring the Ramadan period. This can be explained by the fact that investors divert their funds towards the socio-religious causes rather than investing in markets (Seyyed et al., 2005). One of the requisite of Ramadan is that Muslims have to give Zakat (Chari- ty) to the poor. This can also be one of the reasons behind stable or negative returns during the Ramadan period. Positive moods of the investor lead to significant returns, like in the case of an odd number of days during the last ten days of this month (21st, 23rd, 25th, 27th and 29th). The highest returns were reported in the study conducted by Al-Ississ (2015). He reported that the markets were behaving abnormally on the 27th Ramadan. As the month Ramadan finished, people go back to their daily lives. Businesses are back to normal or, in some cases, they earn higher returns during the following months. There were some studies, in which it was found out that during Eid ul Fitr, the markets were not affected at all, and the returns were similar to the ones in the preceding months. The study Source: Compiled by the authors based on S&P’s website

Khan, A., Tabash, M. I., Sarim, M., & Akhtar, A. / Economic Annals-XXI (2018), 170(3-4), 64-68 66 MONEY, FINANCE AND CREDIT of S&P Emerging Shariah Market at time t, Tab. 2: Descriptive Statistics while Di is the dummy variable of Rama- dan i (1 for Ramadan and 0 for the rest of the dates of the other months). jt is the error term. In the variance equation, hjt is the conditional variance; is the ARCH which will capture the volatility from the previous period. j and j are the effect of the ex- cluded dummy variables. This model is similar to the one used in the studies by Jebran and Chen (2017). 4. Empirical Results Source: Compiled by the authors 4.1. Descriptive Statistics The Jarque-Bera test results suggest that the returns are not normally distributed. The results re- The GARCH results have indicated both a significant lating to the years 2011, 2013, 2014 and 2015 were nega- and insignificant effects of Ramadan over the index. The tively skewed as shown in Table 2. 2012 and 2013’s returns study has useful implications for the investors, so that they were significant at the 5 percent level. The kurtosis value was can time their trading strategies and invest during the Ra higher than the critical value of 3 in all the years except 2011 madan period because the returns during this period are and 2015. The results are similar to the results obtained by either high or stable. The effects of the Islamic calendar can Halari et al., (2015). The results also showed that during 2011 only be found in the regions which are under Islamic law. the mean of the returns was positive, as compared to the The financial shocks also had an effect on the performance rest of the months. For the year 2017, the return is positive. of the markets. During the bearish periods, the Islamic mar- However, we cannot judge it on the basis of just 9 months kets were performing better than the market benchmarks, taken in this study. The standard deviation is approximately whereas during the bullish periods the benchmark markets the same all throughout the years. were outperforming the Islamic markets. This study will 4.2. Overall performance versus performance during also help the ‘active investors’ to decide when to invest for Ramadan higher returns. Future studies should be done with regard to To evaluate the performance during both the Ramadan evaluating the performance of the indices during the calen- period and the overall period, Jensen’s alpha is calculated dar anomaly in conventional and Islamic markets. by taking one-month lag. In the years 2010, 2012 and 2017, the overall index performed well, but in the rest of the months they were underperforming, compared Tab. 3: Jensen’s Alpha for the overall period and the Ramadan period to market benchmarks. In the year 2010, the performance of the index during Ramadan was poor, as compared to the rest of the months. This can be explained by the fact that the index was not well established in all the regions of the emerging markets. In some of the markets, the index started operating from the year 2009. After that year, the markets stabilised and investors started investing in the Islamic index, which is why from the year 2011, the performance during Ramadan considerably improved. There were no as financial shocks during those years except for the year 2016, when Brexit took place. If we compare the performance of the market in terms of the prece ding years, it can be observed that the overall market was performing better. During the Ramadan of 2016, the market outperformed the market benchmark. The results of the Jensen’s Alpha are given in Table 3. The relevant results are also represented in Figure 1. 4.3. GARCH results The results of the GARCH test are given in Table 4. As we can see from the table below, Ramadan had no significant effect on the returns of the market in the period between 2010 and 2013. The study is similar Source: Compiled by the authors to the one conducted by Jebran and Chen (2017), in which it was reported that there was an insignificant Ramadan effect on the market, however during the period between 2014 and 2017, a significant effect was observed in the market. The results are similar to the results repor ted by Al-Ississ (2010), Al-Hajieh et al., (2011) and Almud- haf (2012). 5. Conclusion In the present study, we have examined the Islamic ca lendar anomaly, i.e. the Ramadan period with regard to the S&P Emerging Shariah Market in view of the period from 2010 to 2017. In some studies, the calendar anomalies were the Zil Haj period, Muharram and Ramadan. However, ta king into account a larger number of countries in our study, we have considered only the Ramadan period. Jensen’s alpha was used to evaluate the performance of the index during both Ramadan and the overall period. The results of Jen sen’ s alpha have indicated that the performance during Fig. 1: Jensen’s Alpha for the overall and Ramadan period Ramadan was slightly getting better year wise. Source: Calculated by the authors

Khan, A., Tabash, M. I., Sarim, M., & Akhtar, A. / Economic Annals-XXI (2018), 170(3-4), 64-68 67 MONEY, FINANCE AND CREDIT

Tab. 4: Results of the GARCH test

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The turn of the year effect and the return premium of small firms. Journal of Portfolio Management, 9(2), 18-28. doi: https://doi.org/10.3905/jpm.1983.18 25. Rouwenhorst, K. G. (1999). Local return factors and turnover in emerging stock markets. The Journal of Finance, 54(4), 1439-1464. doi: https://doi.org/10.2139/ssrn.115788 26. Schwert, G. W. (2001). Anomalies and Market Efficiency. In G. M. Constantinides, M. Harris, & R. Stulz (Eds.), Handbook of the Economic Finance (pp. 939-972). Amsterdam: North Holland. Retrieved from http://schwert.ssb.rochester.edu/hbfech15.pdf 27. Seyyed, F. J., Abraham, A., & Al-Hajji, M. (2005). Seasonality in stock returns and volatility: The Ramadan effect. Research in International Business and Finance, 19(3), 374-383. doi: https://doi.org/10.1016/j.ribaf.2004.12.010 28. Tabash, M. I., & Dhankar, R. S., (2013). An Empirical Analysis of the Flow of Islamic Banking and Economic Growth in Bahrain. International Journal of Management Sciences and Business Research, 3(1), 96-103. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2717338 29. Tabash, M. I., & Dhankar, R. S. (2014). The flow of Islamic finance and economic growth: an empirical evidence of Middle East. Journal of Finance and Accounting, 2(1), 11-19. doi: https://doi.org/10.11648/j.jfa.20140201.12 30. Wong, P. H., & Lim, W. C. (2016). Effects of Holidays on the Malaysian Stock Exchange. International Journal of Business and Management, 11(2), 274-298. doi: https://doi.org/10.5539/ijbm.v11n2p274 Received 20.04.2018

Khan, A., Tabash, M. I., Sarim, M., & Akhtar, A. / Economic Annals-XXI (2018), 170(3-4), 64-68 68 DEMOGRAPHY, WORKFORCE ECONOMY, SOCIAL AND ECONOMIC POLICY

Tatyana Golubkova Kristine Kalinina Hany Asaad Yousif Moussa PhD (Economics), Professor, PhD (Economics), Lecturer, MBA, PhD Student (Economics), Baltic International Academy Transport and Telecommunication Institute Baltic International Academy 4 Lomonosov Str., 1 Lomonosov Str., 4 Lomonosov Str., Riga, LV-1019, Latvia Riga, LV-1019, Latvia Riga, LV-1019, Latvia [email protected] [email protected] [email protected] ORCID ID: ORCID ID: ORCID ID: https://orcid.org/0000-0002-6618-9518 https://orcid.org/0000-0002-4428-299X https://orcid.org/0000-0003-4100-3673

An analysis of international activity of foreign students in Latvia

Abstract. This article explains the importance of the topic through a carefully made research on the subject, including the analysis of the theory of an academic activity, the analysis of the academic activity of foreign students currently studying in higher educational institutions of Latvia, the forecast of academic activity of foreign students currently studying in higher educational institutions of Latvia. The authors of the article have detected a connection between the consumer, who is a foreign student studying in Latvian universities, and the country’s GDP by using field research based on surveys of foreign students on the necessity to maintain academic activity in the higher educational institutions of Latvia and provide a description of foreign students as consumers in the educational market of Latvia. Keywords: Consumer; Foreign Students; Academic Mobility; Economic Impact; Marketing Research; Survey JEL Classification: A12; M31 DOI: https://doi.org/10.21003/ea.V170-12

Голубкова Т. доктор економічних наук, професор, Балтійська міжнародна академія, Рига, Латвія Калініна К. доктор економічних наук, викладач, Інститут транспорту і зв’язку, Рига, Латвія Мусса Г. MBA, аспірант, Балтійська міжнародна академія, Рига, Латвія Аналіз міжнародної активності іноземних студентів у Латвії Анотація. Важливість зазначеної теми розкрито за допомогою ретельно проведеного дослідження, яке включає аналіз академічної діяльності, а також прогноз академічної активності іноземних студентів, які навчаються у вищих навчальних закладах Латвії. Автори статті виявили зв’язок між споживачем, що є іноземним студентом, який навчається в латвійських університетах, і ВВП країни шляхом проведення польового дослідження на підставі опитування іноземних студентів щодо їхньої академічної діяльності у вищих навчальних закладах Латвії та опису іноземних студентів як споживачів на освітньому ринку Латвії. Ключові слова: споживач; іноземні студенти; академічна мобільність; економічний вплив; маркетингове дослідження; опитування.

