Twice a Year Scientific Journal

PUBLISHER 

Institute of Economic Sciences 

12 Zmaj Jovina str 

11000 Belgrade 

Serbia 

www.ien.bg.ac.rs 

Vol. 43 No. 1-2 

Twice a Year Scientific Journal 

ISSN 1821-2573 = Economic Analysis 

UDC 33,33 

COBISS.SR-ID 169576460 

First Published 1967 

EDITOR-IN-CHIEF 

Mirjana Radović-Marković 

Institute of Economic Sciences, Belgrade 

ASSOCIATE EDITOR 

Božo Drašković 


EDITORIAL BOARD 

Aleksandra Bradić~Martinović 


Ivana Domazet 




Dejan Erić 


Hasan Hanić 

Belgrade Banking Academy, Belgrade 

Dušan Kostić 


Gradimir Kožetinac 


Jelica Minić 

Regional Cooperation Council - Sarajevo, Bosna 

and Herzegovina 

Srdjan Redžepagić 


Ivan Stošić 


Jovan Zubović 


Joăo Sousa Andrade 

Universtiy of Coimbra, Portugal 

Claude Berthomieu 

University of Nice - Sofia Antipolis, France 

John Board 

ICMA Center, University of Reading, UK 

Giuseppe Dutto 

University of Torino, Italy 

Jean~Paul Guichard 

University of Nice - Sofia Antipolis, France 

Saša Popović 

University of Podgorica, Montenegro 

Xavier Richet 

University of Paris, France 

Adnan Rovčanin 

Univesrity of Sarajevo, Bosnia and Herzegovina 

Mitja Pavliha 

BDO EOS, Ljubljana, Slovenia 

Vasileios Kallinterakis 

University of Durham, Department of 

Economics and Finance, UK

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Dragan Milinković Fimon 


Srdjan Redžepagić 


Mirjana Radović-Marković 




Gradimir Kožetinac 


Dejan Erić 


Ivan Stošić 


Slavenko Grgurević 


Dušan Kostić 


Zvonko Brnjas 


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(excluding conference preceding). Publisher has the copyright to all published articles 

Copyright© 2010 by Institute of Economic Sciences Belgrade, All rights reserved.

C O N T E N T S 

The Upsurgence of Clusters in the Light of Globalization.................................................... 9-24 

Matray Myriam 

The Analysis of Long Run Growth Oriented Fiscal Policy.................................................. 25-33 

Erős Adrienn 

Economic Assessment of Selected Bank Mergers in the Central-East Europe Region in 

Comparison with Developed Countries........................................................................................ 34-43 

Tej Jakub 

Matrix Theory Application in the Bootstrapping Method for the Term Structure of Interest 

Rates................................................................................................................................................. 44-49 

Glova Jozef 

Method of Banks Valuation ........................................................................................................... 50-60 

Horvátová Eva 

Future Stance of Currencies in the International Monetary System .................................. 61-69 

Kotlebova Jana 

Differences Between Harmonized Indices of Consumer Prices and Consumer Price Indices 

in Selected Countries ...................................................................................................................... 70-82 

Milecová Zuzana 

Do Minimum Wage Changes Influence Employment? ............................................................... 83-90 

Vokorokosová Renatá 

Information Resources for Financial Monitoring in Enterprises........................................ 91-98 

Kościelniak Helena 

Business Relations in Reverse Logistics Outsourcing ........................................................ 99-107 

Grabara Janusz, Kot Sebastian 

Social Aspects in Buyer-Supplier Relationships of SMEs in Hungary ......................... 108-116 

Gubik Andrea 

Competition in Banking Market in Slovakia...................................................................... 117-125 

Střelecká Zdenka 

Innovation Policy Based on Network Paradigm ................................................................ 126-133 

Pachura Piotr 

Foreign Direct Investment and Global Economic Crisis .................................................. 134-141 

Ślusarczyk Beata 

Book Reviw: 

Inflation and Unemployment ................................................................................................ 142-143 

Lovre Ivan, Perić Mladen

Note from the Editor-in-Chief 

I am pleased to be able to present this special issue of Economic 

Analysis which is devoted to Scientific Conference “Economic Prospect in 

the Second Decade of the 21 st Century” (14. – 15. April 2010), organized 

by Belgrade Banking Academy and Institute of Economic Science in 

Belgrade. Furthermore, I am glad to announce that almost articles for this 

issue have been collected by Dr Jozef Glova from Faculty of Economics, 

Technical university in Košice, Slovakia whom I invited to be our guest 

editor and help me in selecting articles for the first issue of Economic 

Analysis in 2010. It is another step forward in strengthening cooperation between our partner 

institutions. At the same time, work on this issue is more closely connected us with colleagues from 

other Faculties of Economics within V4 and countries of South Eastern Europe who provided special 

contributions to our peer Journal with their high quality papers. 

Thanks to everyone for their cooperation with the hope that it will continue in the future. 

Prof. dr Mirjana Radović Marković 

Editor-in-Chief 

Economic Analysis

Guest Editor’s Notes 

The current volume of Economic Analysis provides a collection of 

original scientific papers and scientific reviews covering a wide range of topics 

from small and medium enterprises (SME) research to price stability and 

employment research, business logistics and business valuation. 

The most of articles were originated through the international cooperation 

in education and science of Visegrad Group countries and Serbia in 

the field of the Investment, Banking and Business, especially oriented on the 

small and medium enterprises. This scientific collaboration is currently cofinanced 

by Visegrad Strategic Program project “Strengthening the educational 

and scientific collaboration among Faculties of Economics within V4 and countries of South Eastern 

Europe” of International Visegrad Fund. 

Within the frame of this project we have slowly but surely established international educational 

and scientific network of teachers and researchers from Czech Republic, Hungary, Poland, Serbia and 

Slovakia (see www.ekf.tuke.sk/ivf to recognize all eight project partners involved). The network 

coordinates the mobility of faculties´ project personnel; prepares workshops and meetings on best 

practices in educational and scientific areas within topics like Investment, Banking and Business. 

We are also pleased to present the most of here published papers personally during the 

International Scientific Conference “Economic Prospect in the Second Decade of the 21 st Century” 

(14. – 15. April 2010) organized by Belgrade Banking Academy and Institute of Economic Science in 

Belgrade. 

This current volume of Economic Analysis journal covers wide range of economic topics, there 

you are 

Erős’s paper focuses on the growth theory and discusses the question whether or not 

government policies can be used to influence the long run growth rate of the economy. The author 

summarize the theoretical and empirical literature of the relationship between fiscal policy and long 

run economic growth shortly on the one hand, and on the other hand used the parameter estimates of a 

third generation study of developed countries to evaluate the fiscal policy actions taken in Hungary 

and in Ireland. She also mapped the explanation for the differences in these two countries’ reactions to 

some of the similar fiscal policy changes. 

The next three contributions are aimed at theory of investment and business valuation, 

especially applied in the financial sector. First one by Horvátová proceeded with bank and financial 

institution valuation enlarging the last contributions in Theory of Investment Value by R. C. Merton 

using the risk-neutral valuation model and its variants. Very close to this topic is the contribution 

focuses on the bank mergers in the Central-East Europe region. In the second one the author Tej 

examined and analyzed differences in financial results in the Central and Eastern Europe region in 

comparison with developed markets. Finally, in more theoretical oriented paper by Glova the author 

attempts to address key issue in designing algorithm for estimating of yield curve. The author 

proposed the application of matrix theory in yield curve points estimation. 

In her scientific review Kotlebová discusses the future stance of currencies in the International 

Monetary System. She mentioned the higher creation of savings in emerging economies compared to 

developed countries; higher investments of developed economies in comparison with developing

8 

Economic Analysis (2010, Vol. 43, No. 1-2, 7-8) 

countries; the current account deficit of the balance of payments in developed countries as opposed to 

the current account surplus of the balance of payments in emerging economies create new conditions 

for future stance of currencies in the international monetary system. She also highlighted the main 

trends in the future development the IMF. 

Milecová’s article analyzes the differences between the harmonized indices of consumer prices 

and the national consumer price indices on the theoretical as well as on the practical levels. Author 

deals with defining the differences between the indices not only in the euro area and in V4-countries, 

but also in Serbia. The main differences are geographic and population coverage and owner-occupied 

housing. Using statistical methods the author test hypothesis of the difference between different the 

indices measuring price stability. 

Vokorokosová in her paper addresses the influence and dependency between minimum wage 

increase and the amount of employed people. This article picks out minimum wage as an important 

part of employment research investigating two files; the number of working people aged 15 – 64 and 

all working labours. 

Kościelniak reviews and analyzes information resources for financial monitoring in 

enterprises. 

Grabara’s article focused on business realations in reverse logistics outsourcing, as key aspect 

of the cost reduction used in companies during fighting for survival, keeping or increases in sales 

levels and profits. More and more often observed tendencies to concentrate commercial and production 

companies lead to rise of demand for outsourcing in a reverse logistics chain. 

Gubik’s paper intends to introduce the reader to the characteristics of supplier-purchaser 

relationships of small- and medium sized enterprises, based on an empirical research’s experiences 

using the questionnaire and its statistical evaluation. According to author’s opinion, we can draw 

conclusions on the intention to cooperate concerning the nature of the buyer-supplier relationships of 

companies, so a wide range of information can be concluded on small- and medium sized enterprises’ 

partnerships. 

Please allow me to express my sincere appreciation to Prof. dr Mirjana Radović Marković for 

confidence. Last but not least I want to thank all contributors and reviewers for their excellent work 

that they have done. 

Jozef Glova

ORIGINAL SCIENTIFIC PAPER 

The Upsurgence of Clusters in the Light of Globalization 

Matray Myriam * , Institut d’Administration des Entreprises IAE - Université Jean Moulin 

Lyon 3 Centre de echerche Magellan - Equipe Euristik, France 

UDC: 005.44 JEL: O21 

ABSTRACT – Clusters, as system of companies anchored in a region, contribute and ensure the 

long-term world competitiveness of national production. The object of this paper is to demonstrate that 

globalization opens restrictions on growth potential, which can be exploited by the clusters in order to 

position themselves on the world markets by maximizing on the benefits of global competition. Thus, 

clusters use the advantages of globalization (including a myriad of networks), channeling the negative 

effects the latter may cause (taking as an example industrial espionage which has become increasingly 

prevalent). Clusters can therefore be a means for firms to be competitive at a time of globalization and, 

at the same time, be integrated in the process. Portraying a policy of growth, most European countries 

– such as France - have adopted this new industrial policy, which is being introduced in its turn in 

some Mediterranean countries (like Morocco for instance). 

KEY WORDS: cluster, globalization, competitiveness, knowledge sharing, networks 

Introduction 

Globalization has released potential for growth; this process is conducive to the 

accumulation of skills, knowledge sharing, the intensification of the networks (via 

Information and Communication Technology ICT), the synergy companies... Yet it puts the 

companies in a new competitive “playground”. In the light of this, businesses adapt 

themselves, and new industrial policies are put in place to maximize on the process of 

globalization without being caught out by the competition it may generate. 

The clusters development policy comes into the framework of. The challenge of these 

clusters is to geographically group together firms, public and private research, laboratories 

and training organizations engaged in a partnership approach to create synergies in order to 

build innovative cooperative projects recognized nationally &/or globally. 

The potential benefit of grouping together companies is not a new invention. Marshall 1 

described this process as “industrial district” and used the term “industrial atmosphere” to 

describe the dynamism generated by cooperation and exchange of know-how within the 

district. Since then, Local Productive Systems (SPL) have been organized following the 

concept of the industrial district in Prato, near Florence in Tuscany, which constitutes the 

first empirical study 2 on this type of industrial concentration by G. Becattini 3 at the end 

* 

Address: Roanne 42 300 (France), e-mail: myriam.matray@gmail.com 

1 

Marshall, A. (1890), Principles of Economics, London: Macmillan. 

2 

In Italy this type of territorial industrial concentration was highlighted by G. Becattini, USA by 

A.Scott and France by C. Courlet.

10 


1970s. Bories-Azeau and Loubès 4 highlight that there is a difference between the concept of 

Local Productive Systems SPL and clusters. SPLs were identified in 1997 by the CIADT 

(Interministerial committee for regional development) as “a group of companies and 

institutions geographically close who work together in the same field.” The afore mentioned 

authors write: “Unlike the centered networks, dominated by one or more large enterprise 

and clusters 5 , which are subject to a new industrial government strategy, the SPLs are closely 

linked local networks, where power is shared amongst their members and consist primarily 

of Small and medium size enterprises SMEs”. They also distinguish by their branch. An SPL 

is more oriented toward more traditional industries (textile...), unlike a cluster which 

specializes in industries with high added value requiring heavy investment (micro-nano 

technologies...). 

Figure 1. Definition of a cluster 6 

Firms 

Training centers 

Joint by 3 common goals: 

- Innovative projects 

- Partnership approach 

- International renown 

Public &/or private 

research 

The purpose of this paper is to underline the paradox that the cluster is an industrial 

policy to maintain national competitiveness arising from the adverse effects of globalization 

(relocation, the race for innovation, increased competitiveness, industrial espionage...), whilst 

wishing to position itself to face competition in the global market. Therefore the clusters 

adapt their development to globalization: first they take globalization to the advantage of 

their development, to then be integrated into the globalization to meet international 

competition. For these reasons, the “cluster industrial policy” is bolstered. It has been 

3 

Becattini, G. (1992), “Le District Marshallien : une notion socio-économique”, In Benko, G. and 

Lipietz, A. (1992), Les régions qui gagnent, Paris, PUF. 

4 

Bories-Azeau, I. and Loubès, A. (2007), “Emergence d’un acteur collectif territorial et réseau 

d’entreprises : l’exemple de CAMDIB”, Revue RECEMAP, October 2007. 

5 

// http://www.competitivite.gouv.fr. or: // http://www.observatoiredespoles.com/ and // 

http://polescompet.canalblog.com/ 

6 

Source figure 1 : Carel, S. (2005), “La politique française de développement de réseaux d’entreprises 

localisés, Technopôles, SPL, pôles de compétitivité : quels enjeux pour les territoires ?”, La politique 

française de développement de réseaux d’entreprises localisés, Septièmes Rencontres de Théo Quant, January 

2005. // http://thema.univ-fcomte.fr/theoq/pdf/2005/Carel-theoquant05.pdf

Matray, M., The Upsurgence of Clusters, EA (2010, Vol. 43, No, 1-2, 9-24) 11 

established in Europe and is developing in Mediterranean countries because it is an 

alternative to international competition companies face daily. 

Globalization, the strength of clusters 

According to Michalet 7 C-A, “globalization is a multidimensional phenomenon, which 

encompasses three main elements: the development of trade and the relocating of 

production and financial movements. These three elements are interdependent.” 

Globalization releases growth potential, yet is causing positive and negative effects. 

Increased competitiveness is particularly favorable to consumers but it can also cause the 

collapse of a company which fails to stand up to the adversity of competition. Globalization 

allows to increase the panel of knowledge fostering innovation, but it can facilitate industrial 

espionage, fires the race for innovation and diverts traditional consumer goods in exchange 

for increasingly more high tech goods. Globalization has no borders; it is a-territorial which 

may cause an issue as to identification of territory. The list of positive and negative impacts 

of globalization is exhaustive. In our article we will put forward the core elements of 

globalization in clusters. 

The a-territoriality of globalization and the anchor-hold of clusters 

Paradoxically national &/or global clusters attach importance to the territory in which 

they are implanted; it reconciles the global and the local. This new industrial policy, which 

has been created to further global competitiveness, thinks “global” but acts “local”. Thus, the 

cluster will use the benefits of globalization advantageously to the extent of the networks, by 

applying “trade flows” 8 beyond borders, to develop itself. 

The agglomeration of enterprises 

Businesses in the field of information technology stand to gain by being able to access 

technological networks. The advantages constituted by network outsourcing increase by the 

number of users. Marshall defined this as non-pecuniary outsourcing which increases profit. 

This network outsourcing may explain a paradox: in general, Information and 

Communication Technology ICT allows to decentralize the relationship between producers 

and buyers, which should allow them to use the means of television as a more 

comprehensive tool of communication for instance video conferencing through webcams. 

Yet, ironically the tendency is for clusters to concentrate in agglomeration; taking as example 

operators, they will tend to seek zones where the demand is strongest and these are 

invariably high-density areas. The implantation of clusters takes into account these 

“centripetal forces” 9 to facilitate their integration into the territory in which they are to be 

located and for quicker development. In this sense, the network does not exclude the notion 

7 

Michalet, C-A. (2003), “Comptes rendus d’auditions, Mondialisation: une chance pour 

l’environnement ?”, 12 March 2003. // http://www.senat.fr/rap/r03-233/r03-23355.html 

8 

Term used to define an aspect of globalization by Michalet, C-A. 

9 

Reference to the ʺcentripetal forceʺ on the location of economic activity, analysis developed by 

Krugman, P.

12 


of proximity. Colletis 10 , the specialist in geographical economics, highlights the fact that the 

connection of networks is not automatic between the different actors if they do not know 

each other, as they need to be built on trust between them. There is in fact no need, indeed, to 

be close to innovate: the development of communities of shared practices around the free 

software is an illustration, but it facilitates cooperation. 

The identity of a cluster 

Whereas globalization comes along with a decline of the idea of Nation state, the cluster 

integrates into a dynamics of co-construction between the territory which it is implanted and 

itself. However, it is not sufficient for the cooperation of the organization of the cluster, it 

must be perceived as a process in the construction of an identity so that each member feels 

totally integrated in the project. This identity is primarily based on the construction of social 

links through reciprocal exchange of rules and values. This sharing of rules and values in an 

entrepreneurial environment is particularly reflected in the third part of the following 

sections of the economic intelligence which encompasses: 

• Industrial espionage with the aim to gain pertinent strategic information, 

• The protection of storage of information heritage. 

• And the manner of expression which influences the propagation of information or 

rules of conduct. The latter can be referred to as “formal capital” as defined by Y. 

Bertacchini and L. Oueslati, which they describe as a set of rules and common 

procedures (published in “Entre information et processus de communication: 

l’intelligence territorial”, 2003. // http: // www.isdm.org). 

This third point highlights the role of the formal structure, actually the efficient 

functioning of a cluster requires: 

• Common opportunities: the ability to work on a common project being the 

underlining condition to be integrated as a member of the community, 

• The ability of the members to cooperate determined by the capacity of the 

members to organize themselves, 

• And common rules. 

The adoption of common rules will allow a high level of reliability favorable to collective 

research, which will consequently lead to the competitiveness of the cluster. 

The communal territory plays its role within the pole, in the following quotation Thoenig 

J-C. and Waldman C. 11 bring to light the importance of the common values passed on by the 

specific geographical area: “the success and the survival of a company lie in its capacity to 

conquer, to define and to develop a territorial and economic community. A territory is 

established by multiple stakeholders (customers, suppliers, employees, civic associations, 

circles of experts, etc.) whom the company federates around its project, by means of common 

values and interests, shared identities, and lasting partnerships. The reference to its territory 

constitutes its code of conduct”. Everyone identifies with their own roots; the expression of 

10 

Colletis, G. (2005), “Entreprises et territoires : proximités et développement local”, published in: 

Entreprises, réseaux et territoires, 22 March 2005. 

11 

Thoenig, J-C. and Waldman, C. (2005), De l’entreprise marchande à l’entreprise marquante, Editions 

d’Organisation.


Blaise Pascal, “the Truth lies on this side of the Pyrenees, the wrongs beyond”, or another 

common expression, “to each their own truth”, both reflect this territorial culture and 

illustrate the relativism which is a doctrine according to which no one opinion is absolutely 

true, each bearing meaning solely with regards to an active point of reference. This point of 

reference which can be an individual, a company, a culture, an industrial branch (chemistry, 

textile, toys & games...), a place. These traditional forms of territorial anchoring seal the 

future in such way that the crisis of a company becomes the crisis of the territory, and the 

decline of an organization rhymes with social drama (Perrat, and Zimmermann, 2003) such 

as the decline of the textile SPL in Roanne. 

As has been noted through the notion of identity, rules, and skills specific to the cluster, 

its identity shapes itself by ʺthe identification with the internal environment and the 

differentiation with the external environmentʺ (Bouchet Y., Bertacchini Y., Noël L.). Thus, the 

adherence to the cluster can be explained by the shape of the social networks it is made up 

of. 

Between a-territoriality and territoriality 

The cluster can be assimilated to a specific territory, a place. The place becomes a pole, a 

center connected with other centers. Jean-Louis Guigou, a delegate to land settlement and to 

regional function DATAR (from 1997 till 2002), highlighted the role of the territory faced 

with globalization by quoting: ““if globalization imposes itself on us, territorialisation 

depends on us”. This quotation, which I often used, is somewhat simplistic.” But it 

underlines this powerful dialectic between the global and the local that some American 

academics illustrated through the concept of “glocalization”. If our societies have indeed 

considerably increased their interdependence and their flow of exchange, and if companies 

have become more and more international and sometimes have given the impression of 

nomadism, territories are nevertheless becoming more and more strategic supports of the 

contemporary economic development, if they know how to organize themselves.” 12 In this 

way, the cluster integrates this notion of territory. Its location is carefully chosen and is 

proportional to its renown. It is also assimilated to the city in which it is to be implanted. So 

the cluster will gradually be made reference to by the city of the pole and vice-versa. The 

success of the pole will also be assimilated to the success of the city in which it is implanted 

as the latter benefits from positive externalities. 

Thus, the cluster channels globalization by offering it a specific space. This territorial 

anchorage allows it to build up a physical and moral reason in order to eventually project 

itself on the global markets. 

The accumulation of skills in globalization and the sharing of knowledge 

within the cluster 

According to the latest work of Michalet 13 the traffic of goods, capital and technology is 

more and more intra industrial and intra enterprise. That is to say outer market. The cluster 

integrates this idea and favors the collaborative research. 

12 

Foreword by Guigou, J-L., In Loinger, G. and Nemery, J-C. (1998), “Recomposition et 

développement des territoires, enjeux économiques, processus, acteurs”, L’Harmattan. 

13 

Michalet, C-A. (2007), Mondialisation, la grande rupture, La Découverte.

14 


Cluster: factor for uniting agents 

This bringing together of actors, companies, researchers... is made all the easier as 

globalization allows a stake in their network, their research (with the example of the portals 

of information) and even if they come from different countries. It is the materialization of 

“brainstorming”, making to unite a diversity of agents coming from different backgrounds 

with the objective to create common motor driving innovative projects through the clusters. 

Actually, one of the first factors of success of a cluster is the joint presence on a common 

geographical location with public or private research centers and companies specialized in 

high technologies as well as local economic actors. The aim being to facilitate the exchange of 

information between these actors in order to set up a process of communication by 

appropriate networks with the intention to transferring of skills and diffusing innovation. 

The pole functions with a logic of collective intelligence 14 , catalyst of collective wealth, 

sharing of knowledge: essential elements to facilitate and to activate research upon which 

this entrepreneurial culture is founded. This collaborative research generates innovation 

aiming for competitiveness on a national or international level. However, it is to be 

emphasized that the collective intelligence is a perpetual process 15 and the information 

passed on in this way is the conveyor of competitiveness because it represents the strategic 

information, which belongs to the pole in question and to none other. The challenge is to 

constantly try to acquire new information in the advent of scientific breakthroughs. 

The sharing of the knowledge in the lap of the cluster 

Globalization and in particular ICT globalization gives everyone access to the required 

data bases, but these latter ones will only become information once they have been treated 

and they will only constitute knowledge once they have been assimilated and retranscribed 

by way of strategic decisions for the future of the pole. Amongst the advantages of a cluster 

is the sharing of information. Zimmermann puts forward the following characteristic within 

firms: the greater the degree of sharing (intervention of a large number of groups in the same 

scheme), the better is the ʺalchemyʺ of the functioning of the pole. The creation of the 

network is not immediate; trust is indispensable between the members all the more as not 

the whole of the information can be passed on by ICT. As a matter of fact, explicit knowledge 

can be transmitted by distance, whereas the implicit knowledge can only be conveyed face to 

14 

Collective intelligence “is specifically to enhance the diversity of knowledge, skills and ideas which 

are in a community and to organize this diversity of knowledge, skills and ideas which are present in 

a community and to organize this diversity in a creative and productive dialogue”. Quote of Zara, O. 

(2005), “Le management de l’intelligence collective: vers une nouvelle gouvernance”, M2 éditions, 

2005, In Knauf, A. (2006), “Le rôle des acteurs dans un dispositif régional d’intelligence économique: 

La place de l’informédiaire en tant que médiateur et animateur du dispositif” 2006. // 

http://hal.inria.fr/docs/00/10/73/12/PDF/knauf_numeroIE2006_corrige.pdf 

15 

Zartarian, M., Centraliens, November 1998, In Carayon, B. (2003), Intelligence économique, 

compétitivité et cohésion sociale, La Documentation Française, p. 111 : “Economic intelligence has 

fundamentally three main vocations: - Control and protection of scientific, technological and 

competitive storage of information heritage - Detention of threats and opportunities that the company 

may face - Constitution of influence strategies for the companies. The process is continuous, 

permanent and heuristics, with the aim to improve the competitiveness of the company by giving it 

the means to know and understand its environment to illuminate its decisions.”


face. Whilst ICT, IE tools, should logically amplify the functioning of a virtual economic 

system, the reality is quite the contrary: interpersonal communication or “face to face” 

remains essential as is apparent in the structure of a pole. It begs the question as to how to 

allow the exchange of strategic information in this competitive environment? ICT networks 

are easily seen through, “pirated”, by the same token “face to face” remains an IE tool in the 

same way as ICT. In that way the interest in a neutral public space contributes to the process 

of the IE: restaurants, cafeteria... often in these places, described by I.N. Fisher as “social 

spaces” for informal meetings with implicit exchanges. The paradox of the “IE is to be 

immaterial and remote and yet close to all” 16 . The most expressive example remains that of 

“The City” (London’s financial center) where bankers and traders daily exchange strategic 

information (economic surveillance...). This process, as long as it continues, ensures the life 

of London’s financial market. Neutral public areas are indispensable just like trust, which 

has to reign between the agents. Information, knowledge and inventions have to be brought 

together and protected; therefore trust is fundamental within the cluster (Bertacchini Y., 

Bouchet Y., and Noël L.) 17 . According to Bertacchini Y. and Herbaux P.: “A territorial 

intelligence is an organizational culture based on sharing and treatment of the signals from 

the economic actors who are destined to supply decisive information to the leaders, at the 

appropriate time”. Mohellebi D. and Dou H. (2007) highlight that the passing on of 

information springs from a corporate culture, that is to say to sensitize and motivate the 

members. The clusters shape strategic places of exchanges of information, thanks to the 

neutral spaces where trust reigns and gradually establish a business atmosphere and a 

corporate culture resting on exchange and cooperation. These phenomena mobilize the 

exchange of decisive information in the clusters which constitute a “competitive advantage” 

(Porter, 1990). 

The storage of information heritage of the cluster and globalization 

The clusters are connected to other places via ICT. In fact, with globalization, not to be 

marginalized, the adoption of ICTs is fundamental. The ICT, the main tools of Economic 

Intelligence IE, are defined as all the techniques applied in the treatment and the 

transmission of information, mainly computing, Internet and telecommunications. Just as the 

pole benefits from a national and international renown by appropriation of the ICT. The 

clusters need broadband telecommunication networks and all other contributions of the ICTs 

in order to function and develop themselves. ICTs also allow potential market expansion 

(electronic commerce). The globalization of ICTs has nevertheless its limits as far as safety 

and ethical terms are concerned. In the event IE intervenes to protect storage of information 

heritage. Thus, the ICTs are limitated as regards to the exchange of information in 

competitive environment. Indeed, Bouchet Y., Bertacchini Y., and Noël L., note that trust is a 

process built without experience and consequently is contingent upon the safeguard of 

information. Furthermore, authors like Ivan Samson, observe that SMEs implanted in a 

16 

Author’s quote 

17 

Bouchet, Y. and Bertacchini, Y. and Noël, L. (2008), “Construire la confiance dans les échanges 

numériques, cas dans un pôle de compétitivité”, ISDM Informations, Savoirs, Décisions & Médiations, 

3 rd quarter 2008.

16 


territory which is holder of positive externalities continue to develop strategies for 

competition and cooperation 18 amongst themselves. 

These lines of thought demonstrate the interest of clusters which wisely use globalization 

to maximize on its own development. The cluster channels the negative effects globalization 

may cause (absence of identity status due to the a - territoriality; the skepticism of the 

exchange of strategic information via ICT, hence the interest of face to face; the fear of 

espionage hence the need for the pole to restore confidence and security of information) and 

uses the benefits globalization provides (a myriad of networks, globalization of ICT and its 

absence of virtual borders). Gradually the new industrial policy of clusters has proven its 

strength in the light of globalization and plays the role of a policy for growth to gain the 

required competitiveness to integrate itself in the stream of globalization. 

The industrial policy of a cluster 

The objective of this policy is twofold; internal development of the territory in which it is 

located and external development namely: 

• Disseminate innovation (F. Perroux) in the territory in which the cluster is located, 

develop territorial economic activity 

• Promote competitiveness national and worldwide renown. 

Thus, in order to achieve the objectives of the pole what matters, according to J. 

Savatier 19 , is the will for putting in place networking actors, yet this will is evolutionary, just 

like social networks which make up the pole. Thus, according to Edward S. et al (2004) 

“networks experience endogenous development related to the transformation of links, 

objectives and members [...] but also changes in the external environment.” To adapt to these 

changes and promote cooperation EI is fundamental as it maintains the renewal of 

information on a daily basis in order to have data updated through the process of spying 

being conducive to research. EI also maintains the notion of trust through the protection of 

storage of information heritage. As an extension to the first part, the emphasis will be on the 

cluster as a component of integration into the globalization process. 

The objectives of an industrial policy of clusters as illustrated in France 

Thus, in order to assimilate these economic changes associated with globalization an 

industrial policy focused on the territory was established by the CIACT (Interministerial 

Committee for Planning and Competitiveness in Territories). From 2005 to 2007, 71 clusters 

were officially recognized as such in France, amongst which 7 were distinguished as world 

clusters and 10 as potential world ones. 