Голубкова Т. доктор экономических наук, профессор, Балтийская международная академия, Рига, Латвия Калинина К. доктор экономических наук, преподаватель, Институт транспорта и связи, Рига, Латвия Мусса Г. MBA, аспирант, Балтийская международная академия, Рига, Латвия Анализ международной активности иностранных студентов в Латвии Аннотация. Важность указанной темы раскрыта посредством тщательно проведенного исследования, включая анализ академической деятельности, а также прогноз академической активности иностранных студентов, обучающихся в настоящее время в высших учебных заведениях Латвии. Авторы статьи обнаружили связь между потребителем, являющимся иностранным студентом, обучающимся в латвийских университетах, и ВВП страны путем проведения полевого исследования на основании опроса иностранных студентов касательно их академической деятельности в высших учебных заведениях Латвии и описания иностранных студентов в качестве потребителей на образовательном рынке Латвии. Ключевые слова: потребитель; иностранные студенты; академическая мобильность; экономическое влияние; маркетинговое исследование; опрос.

1. Introduction migration promotes academic activities, as well. Such cir- Today, international academic activity is a very topical cumstances have predetermined different viewpoints on the issue raising interest not only in scientific circles but also subject of international education both on a global scale in the whole society. One of the reasons is that increasing and in Latvia.

This research has been inspired the purpose to analyse in- region is based on the idea of European identity, which is added ternational education activities with regard to foreign students to the ambitions of national states, but does not replace them who are studying in higher educational institutions of Latvia and cannot be a private case of internationalisation. Also, it can- and to determine conditions required for the improvement of not be a special case of manifestation of globalisation, if it un- the educational market of Latvia. dertakes the functions of subordination of the local peculiarities 2. Research tasks, methods and brief literature review to the irresistible force of the world market or ideology [3]. The purpose of the article is to analyse the theory of aca- The Association of the European Universities has defined demic activity, study academic activity of foreign students cur- the following fundamental principles of the European space of rently studying in higher educational institutions of Latvia, fore- the export of higher education [4]. European higher education cast academic activity of foreign students currently studying in institutions (HEI) should keep their inextricable connection with higher educational institutions of Latvia, discover the impact research activity at the accessible level for each university not which foreign students studying in Latvian universities have on only in terms of supply to the students with the most advanced the country’s GDP, reflect the results of the conducted field re- knowledge [5]. It is necessary to develop the culture of qua search based on the survey of foreign students on the necessi- lity in the European higher education institutions (HEI). For this ty to maintain academic activity in the higher educational insti- purpose, it is possible to develop methods of determination of tutions of Latvia and provide a description of foreign students progressive methods of work and determine certain awards or as consumers in the educational market of Latvia. ranks. The formation and development of the European edu- For this purpose, we used statistical methods of economic cational space has become a subject of a number of European and marketing research. international programs. For example, the ERASMUS program The difficulty of solving the stated problem lies not only in was launched by the decision of the European Council and the the lack of experience as such in the whole global communi- European Parliament in1986 [6]. ty, but also in the fact that it is connected with the field of edu- The European Student Information Bureau (ESIB) inte- cation. It is studied as a topic relating to socio-humanities and grates national student unions from 36 European countries, considered from the perspective of cross-cultural education expressing the will of 11 million European students. Today the and global educational studies. The authors propose to solve ESIB is a full member of the academic processes in Europe de- the problem of integration of foreign students by considering fending the interests of European students and is a political or- marketing as the main science for the research and applying ganisation with a clear structure and decision-making proce- econometric methods, which allows expanding the essence of dures [9]. Scientists, among whom are marketing specialists, marketing as part of applied economics. In addition, this as- including I. Akulich, mark that the term «export» is used when pect emphasises the interdisciplinary connection [1]. designating the method of accessing foreign markets in terms The integration of foreign students is reflected in modern of sales of a product or service [8] for the product or service methodologies relating to socio-humanities, where it is consi to be consumed in foreign markets and to meet consumer’s dered from the perspective of cross-cultural education and glo needs and demands in the country of consumption. bal educational studies. We will present a comparative analysis of Emphasising that export is a method of increasing the yield opinions of different scientists studying the problem of integration of a product/service in the foreign market, but not the process and define the connection between marketing and integration. itself, we will continue to exclude contradictions [10]. This re- The research methodology is based on systemic and dia search is devoted to foreign students’ integration, i.e. market in- lectical analyses. The statistical data analysis methods integration of students consuming educational products as a re- clude the main indicators of descriptive statistics (indicators sult of the movement, which brings physiological understanding of central tendency or location, indicators of variability, indica- of the «export of education». Due to the movement of consump- tors of skewness and kurtosis), time series analysis and fore- tion of educational products or services within the frameworks of casting, correlation analysis and regression analysis, analysis the concept of «export of education», according to the opinion of variance (ANOVA) for testing statistical hypotheses with the of the authors, there occurs «academic mobility», which reflects use of the t-test; chi-square, the Kolmogorov-Smirnov test, the depth of «export of education» in the case of marketing [11]. the Shapiro-Wilk criterion, etc. Also, it should be noted that the types and characteris- Works by leading Latvian and foreign scientists serve as tics of the academic mobility, suggested by the authors, can theoretical, methodological and information bases of the re- be used not only in the terminological, but also in the practi- search. B. Rivža, A. Batraga, S. Buka, R. Garleja, B. Sloka cal sense [7; 12]. and J. Salkovska, as well as some foreign researchers such 4. The analysis of the dynamics of the number of as G. Gerken, R. Kopelman, J. Rovenpor, conducted exten- foreign students in Latvia sive research on academic activity and foreign students in Lat- Let us estimate the changes in the number of foreign stu- via. In their studies, the authors have shown the increasing le dents in higher educational institutions of Latvia. As we can see vel of academic activity in the field of higher education and the in Figure 1, the number of foreign students has a positive trend. possibility of its development in Latvia, which is another proof The analysis by the SPSS of the dynamics of the num- of the pertinence of the topicality of the issues under research. ber of foreign students, based on the report by the Ministry 3. Export of education of Education of Latvia covering a period from 2004 to 2017, The globalisation of education is the highest stage of inter- gives us a possibility to conclude the following. nationalisation of education. According to D. Honeck’s opinion, A Shapiro-Wilks sample test shows that the residues meet trade in the educational services has a wide prospect: «The the theoretical conditions for the model of regression. trade in services is a unique business, as opposed to the trade The summary for the model with the dependent va in goods it has (at least, in terms of the World Trade Organisa- riable «Foreign Students» shows that the model describes tion) four «methods of delivery», including the supply of servi the data very accurately, where R = 0.998, R 2 = 0.996, and ces abroad» [2]. The fact of trade exists in the case when goods the adjusted R 2 = 0.996. are moved across borders between the states from the place, The analysis of variance with the dependent varia- i.e. from the place where they are produced to the place where ble «Foreign Students» indicates that the regression of the they will be consumed. Trade in services includes the use of the sum of squares = 59,098,131.834, the regression of mean telephone, e-mail or facsimile with the aim of providing educa- square = 29,549,065.917 and the main value of regression tional consultation services. Of course, due to the enormous = 0.000, which also shows that the model is significant, and growth of the Internet, the capabilities of providing relevant ser- it can be used for the forecast. vices abroad have expanded quite significantly [2]. The residues are distributed normally with the mean value According to the European Association for International of 0. On the basis of the obtained data, we can make a fore- Edu cation (EAIE), the main goal of its activity is the formation cast on the basis of the obtained model [13]. and development of the European educational space. If inter- As seen in Figure 1, the graphic representation of the fore- nationalisation is conceptually inseparable from the historical cast from the time point (the year 2018) increases by appro national state, then Europeanisation of higher education in the ximately 4% each year. Such a trend has confirmed a positive