18 

Bouchet, Y., Bertacchini, Y. and Noël, L. (2008), “Construire la confiance dans les échanges 

numériques, cas dans un pôle de compétitivité”, ISDM Informations, Savoirs, Décisions & Médiations, 

3 rd quarter 2008. 

19 

Savatier, J. (2007), “ Table-ronde d’ouverture “l’innovation et l’anticipation des mutations 

économiques et sociales : perspectives européenne”” in “innovation et anticipation des mutations 

économiques et sociales”, Seminar organized by the European Commission, Diact and DGEFP, 

Bordeaux, 22-24 October 2007.


History of the establishment of clusters; new industrial strategy of government. 

Figure 2. History of the establishment of clusters 

2002 Implementation of a strategic committee by Jean-Pierre Raffarin CIADT of 13 

December 2002. 

2003 Establishment of an ʺindustrialʺ working group 

2004 Datar Report – “France, an industrial power”- February 

Blanc Report - ʺFor an ecosystem of growthʺ - March 

Financial bill for 2005 presented by Nicolas Sarkozy (Art. 24) 

CIADT of 14 September 2004 

Call for presentation of projects of ʺclustersʺ - November 

2005 Closure of the call for presentation of projects - 28 February 2005 

Completion of inquiry by technical experts of projects - May 9 

Establishment of the Group of qualified actors - May 16 

Proposal of the Interministerial Working Group to Government - end June 

CIADT of 12 July 2005 – Official recognition of the 67 cluster projects 

CIADT of 14 October 2005 - Validation of draft contracts and field of R & D. 

Decree of 14 October 2005 – “Interministerial Committee for Planning and 

development of territories” CIADT is renamed “Interministerial Committee 

for Planning and Competitiveness in Territories” CIACT. 

2007 5 July 2007, 71 clusters are officially recognized 

Source: Jacquet, N. and Darmon, D. (2005), “Les pôles de compétitivité. Le modèle français”, 

Documentation française, coll. Etudes n°5225. 

Criteria of quality selected for agreement of cluster 

F. Leroy 20 , head of Mission, member of the working group ʺclustersʺ, Management of 

entreprises, MINEFI, outlines the main objectives of clusters namely: 

• Strengthen competitiveness of the national territory, 

• Boosting economic development, 

• Create or maintain jobs in industry, 

• And attracting investment and expertise at European level and globally. 

In view of this, in order to be recognized as a cluster, a draft project of pole must meet the 

specified criteria defined in November 2004 by the government. The following four criteria 

are decisive: 

• A development strategy consistent with the economic development of the 

territory of the pole, 

• A development strategy consistent with the local dynamism and performance of 

the economic fabric in the light of international competition, 

• Sufficient international recognition, both industrially &/or technologically. 

The projects submitted must eventually pave the way to a leading position worldwide in 

their specific fields. The second criterion refers to a distinction between the poles with the 

20 

Leroy, F. (2005), “Pôles de compétitivité : de l’appel à projets à la labellisation”. Entreprises, réseaux 

et territoires, 22 March 2005.

18 


main focus on technological research activities and the strength of interactions between 

research centers and companies working on the development in a field of technology by 

comparison to the dominant industrial poles which cluster companies with more concretely 

applied R & D and consequently is closer to the immediate market. 

• A partnership between actors and a structured, operational management. 

• In actual fact, the quality and efficiency of R & D partnerships between agents 

(industrials, researchers, lecturers...) are the main criteria for official recognition of 

a cluster. 

• The ability to create synergies in research and development and bring new wealth 

with high added values. 

The ultimate goal is to improve the competitiveness of the French offer on international 

markets. 

In Europe, the lack of competitiveness persists and is worsening specifically in view of a 

stronger euro. The new policy allows to draw benefits from this situation with companies 

benefitting from the disinflationary effect of the strong euro on the cost of raw materials in 

particular. Europe places high value on quality, this being the only way it can face 

competition dominated by cost. The purpose of the clusters is to accentuate Europeʹs 

competitiveness with the desire to achieve the goals set in 2000 by the Lisbon summit 21 . 

The initiative of clusters in the Mediterranean countries via the Euro- 

Mediterranean partnership with the example of Morocco 

Mediterranean countries having specialized in low cost production for a long time, are 

feeling the brunt from competition, especially in traditional sectors (e.g. textiles), from India, 

from Asia or eastern countries. They are also faced with the dumping of international 

monetary exchange. 

The cluster policy is at its initial stages. It is in their interest to integrate this new 

perspective to update and show off the advantages of their know-how through globalization. 

The challenge is to assert themselves in gathering their expertise to give a quantitative and 

qualitative added value to production, a competitive advantage in order to revitalize the 

Mediterranean economy on the international market. Hence the establishment of support 

plans with the financial aid of the European Union. 

Since the autumn of 1995, the Barcelona process, provides a framework for relations 

between the EU and the countries of the southern shores of the Mediterranean and with the 

objective to work towards building a Euro-Mediterranean shared prosperity and progressive 

introduction of free trade. It is a turning point in the relations between EU and its 

21 

This strategy of clusters puts forward the regional appeal. It was highlighted at the Lisbon summit 

in 2000, at which the heads of States set the objective to make Europe the leading world region for its 

competitiveness by 2010, « The most dynamic economic knowledge and the most competitive in the 

world able to sustain a lasting economic growth » by investing 3% of the gross domestic product GDP. 

Seven years on, it has severely fallen behind as none of the countries have stuck to the set objectives 

except Finland (in particular with the development of Nokia, the renowned telecommunication 

cluster) and Sweden. The only two countries having honored their engagement to dedicate 3% of their 

GDP to R&D activities.


Mediterranean neighbors. Through this process, the European Commission supports specific 

projects to sustain development through an expansionary fiscal policy. Thus, the launch of a 

European Neighborhood Policy to support the Euro-Mediterranean Partnership, has been 

initiated for numerous projects amongst which the MEDA projects (acronym for measure 

adjustment). Similarities of local policies with Europe appear as the emergence of the policy 

initiative of clusters combining endogenous growth, territorial economic intelligence leading 

to world renown. The trend of “glocalization” is gradually becoming a widespread policy of 

regional development for global competitiveness. The Barcelona II conference, held in 

November 2005, led in particular to a stronger political partnership. Thus Morocco manages 

to do the bulk of its trade with the European Union, which, on 13 October 2008, awarded it 

the “advanced status”, setting it halfway between partnership and membership. Morocco is 

the first of the Mediterranean partner countries to have been awarded this status which 

strengthens the partnership: the opportunities for cooperation with the European Union are 

providing a broader and more liberal trade, an enhanced political dialogue, exchanges 

relating to foreign and internal security policy issues and allowing access to certain 

programs and community agencies with budgetary support as of 2013. 

Initiation by Mediterranean countries to engage partnerships 

Since 2004, the Mediterranean partners and Libya - except Turkey who began 

negotiations with the European Union on 3 October 2005 - are also included in a new set up: 

the European Neighborhood Policy started in March 2003 for the countries not belonging to 

the Union. The following tables highlight the positioning of the Mediterranean countries 

compared to the EU. 

Table 1. Economic indicators of the Mediterranean countries and the EU 

Economic indicators Algeria Morocco Tunisia European Union 

Population (2007) 33 333 216 33 757 175 10 227 157 490 426 060 

Rate of growth (2006) 3 % 7.3 % 5.2 % 

Rate of growth of the 27 (2007) 

countries 

2.9 % 

Unemployment rate (2006) 9.7 % 1 13.9 % 8.5 % 

Source: http://www.statistiques-mondiales.com/index.html 

1 

http://www.imf.org/external/np/ms/2007/fra/061107af-1.gif 

Table 2. Progression of growth rate of the Mediterranean countries 

Growth rate progression 2002 2 2005 3 2006 2007 2008 3 

Algeria 4.1 % 5.3 % 3 % 6.5 % 5.4 % 

Morocco 3.2 % 1.8 % 7.3 % 3.2 % 4.9 % 

Tunisia 1.7 % 4.2 % 5.2 % 5.8 % 

North African countries 5.2 % 

Source: http://www.statistiques-mondiales.com/index.html 

2 

Statistics of the World Bank. // http://www.worldbank.org/data/countrydata/ countrydata.html 

3 

According to the FMI report, “Les perspectives de l’économie mondiale”.

20 


Table 3. Mediterranean countries and their trade volume 

2002 Algeria Morocco Tunisia 

Balance of payment (% of GDP) 7.7 % 2.9 % -3.5 % 

Trade volume with the EU (Mio €) 22 377 13 992 13 629 

EU balance of trade (Mio €) -6 201 1 402 1 539 

Direct foreign investment (Mio USD) 1 100 428 794.8 

Source: Statistics of the World Bank 

http://www.worldbank.org/data/countrydata/ countrydata.html 

The levels of development of the partner countries are very unequal, particularly in terms 

of population and GDP. With the extension of the EU on 1 May 2004, the EU has integrated 

two out of the twelve Mediterranean partners 22 namely Cyprus and Malta. The 

Mediterranean countries with the highest population have been statistically identified 

(Algeria, Morocco, Tunisia) in order to establish a comparison with the European Union. In 

2002 these countries had already recorded trade with the EU with growth rates of 4.1% for 

Algeria, 3.2% for Morocco and 1.7% for Tunisia respectively. Now set in a growing phase, 

the Mediterranean countries continue to increase their growth rates with 3% for Algeria, 

7.3% for Morocco and 5.2% for Tunisia in 2006; the drops being mainly due to drought and 

rising oil prices. Thus the North African countries have an estimated growth rate of 5.2% for 

2008 while the 27 European Union countries stagnated with a growth rate of 2.9%. The Euro- 

Mediterranean partnership is of equal importance to each. It allows the EU to expand its 

markets and formally establish constructive partnerships, as in the field of textile following 

the dismantling of Multi-Fiber Agreement MFA in 2005. As for the Mediterranean countries 

the Barcelona process allows to uphold past relations with the EU, to position themselves as 

partners with the EU in the face of competition from new entrants from Eastern countries 

into the EU, which increasingly monopolize the EU budget, and can to acquire new markets 

by teaming up with the EU as united front facing up to competition from emerging 

countries. This partnership now englobes thirty-seven countries of which twenty-seven 

being EU member countries and ten being Mediterranean partner countries. 

The cluster policy: the emergence of a new strategy in Mediterranean countries 

through the MEDA program… 

In order to further optimize the Euro-Mediterranean partnership, the agreement provides 

tools for financial cooperation to support the economic move within the Mediterranean 

partner countries. It revolves around various support plans such as the MEDA projects, 

projects from the FEMIP (Facility for Euro-Mediterranean Investment and Partnership)... The 

interest in this research focuses on the MEDA projects in Morocco. The MEDA program, 

agreed by the European Council of Cannes in June 1995, is one of financial instruments for 

the implementation of the Euro-Mediterranean Partnership. Through this program, the 

22 

The twelve Mediterranean partners are Algeria, Cyprus, Egypt, Israel, Jordan, Lebanon, Malta, 

Morocco, Syria, Tunisia, and Turkey.


European Union provides financial and technical assistance to Mediterranean partners to 

enable them to achieve the objectives set out in the Barcelona Declaration bearing three 

components: political, economic and social. The main focus being on the economic element 

which has as its objective to progressively establish a free trade. The economic component 

has facilitated financial cooperation through various support projects such as the MEDA 

program and loans from the European Investment Bank. Thus, a global budget is granted by 

project not by country. It is the European Commission which, in collaboration with each 

individual Mediterranean partner, is developing programs to aid the economic transition, 

funded under MEDA. These programs can take different forms including “private sector 

development support, economic transition support, sustainable socio-economic development 

support and structural adjustment programs support” 23 . The beneficiaries of funding by the 

MEDA program are the States, the regions, the local authorities, government agencies and 

non-governmental organizations within EU countries and Mediterranean partner countries. 

The role of MEDA program in Morocco 

The MEDA program aims to adapt to the new dynamics of competitiveness through 

sustainable development, job creation and wealth. It allowed the establishment of Support 

Project Units (UAP), MEDA project management entities. In Morocco, they focus in 

particular on human resources development 24 (education, training), of which three 

specifically selected fields of activity drive its economy: tourism, textiles, the New 

Information Technologies and Communication (NTIC). These projects emphasize (vocational 

training, skills-based approach) and develop these fields in order to meet the needs of social 

and economic development in view of international expansion. What is the relation with the 

cluster policy? The importance of the role of training. This method involves the process of 

economic intelligence in companies in a given geographical territory. The capital of human 

training &/or else the presence of appropriate infrastructures are the first phase of emergence 

to initiate a cluster policy. 

The governance aspect may also intervene in such instances as uneven geographical 

location of Information and Communication Technologies (ICTs) in a territory and a country 

(importance of the role of clusters regarding the distribution of innovation and transmission 

of knowledge). In this context Y. Bertacchini stresses the utter importance of ICT territorial 

integration with an initiative of information and communication “at risk of being 

marginalized nationally and internationally” 25 . As a result governance can cover all or part 

of the draft economic development, hence the importance of integrating the functioning of a 

cluster in Mediterranean countries. 

Expected results for 2010 

Results forecast for 2010 would be: 

23 

“Union européenne et Méditerranée”, la Documentation française. // 

http://www.ladocumentationfrancaise.fr/dossiers/europe-mediterranee/index.shtml 

24 

Some projects have also focused on the development of infrastructures, trunk roads, and other fields 

of activity. 

25 

Bertacchini, Y. and Oueslati, L. (2003), “Entre information et processus de communication: 

l’intelligence territoriale”. // http://www.isdm.org

22 


• “In tourism, training of 72 000 young people, including 18 000 through 

apprenticeships and upgrading of human resources; 

• In textile, training of 75 000 young people, including 30 000 through 

apprenticeships, the achievement of a basic literacy skills program for the benefit 

of 50 000 workers and upgrading of human resources; 

• In ICT, training of 63 000 young people and upgrading of human resources” 26 

The interest to define these objectives is to emphasize the achievement of training in these 

three driving fields. 

These support plans, including the MEDA program, constitute the beginnings of an 

industrial policy of clusters for the Mediterranean countries. According to Michalet CA., 

Globalization is not yet a global phenomenon. Only some countries are concerned: in 

addition to the countries of the Triad - EU, North America and Japan - there are fifteen 

emerging economies: China, India, the newly industrialized countries (the Dragons) and the 

Asian Tigers in Asia, Mexico, Chile and Brazil in Latin America, Poland, Hungary, Slovenia 

and the Czech Republic in central Europe. Thus, countries on the sidelines of globalization 

seek to attract foreign investment (one of the four objectives of the cluster policy) because 

they fear marginalization. In this way the Mediterranean countries wishing to become more 

industrialized, to increase their export in order to better position themselves vis-à-vis 

competition and therefore to be able to be integrated in the flow of globalization. 

Conclusion 

The cluster is defined as “a system of enterprises rooted in a region where interactivity 

helps to secure long-term global competitiveness of national production” 27 ; this quotation 

reflects the fact that the pole is a territorial representation of globalization. So, it was 

demonstrated in the first part that the cluster, in order to develop, incorporates in its 

functioning that which globalization brings with it. Furthermore, this policy was created to 

be consistent with market expectations, which are ever more demanding, and its everincreasing 

race for innovation. Consequently this policy is reflected in relation to these new 

conditions, which are becoming relentlessly more difficult to fulfil (importance of 

innovation, importance of investment in research and training, particularly in higher 

education, complexity of innovative processes...). This policy proposes development 

prospects. With this logic, competitiveness clusters gradually become a model of industrial 

performance. In effect, changing technology and accelerating markets have brought about 

the change. What is now required is to combine expertise in the diverse fields of technology 

with a speedy and well-timed reactivity on the market of innovations. These two major 

issues make the process of “collaborative innovation” unavoidable. Accordingly the clusters 

have permitted to put in place those conditions imposed by globalization and, paradoxically, 

in order to remain or to be integrated in the globalization process, to allow the country in 

which they are implanted optimum competitiveness. The cluster is primarily a policy of 

growth hence the interest to continue to support this policy in European countries and to 

introduce it in Mediterranean countries so that everyone can take a stand in the light of 

26 

Meda Website of Morocco. // http://www.meda2-fp.ma/ 

27 

Samson, I. (2008) under the direction of., L’économie contemporaine en leçons, Dalloz.


competition and confirms their position in global markets. The dominant overall 

configuration of the financial profitability is fragile, the industrial policy of clusters might 

therefore become the basis for a “new governance”, to correct, to channel the excesses of 

globalization. As the term “governance” highlights, it is also important to clarify the role of 

institutions for the implementation of poles. The author Colletis mentions the need for 

institutional agents for the creation and sustainability of the pole, whether it be in 

infrastructure, equipment, funding research programs, partnerships with the region, 

department, local organization or chambers of trade and industry. European funds for the 

establishment of clusters in France or government aid through projects such as MEDA 

programs in Mediterranean countries show how imperative involvement of institutional 

bodies is for the credibility of a project, for its launch and for its sustainability over time. 

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Article history: 

Received: 30 March 2009 

Accepted: 19 October 2009


The Analysis of Long Run Growth Oriented Fiscal Policy 

Erős Adrienn * , University of Miskolc, Institute of Economic Theory, Miskolc, Hungary 

UDC: 336.02(439);(415) JEL: H3; N14 

ABSTRACT - One of the most debated questions of growth theory is whether or not government 

policies can be used to influence the long run growth rate of the economy. Neoclassical theory states 

economic policy actions can only have short run effects on the growth rate of the economy, but it can’t 

change the long run perspectives for growth. 

Endogenous growth theory integrated (among several other factors) fiscal policy to the growth 

models, enabling it to influence long run growth performance. According to these theories some 

elements of the government budget have positive effects on the long run growth rate of the economy 

(productive expenditures, and budget balance), while others are neutral (non-distortionary taxation 

and unproductive expenditures), or have negative consequences for growth (distortionary taxation). 

In my paper I summarize the theoretical and empirical literature of the relationship between fiscal 

policy and long run economic growth shortly. Then I continue my work with using the parameter 

estimates of a third generation study of developed countries (which considers the budget constraint as 

well) to evaluate the fiscal policy actions taken in Hungary and in Ireland, concentrating on the 

overall long run trends in the last one and a half decade. I will try to give explanation for the 

differences in the two countries’ reactions to some of the similar fiscal policy changes mapped during 

my research. 

KEY WORDS: fiscal policy, economic growth, Hungary, Ireland 

Review of the research topic 

The most important aim of economic policy is to ensure the highest level and most 

general welfare possible to the citizens of a country. There can be no other way to improve 

welfare over the long run but stimulating intense and sustainable economic growth. That is 

why the analysis of economic growth is a central question in the theory of economic policy, 

macro- and international economics. 

„Even small differences in long-term growth rates when cumulated over a generation or 

more, have much greater consequences for standards of living than the kinds of short-term 

business fluctuations that have typically occupied most of the attention of macroeconomists. 

To put it another way, if we can learn about government policy options that have even small 

effects on the long-term growth rate, then we can contribute much more to improvements in 

standards of living than has been provided by the entire history of macroeconomic analysis 

of countercyclical policy and fine-tuning. Economic growth is the part of macroeconomics 

that really matters.” [Barro – Sala-i-Martin (1995) 4-5 pp.] 

* 

Tel: +36 / 46 / 565-111 / 18-71, mob: +36 / 20 / 34-27-486, fax: +36 / 46 / 565-194, e-mail: geteros@unimiskolc.hu

26 


The above cited words perplexed me, when I first read them. I found their message a bit 

exaggerated, showing the self-consciousness of the researcher, his preference of his own 

interest. Still they made me think about the question. The more I thought about their 

veracity, the more I had to admit they are right. I think the matter of long run economic 

growth is of major importance. It is a stressful and timely problem from Hungary’s point of 

view, as after our accession to the European Union, convergence got into the focus of 

attention. Hungary’s per capita GDP, based on purchasing power parities did not reach even 

half of that of 25 member European Union’s average a decade ago (in 1997 it was only 49,5% 

of that, Eurostat), and even in this year, in 2007 it reaches only 64,5% of the EU average. 

We are facing a long period of convergence, based on these data. It is a highly logical 

question to ask what we can do to improve the pace of economic growth. This question 

belongs to the field of economic policy (among others) as well. I chose to study the fiscal 

instruments’ possible effects on long run economic growth in my research. I had three 

reasons to make this choice. On the one hand, the literature of economic growth theory 

focuses on fiscal policy’s growth effects, while on the other hand monetary policy (as we 

hope) will be lost as a national policy instrument after accessing the Euro-zone. This means 

the only policy left at our disposal to influence economic activities (among them economic 

growth) will be fiscal policy. My third reason was that before this research I was concerned 

with taxation matters and international tax harmonization so fiscal policy was familiar to me. 

I chose Ireland as a reference country, because she proved in the last two decades with her 

outstanding economic performance that convergence is not just a dream, and that economic 

policy (if properly done) can contribute to the pace of economic growth. 

Research background and methodology 

During the empirical work (arising from the macroeconomic characteristics of the theme) 

I made my calculations based on data taken from different international statistical databases. 

The main (but not the only) source of the data I used was the SourceOECD on-line statistical 

database. In order to ensure comparability, I endeavoured to minimize the types of databases 

used. Because of the methodological differences sustained by Hungary till 1997 distinct data 

are not published for Hungary in international databases. So in the case of those variables I 

had to rely on the data of the KSH (Central Statistics Office of Hungary), and PM ÁPMSO - 

ÁHIR (Hungarian Finance Ministry’s database). 

In my empirical work I analysed the relevant fiscal variables by using SPSS 14.0 and 

EViews 4.1. software. 

Empirical analysis 

The question dealt with in the paper is whether there is correlation, and if yes, how 

strong it is, between the long run growth rate of the economy and fiscal policy. Arguments 

can often be heard that economic policy is almighty, and the state can do anything. Other 

experts tend to stress that the state should not involve in economic affairs and its influence 

on economy ought to be minimized. Others add that the major aim should be (if economy 

evolved in such a way that state’s involvement in the economy, and mixed economy can be

Erös, A., The Analysis of Long Run Growth, EA (2010, Vol. 43, No, 1-2, 25-33) 27 

considered as natural) the maintenance of budget balance and the confine of state’s debt as a 

share of GDP. 

According to neoclassical growth theory, long run economic growth can be contributed 

to two exogenous factors, technological progress and the growth rate of economically active 

population. This attitude leaves only limited, short run, temporary effect for fiscal policy on 

the growth rate of the economy even though it is capable of changing the achieved level of 

welfare permanently. Endogenous growth theory on the other hand states that fiscal policy 

can influence the long run growth rate of the economy as well. The most recent, third 

generation empirical studies based on the endogenous theory of growth use several groups 

of variables which can either contribute to the growth rate (like productive expenditure, 

budget balance), or be neutral to growth (like non-distortionary taxation and unproductive 

expenditure), or harm growth (like distortionary taxation). Those revenue sources and 

expenditure types, which have ambiguous growth effect, are called other revenues and other 

expenditure. 

According to our hypothesis there is correlation among these fiscal variables and the long 

run growth rate of the economy, and these correlations meet the expectations concluded by 

surveying the relevant theoretical and empirical literature both in their strength and in their 

directions. 

Based on the correlation and regression calculations made it can be concluded that the 

calculated results meet our expectations based on the survey of the theoretical and empirical 

literature in the case of most fiscal variables, even though there are some exceptions. Both the 

indicators used to measure the extent of the state as a share of GDP (the ratio of income 

centralisation and the ratio of redistribution) are negatively correlated with long run growth 

rate of the economy in both countries. This relationship is known as scale-effect in the 

literature of endogenous growth theory, and its existence can be confirmed in case of the 

analysed countries. 

The ratio to GDP of distortionary taxation is negatively related with the growth rate of 

the economy in both countries, which tendency meets our expectations formed when 

surveying the theoretical and empirical literature of growth. 

The share of non-distortionary taxation to GDP is not significantly correlated with 

growth based on Irish data, which trend coincides with our theoretical cognition. At the 

same time, Hungarian data show a reverse relationship, showing significant positive 

correlation between the two variables. The most probable reason for this is the increase in the 

share of non-distortionary taxation within the generally shrinking tax wedge, while decrease 

in the share of distortionary taxation is positively related with growth. The increase of the 

ratio of non-distortionary taxation to revenue enhances growth based on both countries’ 

data, which result meets our expectations. 

Productive expenditure as a share of GDP is not significantly related with the growth rate 

of the economy based on Irish data (this results meets our expectations), while according to 

Hungarian data the two variables correlate negatively. This contradicts the finding of 

theoretical and empirical literature, and the reason for it must lay in the parallel changes 

occurred in the structure and extension of the budget as a share of GDP. The ratio of public 

expenditure to GDP decreased by 8 percentage points during the period in question, while 

productive expenditure as a share of GDP fall back only by 2 percentage points, so their

28 


share of all expenses rose by 2 percentage points. The decrease of productive expenditure’s 

ratio to GDP must rather have been parallel in time to the rise of the growth rate than being 

the reason for it. 

The share of unproductive expenditure in GDP is not significantly correlated with the 

long run growth rate of the economy in Ireland, in accordance with the predictions of the 

third generation studies. In Hungary significant negative relation can be found between the 

two variables. This suits the findings of certain second generation studies, showing negative 

relation between the extension of transfer programmes and the long run growth rate of the 

economy. 

The ratio of budget balance to GDP relates positively with the long run growth rate of the 

economy according to all types of empirical studies. This statement can be confirmed both in 

the case of Hungary and Ireland, showing significant positive correlation between the two 

variables. Two measures were used to characterise the relationship between long run 

economic growth and state debt. Three and five year averages of state debt’s share in GDP 

relate significantly negatively with growth in both countries. Three and five year average 

change in state debt is in significant negative correlation with the long run growth rate of the 

economy. These results meet our expectations formed when surveying the theoretical and 

empirical literature. 

Our conjuncture is that Ireland forewent the previous leaded states. What can the 

enviable success of Ireland be attributed to? Several possible reasons, like aptitudes 

(geographical position, English mother tongue, a young population unmatched in developed 

countries) economic history (doubling of the EU funds, Single European Market), and 

economic development (globalisation, foreign direct investment, change in the importance of 

distance, revolution of the IT systems) are mentioned in literature. Many of the experts stress 

the importance of economic policy actions (tax system and industrial policy aiming to attract 

FDI, activities of enterprise agencies, reform of the system of education, partnership 

agreements securing a low wage level for a long period of time). We think additionally to 

what has been mentioned the role of certain political and cultural factors, economic and 

social sacrifices made for success are worth attention as well. Fast convergence is due to 

several factors. 

According to our analysis a possible explanation of the “Irish economic miracle” can be 

conditional convergence. The two known forms of transition paths (delayed convergence, 

which occurs due to the elimination of barriers to growth and imitation based on adaptation 

of more developed, more productive technology) strengthened each-other, and three 

beneficial external factors’ synergic effect (doubling of the EU Funds, European Single 

Market and a long boom of the US economy) made the convergence so fast and dynamic. 

We can conclude convergence has happened in Ireland. Further strengthening of her 

economic position (foregoing the present leader states) requires her to take part in 

developing new technologies. The country is committed to this and R&D expenses have been 

increased seriously even in real terms. Irish enterprise agencies have noticed that their 

strategy needs to be reformed, as competition for international capital escalated and Ireland’s 

traditional competitive advantages, low wages and low taxes are not unique in the EU 

anymore, and after the new member states in Eastern Europe accessed the Union. New 

strategic directions were appointed in 2004; the aim is to form new clusters in high value


added sectors and internationally tradable services. Most of the selected industries have 

antecedents in the country and the necessary regulations are being formed now. Based on 

these facts we can conclude that Ireland does not rest in her laurels but takes any steps she 

can in order to maintain her dynamic growth. 

According to economic data Ireland’s convergence is so successful that she has already 

foregone almost all her competitors with respect to per capita real GDP based on purchasing 

power parity (she has foregone most of her EU-member concurrent during 1997-1998, since 

2001 only the performance of Norway, Luxembourg and the USA is higher than Ireland’s). 

Convergence has been finished in Ireland, moreover, she has even foregone the previous 

leaders (those member states of the European Union whose economic performance was 

better than hers), and we have witnessed the rare phenomena of leapfrogging in Ireland’s 

case. 

As we have seen, the direction of the correlation between fiscal variables and the growth 

rate are the same in each variable’s case in both countries. At the same time, according to our 

hypothesis the decrease of government sector as a share of GDP (and any other budgetary 

variables) can not be unrestricted; the pace of growth can not be dynamized by this 

endlessly. This conjecture of us is strengthened by the fact that underlying processes in the 

two analysed countries differ. During the analyses of the correlation between most of the 

fiscal variables and the long run growth rate of the economy we discovered an important 

statutory. We found a negative relation between the certain fiscal factors and the long run 

growth rate of the economy in both countries’ case during correlation calculations, but when 

estimating regression equations we experienced that negative correlation is unambiguous 

based on Hungarian data, but to Irish data parabolic regression functions can be fitted in 

most cases (there are some exemptions like social security contributions, health and 

productive expenditure). In the case of all the other variables we can conclude that the right 

hand leg of the Irish parabolic function can be regarded as the continuation of the negative 

regression fitted to Hungarian data. 

This finding can be originated in two reasons. On the one hand, Hungarian government’s 

extension as a share of GDP is higher, than the Irish one. For example, the ratio of 

government expenses to GDP shrunken from 45,3% to 31,5% in Ireland during the period in 

question, while in Hungary it fall back from 63,44% to 47,4%, so it is still much higher, than 

the original level of Ireland used to be in 1990. Similar tendencies show in the other possible 

measure of government’s extension, government revenues’ share in GDP. 

On the other hand, another possible explanation for the divergence in the behaviour of 

the two countries can be the different situation the two countries are in on their transition 

paths. Ireland stepped on a transition path around 1987. During the twenty years passed, 

convergence finished and even more, we witness the rare case of leapfrogging. Hungary is in 

quite a different situation after the changing of the Regime [Erdős (2003) 294 p.], she is on a 

transition path as well, but her path is very different from that of Ireland’s and her lag from 

the leaders is still very large. The gap is closing from year to year, still, even in 2007 we only 

achieve 64,5% of the 25 member EU member states’ average per capita GDP based on 

purchasing power parity. Hungary still has a long convergence period to go through. That is 

why we do not have to expect the tendencies to turn for a long period of time, which means

30 


that the advices given by growth theory are worth considering in Hungary’s case, based on 

Irelands recent past. 