Golubkova, T., Kalinina, K., & Moussa, H. A. Y. / Economic Annals-XXI (2018), 170(3-4), 69-72 70 DEMOGRAPHY, WORKFORCE ECONOMY, SOCIAL AND ECONOMIC POLICY tendency towards the increasing number of foreign students studying in higher educational institutions of Latvia, which requires special attention to develop the topic of research. In addition, the given analysis has revealed consumers in the educational market. The following analysis confirms the actuality of such statements by demon strating the impact of foreign students on Latvia’s GDP. The impact of foreign students on Latvia’s education and other industries is Fig. 1: The dynamics of the number of foreign students from 2004/2005 until 2016/2017 getting more significant, as it is said in a study years and the forecast of the growth research by the analytical cent er Certus. in the number of foreign students for the 2018-2020 period D. Auers and S. Gubin, the authors of Source:Compiled by the authors based on [13] the research «The economic significance and influence ofhigher education exports in Latvia, Dom Certus», proved the Tab. 1: Forecast of foreign students’ contribution to Latvia’s GDP existence of a real economic impact of in the period of 2017-2019 foreign students on Latvia’s GDP. Ac- cording to their research, it is found that one foreign student per one academic year spends about EUR 12,264 on ave rage, with EUR 3,432 spent on payment Source: Compiled by the authors based on [13] for the boarding, EUR 3,696 spent on food and EUR 5,136 spent to pay the tuition fee. In addition, The target respondents were university students of univer- when conducting the research, its authors found that friends and sities, who were directly in one territorial segment and live near relatives, who stayed with foreign students in Latvia, spent about the place of learning. Such territorial segment is Lomonosov EUR 6.1 million per year altogether. All indicators calculated, it Street, where there are such large commercial educational in- occurred that foreign students spent about EUR 73 million in stitutions as the Baltic International Academy (BIA), Transport the 2015/2016 academic year. In addition, the higher education and Telecommunication Institute (TTI), the High School of In- has a multiplier effect because of foreign students’ budget and formation Systems and Management (HSISM) and the High stimulates the demand for accommodation services, food, en- School of Economics and Culture (HSEC). This territorial seg- tertainment and tourism (total EUR 75 million). The overall effect ment is chosen not coincidentally. According to the authors’ of higher education on the Latvian industry makes up EUR 148 opinion, it is possible to introduce an integration model of fo million and is 0.61% of the country’s GDP. Latvia’s mean income reign students, based on a significant number of universities from taxes makes up 28%. Consequently, foreign students con- in one location. In addition, the places where foreign students tribute EUR 20 million to the budget of the country annually [14]. choose to live in are, as a rule, near their places of learning. In addition, there has been another deep analysis of the Excerpts from the survey are given below [13]. impact of foreign students on Latvia’s GDP. The relevant da- To analyse the consumer demand of those who study at ta are provided below based on the research materials for the the universities of Latvia, the respondents were invited to an- 2017-2019 period (Table 1) [13]. swer the following questions: Based on the calculations, it follows that, despite a decrease • How did you get to know about the opportunity of studying in the total number of students in higher educational institutions in Latvia? of Latvia, the number of foreign students in the next three years • How did you prepare documents for obtaining a temporary will increase. Taking into account the total contribution of foreign residence permit in Latvia? (Figure 2). students to the economy of Latvia, it may be concluded that the • What or who can be the solution of a problem of integra- country’s GDP will increase by 0.8% in the next three years, with tion in Latvia? (university, society, dormitory, hobby club, an increase of 0.9% next year, which shows a good trend. national diaspora, students on the course, society, student The given analysis has proved the existence of the posi- complex) (Figure 3). tive impact on Latvia’s GDP in terms of educational activity of foreign students, who are consumers in the educational market. The authors believe that the present study should be complemented by a field research, surveying consumers about the necessity to develop the market of the higher education of Latvia and to create favourable conditions for such development. The le vel of reproduction of this survey has been proved by 53% of the participated in the survey. The authors developed a special questionnaire. The collected results were processed by the SPSS program. The survey was carried out among students at their place of residence (in dormitories and hotels), at the place of learning, in universities and by means of the Internet, including social networks. The total number of students included in the sample made up 136 people Fig. 2: The results of the survey on the questions from 13 countries, including the Czech Re- «How did you prepare documents for obtaining a temporary residence permit in Latvia?» public, Germany, Nigeria, Egypt, Kazakhstan, and Azerbaijan, Poland, Turkey, Russia, Ukraine, «How did you get to know about the opportunity of studying in Latvia?» Belarus, Georgia and Uzbekistan. Source: Compiled by the authors based on [13]

Golubkova, T., Kalinina, K., & Moussa, H. A. Y. / Economic Annals-XXI (2018), 170(3-4), 69-72 71 DEMOGRAPHY, WORKFORCE ECONOMY, SOCIAL AND ECONOMIC POLICY

The SPSS program was used to perform the necessary calculations. The standardised Cronbach’s alpha coefficient is calculated by the following formula:

(1)

where: N is the number of the researched components; determines the average coefficient of the correlation between the components. The results are represented in Table 2, with the Cronbach’s alpha coefficient being Fig. 3: The results of the survey on the question sufficient (>0.7), which points to reasonably «What or who can be the solution of a problem of integration in Latvia high accuracy of the test. (university, society, dormitory, hobby club, national diaspora, The Kuder-Richardson formula and students on the course, society, student complex)?» Cronbach’s alpha were used to obtain the Source: Compiled by the authors based on [13] results of the calculations [13].

Having received a positive reply regarding the place of residence in a single area from foreign stu- Tab. 2: Statistics of reliability dents, the respondents were asked questions about the possibility and willingness to change the place of residence in the student complex, including campus, café, sports complex, library or classroom. Preparation for classes and bedtime were named Source: Compiled by the authors as possible options for students to spend the time out of their education. The questionnaire contained general questions relating to the most popular events in the stu- 5. Conclusions dent community. The results surpassed all expectations. The stu- The research, based on existing scientific theories, has dents were ready and willing to attend different elective courses, proved that international academic activity is directly rela including language courses, and the study of Latvian language ted to the increasing number of foreign students studying in and other languages. In addition, they wished to attend various higher educational institutions. cultural events, go in for sports in the available sports complex The increasing number of foreign students revealed by the within the student complex. The availability of cafes with varied statistical analysis, points to the long-range development of cuisine was also considered a benefit. At that, 40% of respon the market of higher education in Latvia. dents were interested in breakfasts, 35% - in suppers, 10% The accomplished analysis has enabled us to detect the would use an opportunity to have both breakfast and supper [13]. consumer of the relevant services, who is the foreign stu- The coefficient of reliability of the survey results dent, and the relevant trends in the educational market of Let us calculate the coefficient of reliability of the results of Latvia. survey. The coefficient of reliability is an important criterion for The results of the conducted research will contribute to the evaluation of the results of the test. the creation of favourable conditions for the development of The goal of the survey was to show how important is the is- the market of higher education in Latvia. sue of integration of foreign students in Latvia. Consequently, The study confirms the topicality of the issue and the need there is an opportunity to identify whether the indicator of im- to continue research on the development of international aca portance of integration will be high. For this purpose, a table re- demic activity. flecting answers of each respondent was created. The so called The results of the research prove that the increasing correct answers were marked 1, while the so called incorrect an- number of foreign students in Latvia positively affects both swers were marked 2. Cronbach’s alpha with the value between the country’s educational market and the national economy 0 and 1 was used to obtain the coefficient of reliability [13]. as a whole.

Reference

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Received 12.05.2018

Golubkova, T., Kalinina, K., & Moussa, H. A. Y. / Economic Annals-XXI (2018), 170(3-4), 69-72 72 DEMOGRAPHY, WORKFORCE ECONOMY, SOCIAL AND ECONOMIC POLICY

Svetlana Gribanova MA (Sociology), Doctoral Student (Economics), Turiba University 38K2-153B Anninmuizas Blvd., Riga, LV-1067, Latvia [email protected] ORCID ID: https://orcid.org/0000-0001-5257-7221

Anna Abeltina D.Sc. (Economics), Associate Professor, Turiba University 52/54-66 Lacplesa Str., Riga, LV-1011, Latvia [email protected] ORCID ID: https://orcid.org/0000-0002-8606-523X

Motivation of IT students in contemporary Latvia

Abstract. This article is devoted to an underdeveloped yet relevant topic regarding motivation of IT professionals in Latvia. An online survey that covered 361 respondents was conducted in Latvian universities. The goal of the research is to find out whether young Latvian IT professionals are oriented towards financial stimuli and guarantees (the vital needs) or non-monetary motivators (the need for self-actualisation and professional growth). The research also offers a classification of different types of young Latvian IT professionals and elaborates some recommendations on their motivation. The respondents were divided into 5 groups based on their professional values: «flexible», «future professionals», «money oriented», «not decided yet» and «idealists». The authors give a detailed description of each group and provide recommendations regarding motivation of the professionals of each profile. The study may be of interest to HR managers in terms of their responsibilities related to attracting, motivating and developing young Latvian IT professionals. The recommendations are very specific and based on representative data, so they can be applied to HR practice. Keywords: Motivation; IT Professionals; Millennials; Generation Y; Latvia JEL Classification: M15; Z13; O15 DOI: https://doi.org/10.21003/ea.V170-13

Грібанова С. магістр соціології, докторант, Університет Туріба, Рига, Латвія Абелтіна А. доктор економічних наук, доцент, Університет Туріба, Рига, Латвия Мотивація IT-студентів у Латвії Анотація. Статтю присвячено актуальній темі мотивації молодого покоління IT-фахівців у Латвії. У ході дослідження в латвійських вишах було проведено опитування 361 респондента, мета якого полягала в тому, щоб з’ясувати, чи орієнтовані молоді латвійські IT-фахівці на життєві потреби, включаючи фінансові стимули й гарантії, чи на потребу в самореалізації та професійному зростанні, що можна віднести до немонетарної мотивації. За професійними цінностями автори дослідження розподілили респондентів на п’ять груп: «індивіди, що проявляють гнучкість», «майбутні професіонали», «індивіди, орієнтовані на гроші», «ті, хто не визначився» та «ідеалісти». У статті дано докладний опис кожної із зазначених вище груп, а також наведено рекомендації, які стосуються мотивації фахівців кожного із профілів. Результати проведеного дослідження можуть бути корисними для HR-менеджерів, в обов’язки яких входить залучення, мотивація та розвиток молодих фахівців. Ключові слова: мотивація; IT-фахівці; міленіали; покоління Y; Латвія.

Грибанова С. магистр социологии, докторант, Университет Туриба, Рига, Латвия Абелтина А. доктор экономических наук, доцент, Университет Туриба, Рига, Латвия Мотивация IT-студентов в Латвии Аннотация. Статья посвящена актуальной теме мотивации молодого поколения IT-специалистов в Латвии. В ходе исследования в латвийских вузах был проведен опрос 361 респондента, цель которого заключалась в том, чтобы выяснить, ориентированы молодые латвийские IT-специалисты в большей степени на жизненные потребности, включая финансовые стимулы и гарантии, либо на потребность в самореализации и профессиональном росте, что можно отнести к немонетарной мотивации. Взяв за основу профессиональные ценности, авторы исследования разделили респондентов на пять групп: «индивиды, проявляющие гибкость», «будущие профессионалы», «денежноориентированные индивиды», «неопределившиеся» и «идеалисты». В статье дано подробное описание каждой из указанных выше групп, а также приведены рекомендации, касающиеся мотивации специалистов каждого из указанных профилей. Данное исследование может стать полезным для HR-менеджеров, в обязанности которых входит привлечение, мотивация и развитие молодых специалистов. Ключевые слова: мотивация; IT-специалисты; миллениалы; поколение Y; Латвия.

1. Introduction (Desai & Lele, 2017), so the interest among the IT ma The focus of this paper is motivation of young IT profes- nagement to this generation is growing fast. sionals in Latvia. The authors deal with three dimensions: age As the topic of job motivation of young Latvian IT profes- (young generation), sphere (IT) and location (Latvia). Each sionals has not been widely researched in Latvia, the current component is well studied, but the combination of these three study is aimed at this target group and offers some ideas on layers has yet to be investigated. how to interact with this particular group of people to get them The data of the Latvian State Employment Agency shows motivated and stay at their companies long-term. that there is a high and growing demand for IT professio 2. The ICT sector in Latvia in the context of the EU nals, which could be satisfied by a younger generation (Sta In 2018, Latvia’s rank by the Digital Economy and Socie- rineca & Voronchuk, 2015). Youngsters are much more fa- ty Index (DESI) is 19th among other European countries (Digital miliar with technologies than the previous generations Economy and Society Index, 2018). There are five components

of this index. Latvia shows the best results by digital public ser- Some researchers believe that IT professionals (young vices (9th place among the EU member-states), the worst - by and senior) value non-material motivators more than ma- human capital and integration of digital technology (23rd place). terial motivators. Some authors highlight professional auto By now, only 57% of the employed and 33% of unemployed nomy as an ability to control the design and timing of their people have basic digital skills. The number of science, techno work (Pare & Tremblay, 2007). Others point out information logy, engineering and mathematics (STEM) graduates has de- sharing and recognition (Pare & Tremblay, 2007); interesting creased over time: from 14.1 per 1,000 in 2013 to 12.7 in 2016. work, independence and need for self-actualisation. At the The number of employed specialists in the ICT sector in- same time, there are researchers that argue that fair reward creased by 69% in 2016 in comparison with 2005 (Dutta, Lan- is one of the key factors of high motivation and low turnover vin, Wunsch-Vincent, 2017), but the level of employment and (Colquitt et al., 2001; Kerman & Hanges, 2002). training of ICT Specialists is comparatively low in Latvia (Table 1). Motivation of young Latvian generations The dynamics of many indicators is positive, yet this is not Despite the fact that the importance of financial motiva- enough for Latvia to be competitive at the EU market. tors is still high in transitional economies, the general pattern ICT specialists’ salaries increase every year (Table 2), still shows movement towards self-expression values. The however the effectiveness of investments in employees is not majority of younger people have not faced dramatic changes high: by the ratio of the average personnel costs for the ICT and significant lack of material resources during their child- sector, if compared with the non-financial business economy, hood, so they feel safer in the current environment and are Latvia has one of the lowest ranks. not afraid of changes which might happen. Therefore, they are Due to the fact that the ICT sector is one of the fastest de- looking in the future from a different angle, and they are not veloping and most perspective, the competitiveness in this afraid to move to another company, to change their place of field is very important for a European country. Latvia shows work or residence in order to make their dream come true or positive dynamics by many indicators, yet these efforts are to gain better perspectives. not enough to compete within the EU market. A smart invest- According to Gonthier’s research, intolerance to income ment in human capital may become a growing point for the differences and therefore attention to the size of the sala- ICT sector in Latvia, which is why we study values, expecta- ry are higher in the countries where inequality in income is ri tions and motivation factors regarding young IT specialists to sing rather than in the countries where it is falling or stabilising make Latvian companies more attractive. (Gonthier, 2017). As Latvia has been facing a growth in income 3. Theoretical framework and Methodology inequality since 1987, we can assume that monetary motivators Motivation of the young generation are important for Latvian citizens. The findings of the research There are a lot of different concepts and classifications conducted by Baltina & Senfelde showed that the younger ge that suggest approaches to the division of modern population neration values a good salary slightly more than other factors: by generations. Students born between 1983 and 2000 were «a good salary (97%), job stability (95%) and the opportunity to chosen as the subjects of the current research. combine work with family life (92%)» (Baltina & Senfelde, 2016). Some authors define them as a generation called Millen- The findings of the PWC report (Millenials at work, 2011) nials or Generation Y (Howe & Strauss, 2000), while other re- underline the importance of combining work and personal life searchers divide them into two generations known as Millen- for youngsters. Inglehart & Welzel believe that the shift from nials or Generation Y and Generation Z. Seemiler and Grace survival to self-expression values is intrinsic to young gene relate current students to Generation Z. According to their re- rations of all developed countries (Inglehart & Welzel, 2005). search, this generation consists of people born between 1995 Combining the knowledge concerning the motivation of and 2010 (Seemiler & Grace, 2016). From the focus of infor- the younger generation (Millennials), young IT professionals mational and communicational technologies, the main classi- and Latvian youth, it can be assumed that the motivation of fying criterion is the interaction of people with new technolo- young Latvian IT professionals will be a mixture of vital needs gies and the Internet. Since all people born after 1983 socia (monetary stimuli and guarantees), self-actualisation and self- lise in the era of rapid technological development, the authors development. do not see any reasons to divide them into subgroups. There- Hypothesis fore, in the current research all people born between 1983 Based on the studies cited above, we propose some hy- and 2000 are addressed as one generation called Millennials. potheses to test the motivation of young IT professionals in Some researchers (Seemiler & Grace, 2016) believe that Mil- Latvia: lennials prioritize non-material factors over financial stimulus, 1. Young generation of IT professionals will have a contradic- while other researchers (Twenge & Kasser, 2013) argue that tion in motivation, both material (high salary) and non-ma- Millennials are more materialistically oriented. terial (need of financial stability, professional and career Motivation of young IT professionals growth). Due to the growing importance of the IT industry in mo 2. Despite the similarity of general values, it is expected that there dern economy, there are many researches that study various will still be a difference in the expectations and motivations of sides of IT personnel management, including the reasons of the respondents. We assume that, depending on life situa- employee turnover, specifics of the IT industry, employee be- tions and personal value orientations, the respondents will be haviour and methods of achieving best results (Sukriket 2014). divided into several clusters, where every cluster will need its Along with employee turnover, employee satisfaction can own special approach in building the motivation system. show how effective the motivation system is. The research 3. The respondents will differ by the level of their ambitions, dedicated to the study of IT employee satisfaction has de willingness for comfort and self-actualisation. The authors monstrated that, along with salary and guarantees, training assume that older respondents, who already have family and recognition play an important role (Sharma et al., 2017). with children, will be more focused on wealth and material

Tab. 1: Indicators of employment and training of ICT specialists

Source: European Commission (2018)

Gribanova, S., & Abeltina, A. / Economic Annals-XXI (2018), 170(3-4), 73-78 74 DEMOGRAPHY, WORKFORCE ECONOMY, SOCIAL AND ECONOMIC POLICY

Tab. 2: Average monthly wages and salaries by activity type (in Euros), Total, Net

Source: Central Statistical Bureau of Latvia (2018)

guarantees, while the younger ones will have more idealis- «Programming», «Computer management and computer scien tic views and will not be sure what exactly they want from ces», «Information technologies»). work - high salary, prestige or self-actualisation. 4. Results Data Cluster profiles For this study, we used an online survey for questioning stu- From the list of questions concerning professional values, dents who study IT at higher education institutions of Latvia. we used only the ones with the greatest range of values. The The survey was held in March-April 2017. The authors used two authors used the K-means classification method in order to online survey panels, which reward panellists for completing define clusters based on the work value questions, as this de surveys online: www.aptaujucentrs.lv (an online survey panel in monstrated more varied and interesting results (Table 3). The Latvia) and www.platnijopros.ru (an online survey panel for Rus- respondents were distributed within the clusters rather evenly: sian-speaking citizens of several countries, including Latvia). in the 14-28% range in each one. The questionnaire programming in Russian and Latvian was Let us describe each cluster. done using professional Sawtooth Software in order to use all the Cluster 1: «Flexible» individuals are more among the 25 year- quality control tools (e.g. checking the average time spent in the olds, the second year students of the University of Agricul- survey, identifying straight-liners and using quality control ques- ture of Latvia (LLU) wherein only one parent has a higher tions) and benefit on attractive and interactive design of the sur- education degree. Freedom, self-development and mobility vey (e.g. pop-up questions, sliders, etc.). Professional translation are important for this group, but at the same time they are services were used for the Latvian version of the questionnaire. ready to be flexible for the demands of employers, condi- The survey invitation was sent to 3,546 panellists (members tional upon a good salary. of both online panels), who mentioned that they are students in Cluster 2: «Future professionals» are mostly among the first their profile. The opening rate was 37.9%. Out of 1,347 panellists year male students studying at the University of Latvia (LU); who clicked on the survey, 402 identified themselves as IT stu- they already work and are either in an unregistered partner- dents. After filtering by using quality control methods, 361 va ship or divorced. In most cases, their parents were born in lid responses were analysed. Based on the information re- Latvia and do not have a higher education degree. «Future ceived from the website of the Ministry of Education of Latvia professionals» want to develop in IT-sphere. It is more im- (Statistika par augstāko izglītību, [s.a.]), four main higher edu- portant for them to gain experience and develop profes- cation institutions which prepare IT specialists with both higher sionally than to get money fast in a job not connected with professional qualification and academic degree were identi- their specialisation. They cannot be called «altruists», as af- fied. They are the University of Latvia (programs: «Program- ter gaining the needed experience, they expect a high salary. ming and computer network administration», «Computer scien Cluster 3: «Money oriented» individuals are mostly aged ces»), Transport and Telecommunication Institute (programs: 23-24 and those who are older than 26, agreeable among « Electronics», «Telecommunication and computer networks», senior students (5th-6th year of study), TSI students, who do «Computer sciences», «Information systems management»), not work, rent a flat, are married, have at least one child, Riga Technical University (programs: «Computer systems», «In- were born outside the EU and have only one parent born in formation technologies», «Automatics and computing», «Elec- Latvia. This group has a very strong monetary motivation. tronics», «Electronic and mobile networks», «Telecommuni- They are ready to make any concessions for the sake of a cation») and the Latvian University of Agriculture (programs: good salary and getting a job.