In our opinion Irish fiscal policy contributes to the slow pace of the necessary fallback in 

the growth rate at the end of the transition path. The existence of conditional convergence is 

strengthened by the fact that the pace of economic growth has been slowing in Ireland in the 

recent past. At the same time, we must consider that the present, relatively slower growth is 

still enviable to most developed countries. It can only be called slow after the outstandingly 

high growth rate experienced from 1987 to 2001. Convergence (as we have already discussed 

above) has been enhanced by several fiscal and non-fiscal measures in Ireland. Based on the 

above analysis we can unequivocally conclude that the radical reform of fiscal policy 

contributed to the evolution of “Irish economic miracle”, or the “Celtic Tiger” phenomena. 

Figure 1. Long run growth rate of the economy as a function of the share of government 

revenue to GDP in Hungary and in Ireland 

Government revenue as a share of GDP 

(Moving average) 

Source: own representation 

Source of data used: SourceOECD 

Consistent shrinking of the government’s extension as a share of GDP, maintenance of 

the budget balance and the decrease of the ratio of state debt to GDP (which the fast growth 

of GDP used as benchmark also contributed to, of course) eventuated the result anticipated 

by growth theory, and even contributes to the evolution of the still very favourable (even 

though slowing) pace of economic growth. We endeavoured to strengthen this result by 

using the parameter estimates of a third generation empirical study as well. The analysis 

performed by the model confirmed recent year’s fiscal policy’s beneficial effects on the 

growth rate of the economy. Our findings show that after the millennium, as the growth rate


started falling back in Ireland, fiscal policy contributed to the relatively slower decrease of 

the growth rate which is statutory at the end of the transition path. 

Hungary is under pressure in forming her fiscal policy today, the most important task is 

(beyond growth aspects we are required to meet the Maastricht criteria as well) to restore the 

balance of the budget. Fiscal consolidation in Hungary started only about a year ago, so it 

would be quite early to evaluate the long run effects of these policy actions now. 

Hungarian tax wedge can be considered as averagely high compared to other EU 

member states (Hungarian tax wedge is 39,2% of our GDP, while the average of the 25 EU 

member states is 40,7%). Even though compared to other recently accessed member states 

(their average is 35,2%) and to the Irish tax wedge (31,7%) it is quite high. [Eurostat, ISSN 

4020-4298] This means we have enough space to shrink the share of tax revenue to GDP, 

which would be beneficial to growth according to our analysis. According to these findings, 

from a growth oriented point of view we should rather decrease government expenses in 

order to restore budget balance, than increase government revenues. 

Opposite to the expansive trends of Irish fiscal policy in the 1970’s, the change in fiscal 

policy’s direction, a gradual shrinking of the budget’s extension as a share of GDP, which 

started at the end of the 1980’s contributed to the evolution of the „Celtic Tiger” phenomena. 

According to our hypothesis it is not enough to concentrate generally on the decrease of 

government activity’s level as a share of GDP. Structure of the budget plays at least as an 

important role in forming growth performance. 

To prove our assumption we used the parameter estimates of the already mentioned 

third generation endogenous Bleaney-Gemmel-Kneller model. The two countries we analyse 

represent too small a sample to calculate our own parameter-estimates based on them. But as 

both are developed countries (OECD member states) we found the study’s results (based on 

OECD member states’ sample) relevant for the countries in question. Authors of the study 

(out of the seven fiscal variables they included in their research) found significant effects of 

three fiscal variables on long run economic growth: 

• The ratio of distortionary taxation to GDP, which they attributed negative growth 

effects to based on the original model of Barro’s (1988); 

• The ratio of productive expenditure to GDP, which turns up with positive growth 

effects (again, in accordance with the model of Barro), and 

• The ratio of budget balance to GDP (which, again meeting our expectations formed 

when surveying theoretical and empirical literature) has a positive coefficient the 

regression equation. 

These three relevant factors influence the complex effect of fiscal policy actions on the 

pace of economic growth with different weights, calculated in the third generation empirical 

study. When evaluating the long run growth effects of Irish and Hungarian fiscal policies by 

using the parameter-estimates of the Bleaney-Gemmel-Kneller model we concluded that 

productive expenditure plays a major role in shaping the overall growth effect of fiscal 

policy. This was the most obtrusive in the case of Ireland, where the decrease in the ratio of 

productive expenditure to GDP meant the main growth impulse since 2000 (since the pace of 

economic growth started slowing). 

In Hungary, the dominant element in shaping the favourable long run growth effect of 

fiscal policy changes was the gradual decrease of the ratio of distortionary taxation to GDP.

32 


At the same time we have to consider the increase in the ratio of productive expenditure to 

GDP in the second part of the time-period, after the years of the Bokros-package, which 

enhanced growth significantly. We calculated a neutral growth effect for the Bokros-Package 

by using parameter estimates of the third generation study. This can be attributed to the fact 

that the positive effect evolving from the improvement of budget balance and the decrease in 

the share of distortionary taxation to GDP was fully outweighed by the negative effect of the 

decrease in productive expenditure’s share in GDP. The dominant element again (we have to 

stress, just like in the case of Ireland) was the decrease in the ratio of productive expenditure 

to GDP. 

Altogether, we wished to demonstrate and strengthen with our analysis that adequately 

adopted fiscal policy actions are capable of enhancing the long run growth rate of the 

economy. Restoration of the budget balance and gradual (but not unlimited) shrinking of 

government’s extension as a share of GDP are needed in order to achieve the aimed effect At 

the same time we must not forget the importance of the structure of revenues and 

expenditure. Reduction of the government expenditure should be done by decreasing 

unproductive expenditure (as those are neutral to growth). Productive expenditure (which 

enhances growth as we have stated above) should be maintained. 

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Received: 7 January 2010 

Accepted: 16 March 2010

ORIGINAL SCIENFITIC PAPER 

Economic Assessment of Selected Bank Mergers in the Central- 

East Europe Region in Comparison with Developed Countries 

Tej Jakub * , Ekonomická fakulta TUKE, Košice, Slovakia 

UDC: 336.7(4) JEL: G15; E44; G34 

ABSTRACT – My intention is to clarify the process of merging from the economic point of view, 

especially impact on financial results after the merger itself. Examine and analyze differences in 

financial results, measured by using various ratio indicators, market value of shares and capital 

adequacy in the region of Central and Eastern Europe in comparison with developed markets in the 

world. 

KEY WORDS: economic situation, merger, the indicators of profitability, market value of shares, 

capital adequacy 

Introduction 

Nineties was characterized by a large number of mergers and acquisitions worldwide. 

This phenomenon belongs in the past decades to the preferred part of economic theory and 

practice. By the volume of capital bank mergers and acquisitions belong to highest rank of 

operations. They are closely linked with the globalization process and thanks to it very often 

cross national borders. Economic assumptions of mergers wave in last decade is the rapid 

development of information technology, reducing the cost of communication and transport, 

markets deregulation and privatization. In particular, acquisitions are an integral part of the 

restructuring process in transition economies. 

Merger itself has not always met planned expectations. There is no guarantee of 

achieving economies of scale, risk diversification and improvement of solvency. To fulfill all 

positive effects, it is necessary to prepare in advance more than just a basic plan and strategy. 

It is necessary to include regional specificities and all other relevant variables. 

Material and method 

The intention of article is to clarify the processes of mergers from an economic 

perspective and impact on financial results after the merger itself. Based on data from annual 

reports, it examines and analyzes the impact of mergers on banksʹ financial results, measured 

by various ratios or market value of shares and capital adequacy in the region of Central and 

Eastern Europe in comparison with developed markets in the world. 

* 

Address: Boženy Němcovej 32, Košice, Slovakia, e-mail: jakub.tej@tuke.sk

Tej, J., Economic Assessment of Selected Bank Mergers, EA (2010, Vol. 43, No, 1-2, 34-43) 35 

Achievement and discussion 

Merger usually means the process of merging two or more separate economic entities, 

which occurs through direct connection to their net assets. The merger, in most cases means 

the merger of relatively strong and equally important subjects, which is reflected in many 

aspects. The merger must be decided by the General Assembly of all participating 

companies. As arguments for mergers and acquisitions is tend to be given many reasons. 

Separations of reasons in favor of the merger and against them are widely various, and what 

some studies have considered clearly positive, others resolutely refuse. As an example, we 

can use the impact of mergers on employment and the expected impact of mergers on the 

effectiveness of the newly created bank. But the problem remains that many mergers are 

justified economically inefficient. Analysis shows that the main problem is merging different 

corporate culture of companies. Only few projects, of mergers and acquisitions have more 

than a basic plan how to solve this problem. Others fail because of incorrect valuation of 

assets or hidden liabilities of the company [5, p. 243]. 

Complicated structure of conglomerates, which occur after the merger, very often 

requires more administrative personnel. The preserved remains specialized, however often 

mutually competing departments. On the other hand are after mergers and acquisitions 

expected savings from reductions in staff or expenses costs (Table. 1). These benefits would 

mean social costs in terms of increased unemployment. The problem in terms of social costs 

is also closing branches, usually associated with reducing supply of banking services, job 

cuts may not be the rule. 

Table 1. Estimates of cost savings in bank mergers (in% of total costs) 

SBC-UBS 23 

Bank of Scotland-NatWest 22 

Bank Austria-Credit Anstalt 18 

BankAmerika-SecPac 17 

Wells-First Interstate 17 

Chemical-Chase 16 

Swedbank-Forenings 15 

Lloyds-Midland 14 

Vereinsbank-Hypobank 14 

Fortis-Generale 11 

Source: Davis, S. I. 2007 [2, p. 97] 

The most important argument for the merger is synergy. Synergistic effect is based on the 

premise that combining two formerly separate companies involves an increase effect on the 

coupling value that is added to the sum of the merging companies. It is known that such 

effects arise when combining two companies, for example, that in newly established 

company arise economies of scale, reduce some costs, lower distribution costs and marketing 

costs, disposal of surplus or unused assets, or just using them. We can say that the 90th were 

synergies reason and argument of many mergers in the financial sector. Acquisition of a

36 


major market positions, or the emergence of oligopoly or even monopoly, should be reflected 

in the growth of the value of the bank and decrease the value of competing banks - however 

most of the studies decrease the value of rival banks didn’t demonstrate [1, p. 135]. 

The motive for mergers and acquisitions may also be to circumvent quotas, tariffs and 

other restrictions in foreign trade, reduce dependence on foreign trade or invest in a safe and 

predictable environment. For successfully manage of merger is very important to make 

valuation of both banks, which want to merge. Financial valuation of bank aims to make its 

value by a sum of money. The potential of bank is then evaluate by cash equivalents. 

Valuation methods can be divided into these main groups [4, p. 12-13]: 

1. methods based on income analysis, 

2. methods based primarily on an analysis of current market prices, 

3. valuation methods based on cost (the cost of purchasing the property). 

Researched bank mergers were divided into groups according to the region in which they 

took place. The first group included the mergers in developed economies such as Japan, 

USA, GB, Spain and Republic of South Africa. 

The second group included mergers acquisitions in transition economies of Central and 

Eastern Europe. The oldest is the acquisition of CSOB by Belgian KBC in 1999 in the Czech 

Republic. In it, KBC has acquired 65.69% stake for 40 billion CZK. Followed by series of 

Austrian ErsteBank acquisitions in the Czech Republic, Slovakia and Romania. The other 

from region are the acquisition of Komerční banka by French Societe Generale in 2001 in the 

Czech Republic, where there was a transfer of 60% of the shares for 40 billion CZK and fresh 

UniBanka merger with HVB Bank in Slovakia in 2007. 

Table 2. The value of mergers under the merged total assets (EUR million) 

Merging banks Total assets Total 

Mitsubishi Tokyo FG + UFJ Holdings 2005 (Japan) 779 338 593 396 1 372 734 

JP Morgan Chase + Bank One 2004 (USA) 955 077 269 512 1 224 589 

Sumitomo + Sakura Bank 2001 (Japan) 500 886 414 775 915 661 

Royal Bank of Scotland + NatWest 2000 (GB) 532 455 309 873 842 328 

Barclays + ABSA 2005 (JAR) 785 852 51 009 836 861 

Santander + Abbey 2004 (Spain) 504 704 248 857 753 561 

SG + KB 2001 (Czech) 512 500 12 175 524 675 

ErsteG + BCR 2006 (Romania) 181 703 13 519 195 222 

KBC + CSOB 1999 (Czech) 156 218 6 557 162 775 

ErsteG + SS 2001 (Slovakia) 80 114 4 643 84 757 

ErsteG + CS 2000 (Czech) 54 935 12 410 67 345 

UniBanka +HVB Bank 2007 (Slovakia) 1 504 2 178 3 682 

Capital adequacy 

Source: own calculations based on annual reports of banks 

Sense of capital adequacy is based on the assumption that the larger the capital of 

financial institutions, the more resources shareholders put in. And the greater will be their


interest for the proper operation of the institution not to lose this money, but to maximize 

their value. 

Graph 1. Capital adequacy ratio (%) 

16 

15 

14 

13 

12 

11 

10 

-3 -2 -1 year of 

merger 

Central and Eastern Europe 

Source: author 

1 2 3 

developed countries 

In case of problems means lower value of capital adequacy for the shareholders and 

depositors a higher probability of loss. When bank will be successful in its activities, the 

lower value of the capital adequacy means for shareholders higher probability of evaluation 

invested investments, but for clients only their deposit interest. Raising capital adequacy 

means better security for clients, but on the other hand it means a reduction in institutions 

profit contributing to the unit of capital [9, p. 195]. 

From the previous graph 1 captivate an increase in capital adequacy of banks from 

Central and Eastern Europe. This can be explained by the some restructuring and reducing 

the risk before merger, or consistent acquisition partner selection. However, the level of the 

years after the merger seems to be overly cautious, since the recommended minimum 

threshold is at 8%. Conversely, banks from developed world economies reported relatively 

stable levels without significant trends at around 12%. 

Profitability ratio indicators 

From all of profitability indicators, each of which focuses on a different type of 

profitability, was included in the analysis one of representative from each category. 

Representations of the course are also most worldwide prevalent ROE and ROA. 

Graph 2. shows the development of Bank’s profitability ratio indicator R1 (net banking 

product * 100/ bankʹs business income) three years prior to the merger till period of three 

years after the merger. It is clearly visible that the group of banks from Central and Eastern 

Europe after the merger increased the share of net banking product up to 75%. In the second 

group of banks throughout the whole period a clear downward trend with small stagnation

38 


in mergerʹs year, which means focusing on other areas, mainly on income from fees and 

commissions, or profits from financial operations. 

Graph 2. Bank’s profitability ratio indicator R1 

80 

70 

60 

50 

40 

-3 -2 -1 year of merger 1 2 3 




Graph 3. Bank’s profitability ratio indicator R3 

30 

20 

10 

0 

-3 -2 -1 year of 

merger 



1 2 3 


R3 indicator works with net profit before tax (R3 = net profit before tax * 100 / bankʹs 

business income + operating income + other income) and thus eliminates any tax differentials 

in all countries. Already one year before the merger can be seen profit growth in both groups 

of banks, which continued also in subsequent years. So this indicator describes the merger as 

a great way how to increase net profit before tax.