Tab. 3: Cluster analysis based on the work value questions

Source: Compiled by the authors

Gribanova, S., & Abeltina, A. / Economic Annals-XXI (2018), 170(3-4), 73-78 75 DEMOGRAPHY, WORKFORCE ECONOMY, SOCIAL AND ECONOMIC POLICY

Cluster 4: «Not decided yet» includes mostly females aged realise their creative potential and have an opportunity for pro- 21-22 years in their fourth year of study at Riga Technical fessional growth. While respondents are ready to sacrifice va- University (RTU) or at any other institution not mentioned cation days and are ready to work in stressful conditions, they in the survey; they do not work, live with parents or in their want to have a flexible working schedule. Minor differences own flats; both parents were not born in Latvia but both between clusters become visible only in the middle of the list. have a higher education degree. This group has material There is no specific tendency towards comfort or achieve- motivation and a need for a guaranteed job. As much as ment for cluster representatives. Only the «not decided yet» possible, they would like to have the opportunity to deve group put basic opportunities a bit higher than the creative lop professionally and to have mobility, however they have ones and «flexible» individuals are more focused on the as- not decided yet which is more important when choosing pects connected with professional realisation. between freedom and money. Correlation of various work aspects Cluster 5: «Idealists» mostly consist of young respondents To study the links between the significance of every work who are in their third year of living in a dormitory, are sin- aspect, we used correlation analysis. The results of biva gle and were born in the EU (both in Latvia and other coun- riate correlation analysis for each cluster are represented in tries). For this group, freedom, self-development and mo- Tables 5-9. Only significant factors are left in the tables be- bility are more important than money, but in a given situa- low. We highlighted all the values which were higher than tion, they are ready to lower their career expectations. For 0.250 and were significant. Bold font was used to show the example, they are ready to sacrifice freedom in favour of a highest value of a correlation coefficient in each table. higher salary; they want a guaranteed job. Table 5 demonstrates correlation between the pairs of dif- The importance of different work aspects ferent working aspects’ importance for the «flexible» clus- To estimate the importance of different work aspects, we ter. The correlations do not exceed 0.4 which means that we used a block of questions beginning with the following: «There do not have strong correlations. The strongest correlation are several aspects which people consider important in their is between the achievement and having not too tense work jobs. Please look at this list and mark which of these aspects (0.337). The main «centre of attraction» for the «flexible» clus- are important for you personally in your job». The list inclu ter is an aspect such as achievement: those who have cho- ded 11 options, and each respondent was to evaluate every sen achievement as an important (or unimportant) work as- one either with «0» (if the aspect was considered to be impor- pect also mentioned requirements for the level of work ten- tant) or with «1» (if it was viewed as important). Table 4 rep- sion, as well as the opportunity to have an interesting job and resents all the answers, from the most important to the least to show initiative. important. The correlations in Table 6 (for «future professionals») The respondents are very close to each other in their an- are also not very strong. The strongest one with the mean of swers, which is a direct consequence of belonging to one 0.5 is a positive relationship between the significance of ha generation and sharing a life stage. They are starting their ving long vacation and not tense work. Upon closer examina- transition to adult life, obtaining a new profession and gaining tion, «future professionals» appear to be very hard in terms of work experience. Ranking the important job aspects demon- motivation, as they are mostly ambivalent to their preferences: strates that it is essential for all the respondents to fulfil basic they need an interesting job which requires maximum output, survival needs, which is reflected in the importance of having tension and realisation of their creative abilities, but they are a good salary. not interested in prestige, too much responsibility and a fle It is significant for the respondents to satisfy their basic xible schedule. needs. This is reflected in the importance of having a job with Table 7 represents correlations for the «money oriented» a good salary and guarantees. It is also important for them to cluster. The highest coefficient is 0.532 - the correlation between

Tab. 4: The importance rating for every cluster

Source: Compiled by the authors

Tab. 5: Cluster 1 («flexible»): correlation of the importance of various work aspects

Note: * is significance at the 0.05 level (2-tailed), ** is significance at the 0.01 level (2-tailed).

Source: Compiled by the authors

Gribanova, S., & Abeltina, A. / Economic Annals-XXI (2018), 170(3-4), 73-78 76 DEMOGRAPHY, WORKFORCE ECONOMY, SOCIAL AND ECONOMIC POLICY achievement and interesting job. Both these aspects take the and realise their abilities. At the same time, they are ready to second position for the respondents, which demonstrates that be motivated materially and work more intensively, showing people belonging to this cluster are not just looking for higher initiative (which was not exposed in other clusters). salaries, but also for a job which provides opportunities for pro- 5. Discussion and Conclusions fessional growth. To test our hypotheses about the motivation of young IT Correlations for the «not decided yet» cluster are not professionals in Latvia, we conducted several types of analy- very strong as well (Table 8). The highest value is 0.408, and ses: clusterisation, cross tabulation and correlation analysis. it belongs to a connection between achievement and interest. The cluster analysis divided the respondents into five groups Generally, this cluster has the same «centre of attraction» as based on their professional values. the «flexible» one, which is achievement. This cluster shows «Flexible» individuals are ready to keep their conditions, very disturbing results. On the one hand, they want to develop yet they want to develop; they are ready for self-actualisation professionally and have interesting tasks, on the other hand, and want to do interesting work. They can be motivated both they want a good salary and - on top of that - a flexible sche in material and in non-material ways by providing them with dule without stress and with guarantees. opportunities for professional development, giving interesting The strongest correlation between the importance of dif- tasks that require responsibility and initiative for the future by ferent working aspects for «idealists» (Table 9) belongs to a broadening their zone of responsibility and teaching them how comfortable schedule and vacation (0.375). Other values are to handle such tasks. lower. «Idealists» have not formed the idea of how they want It is hard to motivate «future professionals», as they are to work and develop professionally yet. Their settings are mostly ambivalent in their preferences: they need interes sometimes mutually exclusive: they do not want responsibility ting work, which requires maximum output, tension and rea and initiative at work, but they want to develop professionally lisation of creative abilities. However, they are not interested

Tab. 6: Cluster 2 («future professionals»): correlation of the importance of various work aspects

Note: * is significance at the 0.05 level (2-tailed), ** is significance at the 0.01 level (2-tailed).

Source: Compiled by the authors

Tab. 7: Cluster 3 («money oriented»): correlation of the importance of various working aspects

Note: * is significance at the 0.05 level (2-tailed), ** is significance at the 0.01 level (2-tailed).

Source: Compiled by the authors

Tab. 8: Cluster 4 («not decided yet»): correlation of the importance of various work aspects

Note: * is significance at the 0.05 level (2-tailed), ** is significance at the 0.01 level (2-tailed).

Source: Compiled by the authors

Gribanova, S., & Abeltina, A. / Economic Annals-XXI (2018), 170(3-4), 73-78 77 DEMOGRAPHY, WORKFORCE ECONOMY, SOCIAL AND ECONOMIC POLICY

Tab. 9: Cluster 5 («idealists»): correlation of the importance of various work aspects

Note: * is significance at the 0.05 level (2-tailed), ** is significance at the 0.01 level (2-tailed).

Source: Compiled by the authors in prestige, too much responsibility and flexible schedules. such individuals until they move to another cluster. After the Being free from ambitions of gaining prestige or high manage- analysis, the cluster name can be changed to «highly de- rial positions, they can focus on such tasks as process opti- manding». misation, creating new concepts or products. «Idealists» are predominantly first year students who The «money oriented» cluster showed itself as a clus- have not yet formed an idea of how they want to work and ter of rationally thinking people who not only appreciate com- develop professionally. Their preferences are sometimes mu- fort but are also ready to work hard and want to have op- tually exclusive: they do not want responsibility and initiative portunities for professional growth. The deeper analysis has work, but they want to develop professionally and realize their demonstrated that besides material motivation, having flexible abilities. At the same time, they are ready to be motivated ma- schedules and comfort can be good motivators. terially and work more intensively, showing initiative (which The «not decided yet» cluster shows very disturbing re- is not evident in other clusters). However, they will readily results. On the one hand, those who belong to it want to de- spond to material stimulation, which can be the first step in velop professionally and have interesting tasks. On the other their professional development, while the employer can build hand, they want a good salary and a flexible schedulewithout up the employee how he or she wants, developing the skills stress and with guarantees. Taking into consideration that and knowledge he or she needs. these respondents are just students and many of them do not The presented clusters may help HR specialists to recog- have any work experience and cannot already be considered nise different types of workers and be able to motivate them as professionals, it would be reasonable to refuse employing more effectively.

Reference

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Received 10.04.2018

Gribanova, S., & Abeltina, A. / Economic Annals-XXI (2018), 170(3-4), 73-78 78 ACCOUNTING, ANALISYS AND AUDIT

UDC: 657.6:657.424(477+438)

Liubov Gutsalenko Miroslaw Wasilewski Tetiana Mulyk D.Sc. (Economics), Professor, PhD (Economics), Associate Professor, PhD (Economics), Associate Professor, Head of the Department of Head of the Department of Finance, Head of the Department of Audit and State Control, Warsaw University of Life Sciences - SGGW Analysis and Statistics, Vinnytsia National Agrarian University (WULS-SGGW) Vinnytsia National Agrarian University 3 Soniachna Str., 166 Nowoursynowska Str., 3 Soniachna Str., Vinnytsia, 21008, Ukraine Warsaw, 02-787, Poland Vinnytsia, 21008, Ukraine [email protected] [email protected] [email protected] ORCID ID: ORCID: ORCID ID: https://orcid.org/0000-0001-5181-8652 https://orcid.org/0000-0001-6791-5713 https://orcid.org/0000-0003-1109-2265

Uliana Marchuk PhD (Economics), Associate Professor, Department of Accounting and Taxation, Kyiv National Economic University named after Vadym Hetman 54/1Peremohy Ave., Kyiv, 21008, Ukraine [email protected] ORCID ID: https://orcid.org/0000-0003-0971-1303 Yaroslavna Mulyk PhD (Economics), Senior Lecturer, Department of Audit and State Control, Vinnytsia National Agrarian University 3 Soniachna Str., Vinnytsia, 21008, Ukraine [email protected] ORCID ID: https://orcid.org/0000-0002-8166-2481

Accounting control of capital investment management: realities of Ukraine and Poland

Abstract The authors overview macroeconomic indicators of Ukraine and Poland. Being the basis of capital investment, they facilitate further increase in agricultural output in the system of strategic agricultural management. The article compares the indicators of Ukraine and Poland and researches the countries’ agricultural prospective. It has been found that capital investment is required by business entities in order to realise their potential. The authors have identified regulatory tools ensuring control and accounting of capital investment in the international media and the accounting systems of Ukraine and Poland and carried out a comparison of the regulatory tools for accounting of capital investment in the international accounting system (International Accounting Standard 16 «Fixed Assets»), Ukrainian accounting system (Accounting Standard 7 «Fixed Assets») and Polish accounting system (National Accounting Standard 11 «Fixed Assets»). The article describes both common and distinctive features of certain parts of the abovementioned regulations and proves that the regulatory tools are to provide local and international investors with a legal framework with regard to changes in fixed assets in order to avoid and reduce investment risks. For instance, the comparison of the notion «fixed assets» in the International Accounting Standards and the National Accounting Standards of Ukraine and Poland proves their similarity. However, differences should be considered as well. The difference between the Polish Standard and IFRS in the valuation of a fixed asset on a balance day lies in the fact that according to IFRS fixed assets are evaluated at fair market prices, whereas the Polish Standard allows asset revaluation by a historic price (expenditure on construction or purchase). The Polish Standard only allows the revaluation of the fixed asset based on a particular regulation. The article investigates the dynamics of capital investment financing in both Ukraine and Poland, and identifies the total share of the countries’ capital investment, including government funding in agriculture, forestry and fishery. In particular, the authors of the article have researched international accounting and control standards ensuring the functions of control over controlling bodies and capital investment. The authors have developed a model of informational tools and impact factor management in the process of investing in agricultural business. Consequently, relationships between different parts of the model, namely informational tools (accounting, control and analysis), investments (internal and external), parties involved (investors, manufacturers, etc.) and risks at micro- and macro levels have been identified. It has been proved that taking these parts into consideration will contribute to the investment attractiveness of businesses in Ukraine and Poland. Keywords: Accounting; Control; International Standards; Investment; Capital Investment; Management; Financing; Agriculture; Risks; Tools; Information JEL Сlassіfіcatіon: E22; F21; M40; Q10 DOI: https://doi.org/10.21003/ea.V170-14

Гуцаленко Л. В. доктор економічних наук, професор, завідувач кафедри аудиту та державного контролю, Вінницький національний аграрний університет, Вінниця, Україна Василевский М. кандидат економічних наук, доцент, завідувач кафедри фінансів, Варшавський університет наук про життя, Варшава, Польща Мулик Т. О. кандидат економічних наук, доцент, завідувач кафедри аналізу та статистики, Вінницький національний аграрний університет, Вінниця, Україна Марчук У. О. кандидат економічних наук, доцент кафедри обліку і оподаткування, Київський національний економічний університет імені Вадима Гетьмана, Київ, Україна Мулик Я. І. кандидат економічних наук, старший викладач кафедри аудиту та державного контролю, Вінницький національний аграрний університет, Вінниця, Україна Обліково-контрольне забезпечення управління капітальними інвестиціями: реалії сьогодення України та Польщі Анотація. У статті здійснено оцінку макроекономічних показників України та Польщі, які є основою стратегії капітального інвестування як стабілізатора подальшого нарощування обсягів сільськогосподарського виробництва в системі стратегічного управління діяльністю аграрного сектору. Проведено порівняльну оцінку даних показників двох держав – України та Польщі. Досліджено аграрний потенціал України та Польщі. Визначено потребу самореалізації господарюючих суб’єктів країн за допомогою капітальних інвестицій. Виокремлено нормативно-правовий інструментарій, що формує обліково-контрольне забезпечення капітальних інвестицій у міжнародному інформаційному середовищі та облікових системах України та Польщі. Здійснено порівняльну оцінку нормативного інструментарію облікового забезпечення капітальних інвестицій у міжнародних облікових системах (Міжнародний стандарт бухгалтерського обліку 16 «Основні засоби», системі України (Положення (стандарт) бухгалтерського обліку 7 «Основні засоби») та Польщі (Національний стандарт бухгалтерського обліку 11 «Основні засоби»). Доведено, що нормативний інструментарій має забезпечувати правову основу змін у складі основних засобів, а також надавати достовірну інформацію потенційним внутрішнім і зовнішнім інвесторам для уникнення або зниження ризиків за вкладеними капітальними інвестиціями. Досліджено динаміку фінансування капітальних інвестицій України та Польщі та визначено частку освоєних (використаних) капітальних інвестицій у сільське господарство, лісове та рибне господарство усього та в тому числі за рахунок коштів державного бюджету. Виокремлено міжнародні стандарти у сфері контролю та аудиту, що забезпечують контрольні функції об’єктів контролю та капітальних інвестицій зокрема. Сформовано модель управління інформаційними інструментами та факторами впливу в процесі інвестування аграрного бізнесу. Визначено взаємозалежність між складовими сформованої моделі, зокрема інформаційними інструментами, інвестиціями, зацікавленими сторонами та ризиками. Доведено, що врахування даних складових дозволить створити сприятливі умови для забезпечення інвестиційної привабливості суб’єктів господарювання України та Польщі. Ключові слова: облік; контроль; міжнародні стандарти; інвестиційна діяльність; капітальні інвестиції; управління; фінансування; сільське господарство; ризики; інструменти; інформація.

Гуцаленко Л. В. доктор экономических наук, професор, заведующая кафедрой аудита и государственного контроля, Винницкий национальный аграрный университет, Винница, Украина Василевский М. кандидат экономических наук, доцент, заведующий кафедрой финансов, Варшавский университет наук о жизни, Варшава, Польша Мулык Т. А. кандидат экономических наук, доцент, заведующая кафедрой анализа и статистики, Винницкий национальный аграрный университет, Винница, Украина Марчук У. А. кандидат экономических наук, доцент кафедры учета и налогообложения, Киевский национальный экономический университет имени Вадима Гетьмана, Киев, Украина Мулык Я. И. кандидат экономических наук, старший преподаватель кафедры аудита и государственного контроля, Винницкий национальный аграрный университет, Винница, Украина Учетно-контрольное обеспечение управления капитальными инвестициями – сегодняшние реалии Украины и Польши Аннотация. В статье осуществлена оценка макроэкономических показателей Украины и Польши, которые являются основой стратегии капитального инвестирования в качестве стабилизатора дальнейшего наращивания объемов сельскохозяйственного производства в системе стратегического управления деятельностью аграрного сектора. Исследован аграрный потенциал Украины и Польши. Выделен нормативно-правовой инструментарий, формующий учетно-контрольное обеспечение капитальных инвестиций в международной информационной среде и учетных системах Украины и Польши. Дана сравнительная оценка нормативного инструментария учетного обеспечения капитальных инвестиций в международных учетных системах (Международный стандарт финансовой отчетности 16 «Основные средства»), системе Украины (Положение (стандарт) бухгалтерского учета 7 «Основные средства») и системе Польши (Национальный стандарт бухгалтерского учета 11 «Основные средства»). Доказано, что нормативный инструментарий должен обеспечивать правовую основу изменений в составе основных средств, а также предоставлять достоверную информацию потенциальным внутренним и внешним инвесторам с целью избежания либо снижения рисков по вложенным капитальным инвестициям. Исследована динамика финансирования капитальных инвестиций Украины и Польши и определена доля освоенных (использованных) капитальных инвестиций в сельское хозяйство, лесное и рыбное хозяйство всего и в том числе за счет средств государственного бюджета. Выделены международные стандарты в сфере контроля и аудита, обеспечивающие контрольные функции как объектов контроля в целом, так и капитальных инвестиций в частности. Сформирована модель управления информационными инструментами и факторами влияния в процессе инвестирования аграрного бизнеса. Определены взаимозависимость между составляющими сложившейся модели, в частности информационными инструментами, инвестициями, заинтересованными сторонами и рисками. Доказано, что учет данных составляющих позволит создать благоприятные условия для обеспечения инвестиционной привлекательности субъектов хозяйствования Украины и Польши. Ключевые слова: учет; контроль; Международные стандарты; инвестиционная деятельность; капитальные инвестиции; управление; финансирование; сельское хозяйство; риски; инструменты; информация.