Graph 4. Personal profitability R4 

500 

450 

400 

350 

300 

250 

-3 -2 -1 year of 

merger 



1 2 3 


Personal profitability ratio shows the effect which brings unit of labour in proportion to 

net banking product (graph 4). In international comparisons it is necessary to use net profit 

before tax due to different levels of taxation in different countries, and also apply profit to 

one employee. This comparison may indicate overstaffed banks or not very successful 

interbank organization, poor levels of technical equipment or in the extreme case low skilled 

and expertise of employees. Optimization of branch network and reducing the number of 

employees is among the core theme of mergers. One might assume that after the merger it 

comes just increase of this parameter. However, in a group of banks from Central and 

Eastern Europe was no bigger increase acting, even in the merger year there was a slight 

decline. And since labor costs were not growing by way to be able to explain this trend, 

mergers in this direction had not brought the desired effect. Conversely group of banks from 

developed economies, recorded an increase to almost twice its value from the year before the 

merger and the trend seems to be strong enough also for the future. 

Graph 5. Return on equity – ROE 

30 

20 

10 

0 

-10 

-20 

-30 

-3 -2 -1 year of 

merger 



1 2 3 

developed countries

40 


Graph 5. shows the performance of banks as measured by ROE. It indicates to 

shareholders how effective their investments in shares are. Visible is a positive increase in 

banks in Central and Eastern Europe. Already one year before the merger they reached a 

significant positive value and growth trend is maintained until the end of the period. By 

contrast the group of mergers in developed economies has value of ROE still in the range 10 

to 20% without significant changes in the mergerʹs year. Thus the merger did not bring any 

significant effect to shareholders in the long run. 

Graph 6. Return on assets – ROA 

1,2 

1,0 

0,8 

0,6 

0,4 

0,2 

-3 -2 -1 year of 

merger 



1 2 3 


The fundamental problem of the indicator ROE as the primary indicator of bank 

profitability, is that it does not take into account a possible leverage factor. The Bank may 

indeed very easily increase its ROE by increasing the total debt, namely use capital to cover a 

higher amount of assets. Therefore, the analysis must be considered simultaneously with the 

second indicator - ROA. Graph 6 - ROA shows how effectively assets are used to make a 

profit, then how much one unit of assets earns in average. The international standard is 

regarded as a value of 1.00 and as we can see, central European banks are reaching that point 

immediately one year after merger. In contrast with second group which are slightly below 

the standard and don’t exceed value of 0.8 throughout whole period of time. The following 

shape of curve caused Japanese banks and their long-lasting crisis in its banking sector, 

which is marked by huge credit losses and overcapacity. 

Market value indicator 

The most important indicator from this category is now considered the market price of 

shares, which immediately takes into account all relevant information affecting their level 

and is a very important tool for investors (graph 7).


Graph 7. Market price of shares 

200 

180 

160 

140 

120 

100 

80 

-3 -2 -1 year of 

merger 


1 2 3 



Note except Slovenská sporiteľňa, BCR, HVB Bank and UNI Bank, which shares are not publicly traded. 

One year after the merger took place as expected, fall in central banks stock prices, but it 

was already deleted the next year and a year later, the average price reached 170% of the 

initial value. The curve of banks from developed economies has fall in mergerʹs year, but the 

following period was marked by a sharp strengthening price of shares up to 190% of initial 

value in the third year after the merger. 

Graph 8. Total loans / total assets ratio 

60 

55 

50 

45 

40 

35 

-3 -2 -1 year of 

merger 



1 2 3 


One of the most important indicator for financing small and medium-sized enterprises 

(SME) belongs the volume of total loans to total assets (graph 8). Which are in the banking 

practice divided in loans to households and small entrepreneurs, large corporate clients, 

special funding and loans to SMEʹs. Now we pay attention just to the last item which is drew 

in graph 9.

42 


Graph 9. SME’s loans / total assets ratio 

16 

15 

14 

13 

12 

11 

10 

9 

-3 -2 -1 year of 

merger 



1 2 3 


The share of SMEʹs loans to total assets has a very similar trend as total loans to total 

assets. We can observe a significant trend of divergence in two groups since year before the 

merger, which is getting stronger every following year. Mergers in the our region didn’t 

contributed to a better allocation of loans for small and medium-sized enterprises, but 

commercial banks are now paying increasing attention to the segment of small and mediumsized 

enterprises [8]. Which do not provide such large volumes of transactions as large 

corporate customers, but better margins and future potential. This led in 2008 to increase of 

lending volume to this segment about the fifth, sometimes up to 30 %. 

Conclusion 

The success of the merger affects many factors. We could say most important are 

managing rationalization of operations, gaining access to new banking techniques, 

optimizing economies of scale, portfolio diversification, synergy, and not least the success of 

the merger determine choosing of financing method of the merger. Assessment of the merger 

success after several years of difficult, but most obvious way seems to be using different 

analytical methods and ratio indicators that can provide a fairly comprehensive view of 

economic performance following years after the merger compared to the years before the 

merger. 

All indicators should be monitored and assessed in longer period of time and it should be 

noted that even slight changes in the indicator level may indicate changes in the range of 

customers or changes in the financial market. The capital adequacy is showing some 

differences between merger groups. Central and Eastern Europe region in the second year 

after the merger amounted value exceeding 15 %, so although in the eyes of clients were 

more secure, on the other hand, this meant reduction in institutions profit contributing to the 

unit of capital. Profitability indicators also speak in favor of the merger in Central and 

Eastern Europe region. Mergers in our region didn’t contributed to a better allocation of


loans for small and medium-sized enterprises, but commercial banks are now paying 

increasing attention to the segment of small and medium-sized enterprises. 

Better results of banks in transition countries in Central and Eastern Europe, is generally 

attributed to a significant restructuring and rationalization process, which took place before 

the merger itself to attract acquisition partners. To evaluate the impact of mergers on banksʹ 

financial results can be done not only with using these methods and indicators, but also in 

other ways. 

Summary 

The study gives an overview of the economic situation coupled with the merger of banks in the area 

of Central and Eastern Europe in comparison with developed markets in the world. It applies to 

different types of mergers of banks ratio indicators, the market value of shares and capital adequacy. 

Attention turns also to the issue of SMEʹs loans measured by the range of indicators. 

References 

BALÁŽ, P., VERČEK, P. Globalizácia a nová ekonomika. Bratislava: Sprint, 2002, s.135. ISBN 80-89085-06- 

7. 

DAVIS, S. I. Bank Mergers. Lessons for the Future. London: Macmillan 2000, s. 97. ISBN 978-0-312-23552- 

9. 

KOTULIČ, R., KIRÁLY, P., RAJČÍNIOVÁ, M. Finančná analýza podniku. Bratislava: Iura Edition, 2007. - 

206 s. - ISBN 978-80-8078-117-0. 

MAŘÍK, M. Určování hodnoty firem. 1. vyd. Praha: Ekopress, 1998, s. 12-13. ISBN 80-7079-938-2. 

POLOUČEK, S. Bankovnictví. 1. vyd. Karviná: SU v Opavě 2005, s. 243. ISBN 80-7248-264-5. 

POLOUČEK, S. a kol. Bankovnictví. 1. vydání. Praha: C. H. Beck, 2006, s. 490. ISBN 80-7179-462-7. 

RÁKOŠ, J. Základy finančnej analýzy. In: Manažment projektov v regiónoch. Prešov: Manacon, 2005, s. 

83-100. ISBN 80-89040-27-6. 

TEJ, J., BRECIK, M., KRASNODĘBSKI, A. Small and medium enterprise - one of the aspects of the regional 

development. In: Acta Agraria et Silvestria. Vol. XLIV/2: series agraria; sekcja ekonomiczna. - 

Kraków: Wydawnictwo Oddzialu Polskiej Akademii Nauk, 2005. 

TEJ, J. ml., TEJ, J. Ekonomické zhodnotenie fúzií vybraných bánk v regióne. In: ANNO 2009. Prešov: PU v 

Prešove 2009, s.191-202. Dostupné na: http://www.pulib.sk/elpub2/FM/Kotulic10/index.html, ISBN 

978-80-555-0005-8. 




ORIGINAL SCIENFITIC PAPER 

Matrix Theory Application in the Bootstrapping Method for the 

Term Structure of Interest Rates * 

Glova Jozef, Technical university of Košice, Faculty of Economics, Slovak Republic 

UDC: 336.781.5 JEL: C41, D35, G12 

ABSTRACT – This article focuses on the term structure of interest rates analysis in the form of a 

yield curve. The yield curve is a basic instrument for understanding the relationship between the price 

of money and the maturity of a financial instrument. It has the same relevance for all economic 

subjects in the form of a basic value determination. The term structure analysis can be used in 

different economic categories like financial management, portfolio management, actuary science, 

company valuation, management of firm value, financial risk management, etc. Such as basic method 

applied in the yield curve construction is the bootstrapping method. Unfortunately, there is great 

computing severity related to this method. Fortunately, however, the application of matrix theory 

helps us to solve this issue very well 

KEY WORDS: yield curve, interest rate term structure analysis, bootstrapping method 

Introduction 

The term structure of interest rates, also known as yield curve, is a static function that 

relates the term to maturity to the yield to maturity for a sample of bonds at a given point in 

time. Thus, it represents a cross section of yields for a category of bonds that are comparable 

in all respects but maturity. 

Specifically, the quality of the issues should be constant, and ideally you should have 

issues with similar coupons and call features within a single industry category. So you can 

construct different yield curves for Treasuries, government agencies, prime grade 

municipals, AAA utilities, and so on. The accuracy of the yield curve will just depend on the 

comparability of the bonds in the sample. 

In generally yield curves do not have the same shape at different points in time, thus 

term structure shape changes depends the time and depends the term to maturity. Depends 

on different term to maturity we knows the rising yield curve, declining yield curve, the flat 

yield curve or the humped yield curve. The rising yield curve is the most common and tends 

to prevail when interest rates are at low or modest levels. The declining yield curve tends to 

occur when rates are relatively high. The flat yield curve rarely exists for any period of time. 

The humped yield curve prevails when extremely high rates are expected to decline to more 

normal levels. Note that the slope of the yield curve tends to level off in general after 15 

years. 

* 

Acknowledgement: This article was written with the support of the VEGA project No. 1/0897/10.

Glova, J., Matrix Theory Application in the Bootstrapping, EA (2010, Vol. 43, No, 1-2, 44-49) 45 

Different shape of the term structure or yield curve explains three major yield curve 

theories - the expectations hypothesis, the liquidity preference hypothesis, and the 

segmented market hypothesis [John Y. Campbell (1986)], [John C. Cox, Jonathan E. Ingersoll, 

Stephen A. Ross (1985)]. 

Theoretical spot rate curve estimation using bootstrapping method 

The yield on a zero coupon bond for a given maturity is the spot rate for the maturity. 

Specifically, the spot rate is defined as the discount rate for a cash flow at a specific maturity. 

At that time, we used the rates on a series of zero coupon government bonds created by 

stripping coupon government bonds. 

In this case, we will construct a theoretical spot rate curve from the observable yield 

curve that is based on the existing yields of Treasury bills and the most recent Treasury 

coupon securities [Sanjay K. Nawalkha and Donald R. Chambers (1999)]. One might expect 

the theoretical spot rate curve and the spot rate curve derived from the stripped zero coupon 

bonds to be the same. 

The fact is, while they are close, they will not be exactly the same because the stripped 

zero coupon bonds will not be as liquid as the on-the-run issues. In addition, there are 

instances where institutions will have a strong desire for a particular spot maturity and this 

preference will distort the term structure relationship. Therefore, while it is possible to use 

the stripped zero coupon curve for a general indication, if you are going to use the spot rates 

for significant valuation, you would want to use the theoretical spot rate curve. 

The process of creating a theoretical spot rate curve from coupon securities is called 

bootstrapping wherein it is assumed that the value of the Treasury coupon security should 

be equal to the value of the package of zero coupon securities that duplicates the coupon 

bond’s cash flow. 

The theoretical price of zero coupon bond ( ) should equal to 

where . 

, (1) 

Consider set of coupon securities with semi annual coupon payment and continuous 

interest running. Then the 0,5 year coupon security should equal to 0,5 year zero coupon 

security containing the face value and 0,5 year coupon payment . The general relation for the 

theoretical price of this bond [Vincent Šoltés a Michal Šoltés (2007)] is 

The theoretical price of 0,5 year coupon bond is then 

where is the face value, is 0,5 year coupon payment paid at the maturity of bond, 

and is the theoretical spot rate of 0,5 year zero coupon bond or 0,5 year zero coupon 

yield. After simplifying 

(2) 

(3) 

(4)

46 


To calculate the 1 year zero coupon we can use the price of a 1 year coupon bond and the 

theoretical spot rate of 0,5 year zero coupon bond, i.e. 

where is the face value, is the 0,5 year coupon paid at the end of 0,5 year and 1 year, 

and is the 1 year zero coupon yield. After simplifying we get 

(5) 

(6) 

Using 0,5 zero coupon yield form equation (4) in the equation (6) we compute the 

theoretical spot rate of 1 year zero coupon bond. 

Following the same approach the theoretical spot rates (or zero coupon yields) fall of the 

N maturities are calculated using the zero coupon yields of the previous maturities. In 

general about 15 maturities are sufficient to produce the whole yield curve of zero coupon 

bonds. 

Using the matrix theory in the bootstrapping method 

To obtain a direct solution we can apply matrix theory there. Let we consider bonds 

maturing at dates , and let be the total cash flow payments of ith bond (for 

) on the date (for ). Then the prices of bonds equal to 

(7) 

Generally described matrix equals to matrix product of matrix and matrix , then 

After simplifying to the matrix 

, 

where the matrix presents the square matrix to the matrix . To determine the inverse, 

we calculate using determinant of 

, 

, where (9) 

and where represents square matrix of type from the matrix . 

As you could see in (7), the upper triangle of the cash flow matrix on the right side has 

zero values. By multiplying both sides of equation (7) by the inverse matrix of the cash flow, 

we get the discount functions corresponding to maturities, then 

(8) 

(10)


Note that this solution requires that the number of bonds equal the number of cash flow 

maturity dates. 

Matrix theory application in the bootstrapping method 

To demonstrate the bootstrapping method using the matrix approach we assume 10 

coupon bonds and their parameters given in the table below. For simplicity we assume all 

bonds make annual coupon payments. The face value of bonds is 100 €. 

Bond Price (in €) Maturity(in years) Coupon rate (in per cent p.a.) 

1 96,60 1 2 

2 93,71 2 2,5 

3 91,56 3 3 

4 90,24 4 3,5 

5 89,74 5 4 

6 90,04 6 4,5 

7 91,09 7 5 

8 92,82 8 5,5 

9 95,19 9 6 

10 98,14 10 6,5 

Using the matrix theory in the bootstrapping method given by equation (10) we get the 

discount functions corresponding to maturities, then 

Multiplication of these two matrices gives the solution 

The theoretical spot rates are obtained from the corresponding discount functions 

derived from equation (1) or

48 


The particular zero coupon yields are depictured in Table 1. and Figure 1. 

Table 1. Particular zero coupon yields (in per cent p. a.) 

1 5,439% 

2 5,762% 

3 5,995% 

4 6,164% 

5 6,294% 

6 6,393% 

7 6,470% 

8 6,533% 

9 6,582% 

10 6,621% 

Figure 1. Theoretical spot rate curve 

Conclusion 

The yield curve (or the term structure of interest rates) shows the relationship between the 

yields on a set of comparable bonds and the term to maturity. Based upon this yield curve, it 

is possible to derive a theoretical spot rate curve. Such as basic method applied for derivation 

of the yield curve (or several theoretical spot rates) is the bootstrapping method. 

Unfortunately, there is great computing severity related to this method. Fortunately, 

however, the application of matrix theory helps us to solve this issue very well, as we 

suggested in this paper. In turn, these spot rates can be used to value bonds using an 

individual spot rate for each cash flow. This valuation approach is becoming more useful in a 

world where bonds have very different cash flows. In addition, these spot rates imply 

investor expectations about future rates referred to as forward rates.

References 


Campbell, J. Y. (1986), “A Defense of Traditional Hypotheses about the Term Structure of Interest 

Rates,” Journal of Finance, 41: 183–193. 

Cox, J. C., Ingersoll, J. E. and S. A. Ross (1985), “A Theory of the Term Structure of Interest Rates,” 

Econometrica, 53: 385–408. 

Nawalkha, S. K., and D. R. Chambers (1999), “Interest Rate Risk Measurement and Management”, 

New York: Institutional Investor. 

Šoltés, V., Šoltés, M. (2007), “Maximum and Limit Value of the Duration of the Coupon Bond, In: 

Economics and Management, 10 (4): 87–91. 





Method of Banks Valuation 

Horvátová Eva * , University of Economics in Bratislava, Faculty of National Economy, 

Department of Banking and International Finance, Bratislava, Slovakia 

UDC: 336.717 JEL: G21 

ABSTRACT – Since there is not a special common framework for valuation banks and it gives 

possibilities to create establishment, improvement and adaptation of various approaches to measuring 

the value of banks and financial institutions. 

Most approaches banks valuation note the strong dependence of financial institutions value from 

market interest rates (Mishkin, F., Miller, WD, Copeland, T., Koller, T., Damodaran, A., and others). 

Each approache reflects greater or lesser degree of accuracy depending on the method of determining 

resources for owners, the discount factor, approaches to defining the rate of growth and methods of 

measurement. 

KEY WORDS: banks valuation methods, free cash flow equity, discounting factor, cost on equity, 

beta factor 

Introduction 

The issue of banks and financial institutions valuation have been written relatively few 

comprehensive theoretical and methodological work. The valuation is carried out by experts 

and expertise for different purposes and with varying degrees of methodological accuracy of 

the estimate of input factors. A significant shift in valuation theory and practice came when 

R. C. Merton (1973) [1], introduced the risk-neutral valuation model for financial assets. Bank 

valuation under this model can be interpreted as determining the value of a call option on 

the value of bank assets. 1 

Currently, (August 2009), R. C. Merton (2009) in the context of the financial crisis makes 

the promotion of a market valuation of banks and their components. It states that banks and 

entities that oppose the use of market valuation, are trying to hide the fall in prices. Equally 

critically views on issues of aid, saying that the government is trying to solve complex 

problems easily. He also expressed the desire to stimulate trading in securities market in 

order to restore the natural function of the market in setting prices. About using of 

derivatives, the lack of market information for investors blames frozen market. 2 

* Address: Dolnozemská cesta 1, 85235 Bratislava, Slovakia., e-mail: eva.horvatova@euba.sk 

1 

Merton, R. C. An intertemporal Capital Assets Pricing Model. Econometrica. Vol. 41, 1973. 

http://ideas.repec.org/a/ecm/emetrp/v41y1973i5p867-87.html 

2 

Merton, R. C.: Mark it to market. August, 19, 2009. 

http://www.swampreport.com/investments/scholes-and-merton-mark-it-to-market/

Horvátová, E., Method of Banks Valuation, EA (2010, Vol. 43, No, 1-2, 50-60) 51 

A. Damodaran (2002) says, that „the fundamental valuation rules may be applied equally 

to companies such as to financial services institutions“ 3 , should be pointed here. 

Some approaches to the bank valuation note the strong dependence of financial 

institutions value from market interest rates (Mishkin, F., Miller, WD, Copeland, T., Koller, 

T., Damodaran, A., and others). 

Each approache reflects greater or lesser degree of accuracy depending on the method of 

determining resources for owners, the discount factor, approaches to defining the rate of 

growth and methods of measurement. 

T. Copeland highlights that the interest rate risk should focus attention on 4 factors: 1 

interest margin between the market rate and bank rate, as well as their flexibility to market 

developments, 2 dynamics of tidal funds, 3 degree of substitution of banking products and 

services as an alternative to interest-rate changes, 4 need to cover risks arising from maturity 

mismatch of assets and liabilities part of the profit. 

Koch, T. W. (2005), Samuelson, Klein and Monti formulate a conclusion on the positive 

relationship between net income and the relative market power of banks. These theoretical 

ideas support empirical research work such as Damodaran, A., as well as other authors. A 

significant shift in valuation theory and practice came when R. C. Merton (1973) [2] 

introduced the risk-neutral valuation model for financial assets. Bank valuation under this 

model can be interpreted as determining the value of a call option on the value of bank 

assets. 4 

Valuation of banks and financial institutions by the yield method 

Business valuation models are largely based on discounted cash flow approach (DCF model) 

and assume some growth stages, which is typical for different growth rate of cash flow or 

resources for owners. 

Expression of FCFE (Free Cash Flow Equity) in financial institutions 

The annual effect on the owner may be defined differently. This may be as free cash flow 

to shareholders (FCFE - Free Cash Flow Equity) generated as operating profit by reducing 

the costs that are not spending in the current period and the investment needed work and 

investment property for the operation. 

According W.D. Miller, the desire is to move closer to the category income of owners net 

proceeds, which could be as bank potencial of dividends. Sometimes, in this case refers to the 

free cash flow to shareholders (Free Cash Flow Equity). 

Using cash flow as a basis for calculating income of owners as dividend income potential 

for the owners of the bank is inappropriate for two reasons: 

3 

Damodaran, A.: Investment Valuation. 2-nd edition. John Wiley & Sons, 2002, 2002. ISBN 978-0-471- 

75121-2, page 603. 

4 

Merton, R. C. An intertemporal Capital Assets Pricing Model. Econometrica. Vol. 41, 1973. 

http://ideas.repec.org/a/ecm/emetrp/v41y1973i5p867-87.html

52 


• Statement of cash flows in the banking business is not suitable for determining 

sources for owners, such as dividends as source for owners can be paid only from 

real net income after tax and not from the movement of cash (cash flow); 

• Bank and company profits are not equally attainable by shareholders, in the bank 

there is no problem with the availability of cash to shareholders because of the 

nature of the vast majority of assets and liabilities, although other types of 

businesses can generate significant differences between cash flow and profits in 

the sense that the business generates profits, but not sufficient cash flow; 

• The main source of income in banking is the differences between interest income 

and expense, as well as fees for services. 

The valuation of financial institutions can not be made without respect of interest income 

and expense as the most significant component of their income and capital growth, or its 

renewal. The calculation of FCFE in banks and financial institutions can be implemented in 

two basic ways: 

1-st method of expressing FCFE: 

FCFE = net income - growth of capital + other income 

It should be noted that net income is not equal to cash flow. With the growth of financial 

institutions should also increase its capital. Growth FCFE lowers the capital, because it 

means that the bank is inserted into the banking business of profits that would otherwise be 

paid to owners as dividends. Otherwise, if the bankʹs growth has not been accompanied by 

an adequate increase in the capital, it could happen to failure of financial institutions due to 

lack of solvency. 

2-nd method of calculating FCFE: 

FCFE = resources from issue of shares - preference shares + dividends - capital increase (+ 

decrease in capital) 

Changes in bank capital are resulting from the relationship between balance, profit and 

loss statements, cash flow and value of financial institutions. Changes in assets and liabilities 

are reflected in changes in equity. 

Equally polemical recommendation is adding into the value of cash flows the initial cash 

balance. The problem is the fact that they were a combination of yield method valuation and 

substance valuation method. 

Since the yield valuation takes into account the future potential of banks, it leads to the 

discussions on the question of the length of the period under review (planning period). 

For example, W. D. Miller (1995) [1] 5 advised to examine 10 years, others, such as M. 

Tucek 6 recommend 2-3 years. This follows from the specifics of the environment, for 

example, in U.S. valuation concerns small, local banks are not investment activities and 

5 

Miller, W. D.: Commercial Bank Valuation. John Villey and Sons, Inc., 1995, ISBN13 9780471128205, 

page 28. 

6 

Hrdý, M.: Oceňování finančních institucí. Praha: Grada Publishing, 2005, ISBN 80-247-0938-4, page 

35.


planning for 10 years it may be relatively simply. Banks in Slovakia perform mixed 

operations, and planning the future results for longer than 5 years could cause problems. 

Net income as a basis for potential dividend or resource for owners by Koller, T., 

Goedhard, M. and Wessels, D. (2005) [1] can establish two basic ways: 7 

1. On net interest income, or 

2. Model based on interest margins (Spread Model). 

Determination of the discount factor 

A particular problem is the correct determination of the discount factor to be within the 

individual models recommended. It is necessary to respect the logical links between the 

numerators and denominators and formulas used to discount the recommended indicators. 

There are different approaches for determining the interest rate for discounting, such as the 

determination of weighted average cost of capital. This method provides, in particular 

disposable cash flow for businesses, called the principle of Free Cash Flow of Firms (FCFF). 

The bank is not appropriate given the high gearing ratio (leverage). For the purposes of the 

valuation of banks need to set the cost of equity. 

Estimate the required rate of return on equity re 

In terms of banking, there are significant differences in the proportion of own and foreign 

sources of funding compared to other businesses. In the banking sector given the nature of 

the business of banking must accept a higher gearing ratio. 

Cost of capital represents the expected rate of income investors given the risk level of the 

investment. Since any form of business is associated with a higher risk than when depositing 

money in the bank, then the expected return is higher than interest rates in the bank. 

The role of the so-called risk-free rate rf (free of risk) may be selected interest rates on 

government bonds or yield to maturity of these types of bonds. Yield to maturity is 

recommended to use as a discount factor such as for example M. Marik (2007) [1]: ʺas a 

source for safe return to the Czech capital market, we recommend using such proceeds to 

maturity of government bonds with maturities equal to ten or more years by source Patria 

Finance.“ 8 

The cost of capital must be re invariably higher than rf in connection with the tax shield. 

Required rate of return on equity can provide a number of ways to serve its particular 

setting: 

• Gordon growth model, 

• CAPM (Capital Assets Pricing Model) or a model of capital assets 

• The average profitability 

• The cost of foreign funds 

7 

Koller, T., Goedhard, M., Wessels, D.: Valuation, Measuring and Managing the Value of Companies. 

Fourth Edition, Mc Kinsey & Company John Willey & Sons, Inc., 2005, ISBN: 978-0-471-70218-4, pages 

670 - 671. 

8 

Mařík, M.: Metody oceňování podniku. Druhé upravené a rozšířené vydání. Praha: Ecopress, 2007, 

ISBN 978-80-86929-32-3, page 218.

54 


• APT model (Arbitrage Pricing Theory). 

1. Gordon growth model is based on a calculation of the growth rate of dividends: 

r 

where: 

dividends 

t+1 

e 

= 

+ 

price of 

shares 

t 

g 

re = rate of return required by shareholders (return on equity) 

g = growth rate of dividends 

2. CAPM is used frequently, although it also has some shortcomings. This model assumes 

that the risk premium is proportional in relation to systematic risk β. The CAPM can be re 

established as follows: 

r 

e 

= r + β . 

f 

[ E( r ) − r ] 

m 

f 

where: 

Risk premium 

rf = risk-free interest rate 

re = rate of return required by shareholders (return on equity) 

β = systematic risk 

E (rm) = expected return on market portfolio 

3. The derivation of the discount rate based on average profitability. Data on the average 

profitability of the industry are relatively accessible, and therefore in practice often used to 

determine the cost of equity. The disadvantage of this method is the impact on accounting 

practices can distort the indicator ROE. The downside is mainly the lack of data on market 

value of capital of financial institutions, as the book value of capital is not suitable for these 

purposes. 

The basic conditions of DCF models include a requirement that the discount rate used to 

be in session with the risk profile of cash flow (for example: FCFF ↔ WACC or FCFE ↔ re). 9 

For the valuation of banks is appropriate to use a model based on FCFE. FCFE is generally 

recommended to enjoy when financial leverage is stable and this is relatively high. Using the 

FCFE model is preferred and recommended if it can generate a large difference between the 

dividends and FCFE. 

An alternative model is the dividend FCFE model. In practice, it could happen that the 

dividends could be higher than FCFE, the likely addition to the problems in the management 

of financial institutions and causing uncertainty in their valuations. It is recommended and 

preferred by Hrdý, M. (2005) [1] model for the dividend FCFE model. 10 

9 

Kislingerová, E.: Oceňování podniku. 2. přepracované a doplnené vydání. Praha: C. H. Beck, 2001, 

ISBN 80-7179-529-1, page 160. 

10 

Hrdý, M.: Oceňování finančních institucí. Praha: Grada Publishing, 2005, ISBN 80-247-0938-4, page 

23., and Koller, T., Goedhard, M., Wessels, D.: Valuation, Measuring and Managing the Value of 

Companies. Fourth Edition, Mc Kinsey & Company John Willey & Sons, Inc., 2005, ISBN: 978-0-471-


Using the FCFE valuation model, banks are avoiding the use of WACC. 

The average weighted cost of capital - WACC is always lower than the cost of equity – re, 

which corresponds with the result that they are reduced by the so-called tax shield resulting 

from the use of foreign funds and netting interest expenses to the bank. 

Determination of the beta coefficient 

Another problem is the calculation of the beta coefficient. For example M. Hrdý (2005) [2] 

11 

recommends using a simplified assumption that β is equal to one, because it assumes that 

changes in the profitability of financial institutions are equal to changes in market portfolio 

returns. 

Another argument in favor of simplifying the calculation of the beta coefficient is that 

fairly significant change of beta affects the overall change in the risk premium in the 

relatively small scale, and also a rather complex calculation of the coefficient beta. Above 

mentioned (the relatively low impact on the valuation premium) is shown on a graph. 

50 

40 

30 

20 

10 

Cost on equity (required return) by different 

degrees of risk (4 risk degrees) for maximum re 

0 

1 2 3 4 

max. r e is 20% max. re is 30% 

max. r e i is 40 % 

If the valuation is performed in less stable conditions, or if there are other reasons to 

choose a more accurate calculation of β, we use these basic approaches: 

1. Coefficient estimate based on historical data. 

2. By analogy. 

3. An analysis of factors. 

Beta coefficient expresses sensitivity to market risk. Actions that have beta between 0 and 

1.0 tend to move in the same direction as the market, but not to an extent. 