Gutsalenko, L., Wasilewski, M., Mulyk, T., Marchuk, U., Mulyk, Ya. / Economic Annals-XXI (2018), 170(3-4), 79-84 80 ACCOUNTING, ANALISYS AND AUDIT

1. Introduction with the disposal of three stages of economic development, indi- Globalisation processes have resulted in further challen cating growing, transforming and developed economies. It has to ges in the area of accounting and control. Particularly, a num- be defined what factors support economic growth. Owing to the ber of discrepancies in accounting regulations in different fact that for most developing economies in transition it is the ex- countries have emerged causing difficulties in communication port and the inflow of funds into the economy, these economies processes between companies and investors in international will be the most sensitive to the inflow of new investments [6]. agricultural business. In order to tackle the crisis phenomena, agricultural busi- Intensification of the European integration processes in nesses have to actively borrow funds, both internal and external. Ukraine, deepening international cooperation of economic The company development is improved directly through acquisi- entities at the national level, increasing capital flows in finan- tion and modernisation of basic production and non-production cial markets, the need to strengthen the competitiveness of assets, their reconstruction and technical re-equipment. enterprises in foreign markets cause a necessity to carry out Capital investment is a driving factor empowering enterpri further reforms in the national system of accounting and re- ses, which stimulates company development and its economy porting [1]. The process of adaptation to the requirements as a whole. Capital decisions are generally defined as relative- of the International Accounting Standards and EU legisla- ly large investments that will have an economic life of several tion in Ukraine puts forward further requirements to reporting years. We will define capital investments broadly, including pur- and information trustworthiness control, which are crucial for chases of equipment, new product development projects, ac- management decision-making and increase in investment, quiring a product line or a company and many others [7]. aiming at enhancing agricultural business attractiveness. The use of outdated fixed assets and production techno The International Accounting Standards, being a tool for logy leads to low quality, hence non-competitive goods ma the economic policy implementation, have to ensure trans- nufacturing, therefore, reducing investment attractiveness of parency and comprehensibility of the information on business the agricultural sector. operations to build a trustworthy base in order to manage and Capital investment is expenditures on construction and control companies’ capital investment and to take control assembly works, reconstruction, extension, technical re- measures to facilitate investment activities of both businesses equipment of the current production facilities and purchase and the country as a whole. of fixed assets [8]. 2. Brief Literature Review Prior to making investment decision, external investors are The informational basis of the research on accounting and to obtain the information on financial standing of the company control relating to capital investment, as well as various stu and ensure reasonable allocation of investment outlay, conse- dies of both the international accounting standards and the quently reducing the risks of capital productivity. national accounting Standards of Ukraine and Poland involves Therefore, before the implementation of investment pro- scientific works not only by researchers from Ukraine and Po- jects, it is essential to use diagnostic methods, revealing com- land but also from all over the world. pany strengths and weaknesses and identifying the opportu- Theoretical and practical issues of investment activity, and nities for financial growth regardless of internal and external capital investments in particular, were researched by scien- crisis phenomena [9]. tists such as N. Chirik (2008), T. V. Mayorova (2015), J. Alexan- Z. V. Hutsaylyuk points out that «the risk as an economic der (2018), A. Goujard and P. Guérin (2018) [2] P. S. Bezrukykh, category and an element of business activity is present in the M. D. Bilyk, I. A Blank, E. Brigham, O. V. Velichko, J. Galbraith, informational system of accounting», and that «the problem of R. Anthony, A. A. Peresada, I. Yu. Chumakova, U. Sharp and risk is much more complicated and primarily related to clari- O. Sheremet, who studied the essence of investment activity, fying the concept of accounting due to the development of types of investments and factors impacting them, as well as world information economy leading to the change in econo other related problems. mic relationships» [10]. A significant contribution to the study of problems of ac- One of the primary goals and components of agricultural counting control of investment activity was made by L. V. Gut- strategic management is the development of capital invest- salenko (2017), S. Kafka (2017), R. Venkata Subramani (2009), ment strategy with the aim of stabilisation and further increase Yan Sun (2016), U. Marchuk, V. Fabiianska (2017), R. Lam- in agricultural production and employment rate. In order to bert, C. Leuz, and R. Verrecchia (2007), R. H. Chenhall, and make effective decisions on capital investment, the compa- F. Moers (2015) [3], M. T. Bilukha, A. M. Gerasimovich, N. I. Do ny has to perform system evaluation of investment feasibility. rosh, G. G. Kirezev, A. M. Kuzminsky, V. V. Sopko, R. Adams, To make sure that our research is well-grounded, we find R. Dodge, J. Lobbeck, O. Rayleigh, J. Foster, K. Drury and it necessary to compare macroeconomic indicators of the two others. They have investigated the organization of the ac- countries, namely Ukraine and Poland (Table 1). counting process and control methodology, as well as ac- The evaluation of the indicators from Table 1 shows that counting control of investment activity. the Ukrainian area is nearly twice as large as Polish, while the The development of the agrarian sector and the attraction level of population density in Poland is almost twice as high. of investments in this area were studied by A. Jezierska-Thöle, The Gross Domestic Product of Ukraine is considerably lower, M. Gwiaździńska-Goraj and Ł. Wiśniewski (2017) [4], A. Yer- compared not only to that of Poland but also to other neigh- molaiev (2015), F. Zhuravka (2017), B. Apostolou (2017) [5], bouring countries, since according to the historic events, the R. Pastusiak, M. Bolek, M, Jasiniak M. and J. Keller (2018), Soviet planned economy was the major principle when ma etc. Nevertheless, the issue of accounting control in capital in- naging the national economy. vestment management of agricultural enterprises is underex- Poland is the seventh biggest agricultural country in the plored and requires further rationale and improvement. EU and the fifth by the number of cultivated lands. Rural re- 3. The purpose of the article is to study accounting control gions account for 93% of Polish area, and the country’s rural of capital investment in the management system of agricultural companies and to evaluate the tools and impact factors which determine management methods for reducing business risks of Tab. 1: The Macroeconomic Indicators of Ukraine and Poland, 2017 capital investment in agricultural business. 4. Results The current economic conditions cause serious problems concerning effective operation of agricultural enterprises. In- flation processes, a sharp increase in prices and crisis phenomena stimulate agricultural companies to strengthen their market positions. The study indicates the existence of economic conditions under which the special economic zones will provide the optimal results to the host country. It can be specified in a more detail way, Source: Complied by the authors based on [11-14]

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population makes up nearly 40%. The agricultural sector is a enterprises are not obliged to use International Financial Re- major component of the economic potential of the country, as porting Standards, except listed companies. it amounts to almost 8% of the total gross added value. The The comparison of the notion «fixed assets» in the Interna- agriculture contributes over 2% to GDP of Poland and pro- tional Accounting Standards and the National Accounting Stan vides employment for one sixth of the labour force, which is dards of Ukraine and Poland proves their similarity. However, dif- the evidence of low productivity of workforce [12]. ferences should be considered as well. The difference between Poland’s productivity has grown significantly over the past the Polish Standard and IFRS in the valuation of a fixed asset on two decades. However, the public and private capital stock is a balance day lies in the fact that according to IFRS fixed assets weak, and investment remains focused on the adoption of exi are evaluated at fair market prices, whereas the Polish Standard sting technologies, which weighs on future productivity gains allows asset revaluation by a historic price (expenditure on con- and innovation. Many microenterprises have low productivity, struction or purchase). The Polish Standard only allows the re- and structural bottlenecks reduce start-ups’ growth and their valuation of the fixed asset based on a particular regulation (the chances of survival [2]. latest one was issued in 1995 due to the high inflation level). For Although the level of development of Ukraine is lower, ag- example, in the IFRS 16 [17-18] specific objects recognised as riculture has been one of the few sectors of the economy that fixed assets are not defined, in contrast to the Generally Accep showed active growth in 2017. The evidence is a great num- ted Accounting Principles (GAAP) 7 [19], where the object recog- ber of agricultural companies set up in Ukraine and the scope nised as a fixed asset can be divided into separate parts. of land banks under their management. The top ten compa- Both in the IFRS 16 and the GAAP 7 «Fixed Assets» nies control 150-670 thousand hectares of farmland. In addi- (Ukraine) refers to the primary value of the fixed assets as the tion, a total of 7.5% of farmland is under the management of total amount charged to expenses for a certain asset on the 10 biggest Ukrainian agricultural holding companies [15]. day of its purchase. Similarly, the primary value of the fixed Using the data from Table 2, we will compare the agricul- assets is defined in the Republic of Poland. tural potential of these countries. Due to the amendments to the Ukrainian legislation, par- The analysis of agricultural economic conditions of agricul- ticularly the Law of Ukraine on «Accounting Standards and Fi- tural manufacturing in Ukraine and Poland (Table 2) shows that nancial Reporting in Ukraine», which stipulates the formation the farmland area of Ukraine is 2.6 times bigger than that of of financial statements according to the requirements of the Poland and constitutes 11% of Europe’s total area. However, IFRS (as of 01 January 2018) and the obligation to adopt ta only 27 out of 32 million hectares of arable lands are cultivated. xonomy, starting from 2019, the need to eliminate of discre The number of labour resources employed in the Ukrainian ag- pancies in certain provisions of these regulations, which en- riculture is 1.5 times higher than in Poland, consequently their sure recognition of the capital investment in the accounting, share is bigger. All the above proves that Ukraine has far more arose. This would facilitate the investment attractiveness of powerful agricultural potential compared to Poland. Ukraine in the international market. According to the statistical data, Ukraine has not become The dynamics of the capital investment financing in Ukraine an object of direct investment from overseas countries yet. It and Poland (Figure 1) shows that the budget funds and inter- is suggested by the decrease of direct investment in the Ukrai nal funds of enterprises are the main sources of its financing. nian economy which shrank from USD 38,992.9 million in 2010 Thus, in 2017 this share constituted 71.9% in Ukraine and to USD 36,154.5 million in 2016. The same trend can be seen 91.4% in Poland, which is 5.6% and 37.6% respectively higher for direct investment in agriculture, forestry and fishery, which if compared to the year 2010. Basically, the capital investment declined from USD 669.2 million to USD 502.2 million. financing in Ukraine is realised through internal funds of en- This situation has stimulated agricultural producers to search terprises. The sources of capital investment financing (budget out local resources. Apparently, capital investment is an internal funds and enterprises) in Poland have remained unchanged in and effective source of self-fulfilment of any economic entity, as recent years. Figure 1 illustrates a decrease in the idle capi- it ensures the implementation of strategic decisions and guaran- tal share, with 17.4% in Ukraine and 8.2% in Poland, which is tees the production of competitive agricultural produce in mar- 16% and 38% respectively lower if compared to the year 2010. ket environment. The statistical data [11] show that the share of Virtually, the whole augmentation of disbursed capital invest- the capital investment financed at the expense of internal funds ment is due to the investment in the agricultural sector, where of agricultural producers constitutes on average 65% in Ukraine. the main sources are external and internal funds of agricultural The process of attraction of investment resources to the companies available for investment. Foreign investors, however , Ukrainian economy is slow due to the influence of political and have not displayed active attitude so far. Figure 2 shows that economic crises. As a result, the inflation processes have been the share of the capital investment disbursed in agriculture, fo activated, the investment potential of the state budget has de- restry and fishery in 2017 was much higher in Ukraine, at 14.0%, clined, the financial standing of enterprises has deterior ated, whereas in Poland it accounted for just 2.7% in 2017. the outflow of bank deposits has taken off, the number of loss- The assessment of the capital investment of Ukraine and making financial and credit institutions increased, the scope Poland, in particular, brings about new opportunities for regio of bank lending to businesses has decreased, and the invest- nal diversification of domestic and foreign investors, increases ment activity of foreign investors has declined [16]. assurance of the effectiveness of investment activities. The state has to ensure the regulation of investment pro- We suggest that Ukraine can become one of the world cess and take responsibility for its organisation, support and leaders in manufacturing sustainable products, which, un- contribute to the development of companies in the market doubtedly, will facilitate financial performance of both eco- environment. In Poland, the International Financial Repor nomic entities and the agricultural sector of Ukraine. ting Standards (IFRS) are only used by joint stock companies The assessment of investment efficiency is carried out by lis ted on stock exchange, as well as by banks. Agricultural means of cost indicators that need to be taken into account by accounting and financial reporting, since the correct reflection of the sources of funding in the accounting is of prime importance Tab. 2: Comparative analysis of the agricultural potential, 2017 for the effective renovation of company production capacity [20]. Accounting for investments is a complex exercise in view of the varied kinds of instruments that have emerged in the market recently. The flow of funds across the borders in the form of financial instruments is ever increasing in the global scenario [21]. A large number of studies into financial security of agra rian enterprises, including changes in accounting and taxation, formation or mergers of joint ventures, innovations in land matters, aimed at increasing investment attractiveness, neces- Source: Compiled by the authors based on [11-12] sitate the use of analytical procedures through the system of

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Fig. 1: Dynamics of capital investment financing in Ukraine and Poland in 2010-2017, % Source: Compiled by the authors based on [11-12]

Fig. 2: Dynamics of the share of capital investment disbursement in agriculture, forestry, and fishery in 2010-2017, % Source: Compiled by the authors based on [11-12]

internal control, which will contribute to the reliability of infor- 1. There is a correlation and dependence between an in- mation presentation in the financial reporting according to investment activities and information resources of a company ternational standards. (I N), namely between accounting, control and analysis. The Lambert, Leuz and Verrecchia (2007) [22] developed an information system of a company is to ensure proper reflec- economy model which is based on material security and shows tion and input of information on operations related to invest- that a low-quality system of disclosure of the information on fi- ment activity from its initial input to the financial statements. It nancing, as well as internal control over accounting, increase is necessary to carry out constant control over expenses and companies’ information security risk. Thus, when comparing incomes related to investment activity, conduct analytical as- cash flow dispersion of a company with that of other compa- sessment of investment attractiveness of the company, effec- nies, investors note that this leads to lower investment in the tiveness of investment activity, etc. company, despite its proven track record [23, 278]. 2. There is a correlation between risks and investment tools The aim of the organisation of the internal control sys- (R N). The link between risks and investment tools can be po tem, including capital investment, depends largely on the le- sitive, because if an agrarian company increases its risks, the gal form, organisational structure of a company, type of busi- need for tools will also rise, in particular accounting tools (due to ness activity, the necessity of controlling certain processes the workload of an accountant and accounting service), control taking place in the company. tools (due to control procedures related to the production pro- The summary and assessment of the regulations of the cess, management decision making on the changes occurring in principal regulatory acts on internal control suggest that fo the company based on the results of the antirecessionary finan- reign countries with a developed market economy are par- cial control and risk control), and analysis tools (due to research ticularly concerned with the introduction of effective control and analytical procedures related to forecasted production and mechanisms which define particular operation principles, ca elimination of the prospect of bankruptcy through early warning); tegories, elements, responsibilities and authorities of the sub- 3. There is a major correlation between the type of risk and jects and facilitate the creation of flexible control models the parties involved (R S). An increase in the types of risk will aimed at meeting the needs of managerial staff. increase the need to regulate the relationship between the par- In order to reflect reliable information in financial state- ties involved. On the other hand, in the manufacturing process ments with regard to European demands and international the parties involved will suffer losses due to a decrease in the standards of financial reporting, accounting control, as well number of consumers, their spending power, price rises and reas to analyse management tools and those reducing busi- quire more support in terms of pricing. In addition, at the level of ness risks in terms of agricultural business investment, their public sector, if there is no transparency of rules and no support impact factors should be investigated. To do this, let us turn of agriculture investors, this will lead to a low level of awareness to Figure 3, which illustrates the factors affecting investment and information support and real changes in legislation. and the dependent variables affecting its promotion at each 4. There is a principal link between the tools and invest- level, in particular risks, parties involved and investment tools. ment promotion (N I). This link depends on the type of invest- According to Figure 3, all the factors affecting the implement and the purpose of its promotion (capital construction, mentation of investment processes in the agrarian sector can purchase (production) of fixed assets, purchase(pr oduction) be presented the following way: of other fixed tangible assets, purchase (production) of

Gutsalenko, L., Wasilewski, M., Mulyk, T., Marchuk, U., Mulyk, Ya. / Economic Annals-XXI (2018), 170(3-4), 79-84 83 ACCOUNTING, ANALISYS AND AUDIT

directly dependent on the investment lead time and the payback period. 6. There is a significant link between the risk type and the encouragement of investment (R I). It is suggested that there is also a con- verse relation between the risk and investment promotion, the increase in the types of risks will raise the need for investment. Therefore, the type of risk is variable and can negatively affect the level of investment promotion. An increase in risks can make companies search out ways to overcome them through financing and technological change. The abovementioned factors affecting the formation of capital investment processes in the agricultural sectors of Ukraine and Poland depend on the functions of information tools ma nagement and will allow creating required conditions for ensuring investment attractiveness of agricultural business companies and promoting their integration into the world economic space. The company diagnostics has to be consistent, assess the current financial and economic conditions and work out the strategy for their future development with regard to the factors of internal and external environment, which will be ensured by risk management. 5. Conclusions In order to ensure proper management of capital investments in agricultural companies, it is necessary to reduce the discrepancies bet Fig. 3: Model of management of information tools and impact factors ween the forms of financial reporting by ma in the process of agrarian business investment ximising the implementation of IFRS or creating Source: Developed by the authors regulatory tools approaching international law standards and to use universal methodological intangible assets, purchase (cultivation) of long-term biologi- techniques and analytical procedures in order to diminish busi- cal assets), which are provided by peculiar features and pro- ness risks and to forecast capital investment efficiency. Par- cedures of constituent investment tools (accounting, control ticular attention should be paid to the factors affecting the im- and analysis). plementation of investment processes in the agricultural sector, 5. There is a significant correlation between the parties in- in particular informational tools (accounting, control and analy- volved and investment (S I). This correlation develops under sis), investments (internal, external), parties involved (investors, the influence of various factors (whether investment is inter- manufacturers, etc.), risks (at micro and macro levels). We be- nal or external, who guarantees the investment process (go lieve that taking into account these components will create fa- vernment or commercial institutions), what results the par- vourable conditions for ensuring investment attractiveness of ties involved obtain from the investment disbursement) and is business entities in both Ukraine and Poland.

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Received 11.05.2018

Gutsalenko, L., Wasilewski, M., Mulyk, T., Marchuk, U., Mulyk, Ya. / Economic Annals-XXI (2018), 170(3-4), 79-84 84