Rapidly growing company has beta over 5 years at level 1.11. The market growth of 1 % 

will increase the companyʹs stock price by 1.11 % or decrease by 2 % of the market reduces 

price of shares by 2.22 %. 12 

70218-4, page 668., and Mařík, M. and all.: Metody oceňování podniku. Druhé upravené a rozšířené 

vydání. Praha: Ekopress, 2007, ISBN 978-80-869929-3, page 206. 

11 

Hrdý , M.: Oceňování finančních institucí. Grada Publishing, Praha 2005, ISBN 80-247-0938-4, page 

10. 

12 

Brealey, R. A., Myers, S. C.: Teorie a praxe firemních financí. Praha: East Publishing, 1992, ISBN 80- 

85605-24-4, page 153.

56 


Beta coefficient may be measured on the basis of historical data and hence the change in 

performance of individual shares in the bank, depending on changes in market portfolio as 

follows: 

β 

n × 

∑R( 

S) 

× R( 

mp) 

− ∑R( 

S) 

× ∑ 

2 

n × ∑R( 

mp) 

− ( ∑R( 

mp)) 

= 

2 

R( 

mp) 

where: 

β - a quantitative measure of the volatility of portfolio 

R (S) - return on shares of a particular bank 

R (mp) - return on market portfolio, 

n - number of years of evolution. 

The disadvantage of this method is that it is not possible to reliably use knowledge about 

the development of beta from past to the future. 

The beta factor derives also by analogy from the following relationship by Marik, M. 

(2007) [2] 13 

⎛ D 

β 

L 

= β 

u 

⋅⎜1+ 

⎟ β 

d 

1 

⎝ E ⎠ 

Where: 

⎞ 

D 

( 1− 

t) ⋅ − ⋅ ( − t) ⋅ E 

ΒU = Beta at zero debt (unlevered beta) 14 

ΒL = beta entity debt (levered beta) 

ΒD = beta for debt = 0 

t = tax rate 

This method of determining the beta is an appropriate indicator in the valuation of banks. 

Βeta coefficients are published for each industry and country. 

As the beta for foreign capital is 0, the resulting relationship is: 

⎛ 

β = β 

u 

⋅⎜1+ 

⎝ 

L 

1 

D 

E 

⎞ 

( − t) ⋅ ⎟ 

⎠ 

This relationship expresses the dependence of beta on the degree of indebtedness of the 

entity. With this option you can use data on individual sectors of beta. Coefficients are 

published for debted and indebted companies. 

The objective determination of β is the worldʹs best practice accepted valuation model 

CAPM. It is recommended that indicators of the environment of the U.S. market have been 

adjusted to current country risk. Capital costs are then expressed by: 

13 

Mařík, M.: Metody oceňování podniku. Druhé upravené a rozšířené vydání. Praha: Ecopress, 2007, 

ISBN 978-80-86929-32-3, page 225. 

14 

Data on the average values of β coefficients for each industry states are published on website of 

Aswath Damodaran (www.damodaran.com , Section Updated Data). The average value of β in 2009 

for European countries indicated 1.04 and the average βU is at 0.80.


re = rf 

+ β ⋅ RPM + RPC 

Where: 

RPM = market risk premium 

RPC = country risk premium is recommended to calculate than 1.5 times the risk of 

failure in the country (0,7.1,5) + 0.6 difference between inflation in the U.S. and for 

example in Slovakia. 

Determination of the cost of equity based on CAPM (on the example of Slovakia) 

Current risk-free return is 3.5 %; 

The risk premium for the capital market in Slovakia 7.21 % 15 

Country risk premium 2.21 % 

Unlevered beta for specialized banking services 0.23 %, 

The ratio of debt and equity 0.95 %. 

β 

r 

= 

L 

β u 

⎛ D ⎞ 

⋅⎜1 + ⎟ 

= 

⎝ E ⎠ 

( 1− 

d ) ⋅ = 0,23⋅ 

( 1+ 

( 1− 

0,19) 

⋅ 0,95) 0, 41 

= r + ⋅ RPM + RPC = 3 ,5 + 0,41⋅ 

7,21+ 

2,21 = 8,67 

e f 

β 

The cost on equity methods based on CAPM model, are assuming the input data set to 

8.67 % in Slovakia. 

Practical problems and procedures of bank valuation 

A key practical problem when evaluating the bank will determine the future anticipated 

net effect on the owner, plans for future net earnings. 

Future development of profit can be detected in two ways: 

• Regression analysis; 

• A financial plan based on data compiled from balance sheet and profit and loss 

account. 

The method of regression analysis is appropriate for the valuation of banksʹ long-term 

stable conditions, and operating in developed economies. Regression analysis is more 

suitable for banks than for companies, because regulatory frameworks for business banking 

ensure continuous development without major fluctuations. 

Nevertheless, the most accurate and most reliable way to estimate deemed dividend 

potential is derived from the financial plan for the bank. The expert must be able to assess 

future development of bank finances and key items of bank profits. The aim should be to 

approximate the planned balance sheet and profit and loss account over the next 5 years. 

Important indicators are known profit generators such as loans and other earning assets, 

recently banks have a large proportion of income from fees for services, which should also be 

included in the calculations. 

15 

http://pages.stern.nyu.edu./adamodar/

58 


The task of valuing the bank by the yield method is ultimately provided by continuing 

value to the bank. The formula for calculating the discounted value of continuing is as 

follows: 

CV 

= 

Where: 

CV 

Div5 

i 

g 

Div 

5 

. ( 1 + g) 

1 

. 

( i − g) ( ) 5 

1 + i 

- continuing value of bank 

- Expected dividend paid in the 5-th year 

- Interest rate used to discount 

- Expected dividend growth rate per year 

With a similar approach is also encountered in determining the value of ongoing 

(Continuing Value) in the work by T. Koller, M. Goedharda and D. Wessels (2005) [2]: 16 

СV 

⎛ 

NI ⋅ ⎜1 

− 

= 

⎝ 

g 

RONE 

( k g) 

e 

− 

⎞ 

⎟ 

⎠ 

Where: 

NI - expected net revenue in 1-st year after the end the projected period 

g - expected dividend growth rate per year 

ke - cost of equity (required return) 

RONE - increasing the return on new capital 

Conclusions – why is bank valuation important 

At present, confidence in the banking and financial sector is simulated by states and their 

guarantees. Experience of banking sector restructuring in SR gives an example of how many 

banks are able to operate with inadequate or even having a negative value of capital. 

If it is well known that a major bank failure is undesirable because it would cause serious 

economic problems, then a function of confidence in the bank does not perform as bank 

capital, as some fiction or a social agreement, which may have different real form. 

The question arises whether the trust bank can reliably operate on this basis. It is 

undisputed and confirmed that the practice in the short term is possible. In the medium and 

long term, it is only a matter of time before such a basis for confidence in a banking 

institution is exhausted and positive incentives will be more costly than alternative problems 

for radical action against the bank. 

Such confidence is not inexhaustible; its boundaries are identical with states and 

capabilities of countries. There is a risk of such an approach, on the other hand, if the banks 

do not use this second chance, the financial crisis could be even greater. 

16 


Fourth Edition, Mc Kinsey & Company John Willey & Sons, Inc., 2005, ISBN: 978-0-471-70218-4, page 

669.


At present, the consequences of the financial crisis occurred requirements (for example, 

Merton R.C.) to value banks by the market valuing approach, which uncovered a genuine 

reality and lead to more real situation on the financial and banking market. Such an 

approach would certainly be very appropriate. 

Valuation of banksʹ issues are important because the focus has to be not on profit growth, 

but on growth of stability and hence the value of the bank. Banks managers also should not 

have rewards based on profit but on the basis of value growth of institution, which they 

manage. 

Therefore, the states and supervisory institutions to carefully analyze the effectiveness of 

its intervention measures to support banking and financial market and take such measures 

that would prevent the repeat similar problems. Access to regulate the banking sector varies 

depending on the distance of negative experiences. This area will be clearly show degree of 

risk in dealing with its negative consequences. Addressing the negative consequences of the 

risks of using public funds is a sign that many economic entities, in principle, are not able to 

cover all the risks that they may occur, and therefore in my view, essential is that such 

entities to regulate the rate of risk-taking potential exist. It is necessary to believe that 

negative experiences will serve as a warning against gambling of people and countries, as in 

the historical experience translated it into a collective sacrifice of wealth necessary to prevent 

fatal consequences of similar threats. 

References 

Adams, M., Markus, R.: A new Approach to the Valuation of Banks. http://www.campusforfinance.com/fileadmin/content/cffrc/documents/2007/Banking_I_Adams.pdf 

Allen, F., Galle, D.: Comparing Financial Systems. Cambridge: MIT Press 2000. ISBN 0-262-01177-8. 

Benninga, S.: Bank Valuation. New York Instirute of Finance Course in Singapore, 

www.wharton.upenn.edu, February 13, 2001. 

Benninga, S. , Sarig, O.: Bank Valuation. February 13, 2001. 

http://senverb.boun.edu.tr/pdf/Bank%20Valuation.pdf 

Brealey, R. A., Myers, S. C.: Teorie a praxe firemních financí. Praha: East Publishing 1992, ISBN 80- 

85605-24-4. 

Calomiris, Ch. W., Doron Nissim: Activity Based Valuation of Bank Holding Companies. Working Paper 

12918. http://www.nber.org/papers/w12918. 

Davis, S. I.: Bank Mergers. Lessons for the Future. London: Macmillan 2000. ISBN 0-333-91260-8. 

Damodaran, A.: Investment Valuation. 2-nd edition. John Wiley & Sons 2002. ISBN 978-0-471-75121-2. 

www.damodaran.com (sekcia Updated Data). 

http://pages.stern.nyu.edu./adamodar/ 

Freixas, X., Rochet, J. CH.: Microeconomics of Banking. Cambridge: MIT Press 1998. ISBN 0-262-06193-7. 

Horvátová, E.: Bankovníctvo. Žilina: GEORG 2009. ISBN 978-80-89401-03-1. 

Hrdý, M.: Oceňování finančních institucí. Praha: GRADA Publishing, 2005. ISBN 80-247-0938-4, 

Kidwll, D. S., Peterson, R. P., Blacwell, D.W.: Financial Institutions, Markets and Money. Forth Worth: 

The Dryden Press 1993. 


Fourth edition. Mc Kinsey & Company John Willey & Sons, ISBN 0471702188, ISBN: 978-0-471- 

70218-4. 

Levy, H., Sarnat, M.: Kapitálové investice a finanční rozhodování. Praha: Grada Publishing 1999. ISBN 80- 

7169-504-1.

60 


Kislingerová, E.: Oceňování podniku. Praha: C. H. Beck, 2001. ISBN 80-7179-529-1. 

Mařík, M.: Metody oceňování podniku. Druhé upravené a rozšířené vydání. Praha: Ecopress 2007, ISBN 

978-80-86929-32-3. 

Merton, R. C.: An intertemporal Capital Assets Pricing Model. Econometrica. Vol. 41, 1973. 

http://ideas.repec.org/a/ecm/emetrp/v41y1973i5p867-87.html 

Merton, R. C.: Mark it to market. August, 19, 2009. http://www.swampreport.com/investments/scholesand-merton-mark-it-to-market/ 

Miller, W.D.: Commercial Bank Valuation. John Wiley and Sons, Inc., USA 1995, ISBN13 9780471128205. 

Mishkin, F.: Economics of Money, Banking and Financial Markets. Reading: Addison-Wesley 2003. ISBN 

0-321-20049-7. 

Rose, P. S., Hudgins, S. C.: Bank Management and Financial Services. Boston: McGraw Hill 2005. ISBN 0- 

07-286163-0. 

Sharpe, W.F., Alexander, G.J.: Investice. Praha: Victoria Publishing 1993. ISBN 80-85605-47-3. 

Sinkey, J. F.: Commercial Bank Financial Management. London: Prentice Hall 1998. ISBN 0-13-521048-8. 




SCIENTIFIC RIEVIEW 

Future Stance of Currencies in the International 

Monetary System 

Kotlebova Jana * , Economic University in Bratislava, Faculty of National Economy, 

Department of Banking and International Finance, Slovak Republic 

UDC: 348.246; 339.743 JEL: F31; G15 

ABSTARCT – The current global crisis is a manifestation of global imbalance. Higher creation of 

savings in emerging economies compared to developed countries; higher investments of developed 

economies in comparison with developing countries; the current account deficit of the balance of 

payments in developed countries as opposed to the current account surplus of the balance of payments 

in emerging economies create new conditions for future stance of currencies in the international 

monetary system. 

The future aspect of the international monetary system is, at present, a major topic of discussion 

for monetary authorities as well as supranational institutions. The intention of this contribution is to 

highlight the main trends in its development 

KEY WORDS: global imbalance, savings, investment, foreign exchange reserves, balance of 

payment, importance of currencies for the international market, international monetary system 

Introduction 

We are in the fourth year of existence of the current global crisis, whereby the claim that 

it is in its final stage, is delivered with great prudence. According to the World Economic 

Outlook of the International Monetary Fund in October 2009 “after contracting by about 1 % 

in 2009, global activity is forecast to expand by about 3 percent in 2010, which is well below 

the rates achieved before the crisis”. 

Global imbalance 

The global economy has been transformed from the so-called bipolar world, where 

countries were explicitly divided into rich and poor, and global economic growth was 

determined by developments in the USA and Europe, into a world that can be described as 

multipolar, in which emerging and developing economies have been assigned a significant 

role from a global perspective. Menbere Tiruneh Workie (2007, 29) 

Since 2004 the global economy has vaulted to the current account surplus of the balance 

of payments thanks to developing countries. Developed economies demonstrate a current 

account deficit of the balance of payments. The graph outlines the IMF forecasts, which 

indicate the time at which the current account of the balance of payments in the aftermath of 

* 

Tel.: 00421 905 225 931, e-mail: jana.kotlebova@euba.sk

62 


the global financial crisis should gradually decrease in the advanced economies, whereas 

further export growth is expected in emerging and developing economies. 

Graph 1. Development of the current account of balance of payments in major country groups 

( % of GDP) 

6 

5 

4 

% of GDP 

3 

2 

1 

0 

-1 

-2 

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 

Emerging and developing economies 

Advanced economies 

Source: author’s own processing, data from www.imf.org 

(2009 and 2010 – forecast of IMF) 

If we compare savings and investment in the major country groups of the world, we can 

notice, that investments in advanced economies are not covered by the creation of savings; 

on the contrary, in the case of emerging economies and developing economies savings 

exceed investments. The basic breakdown of countries into two groups can thus indicate the 

fact that investments in more developed parts of the world are created because of the savings 

of less developed parts of the world. If we look at the global data, we can notice that 

investments and savings stand almost on the same level, which could testify to the 

maintenance of global equilibrium; however, a detailed analysis of these data, according to 

other subgroups, can lead to interesting facts. 

The unambiguous conclusion of the analysis of the relationship between savings and 

investment is that the driving force of the current global economy is the savings in the 

developing world and the newly industrialized Asian economies. This tendency should be 

supported in the future by the fact that in these countries there is a strong population

Kotlebova, J., Future Stance of Currencies in the IMS, EA (2010, Vol. 43, No, 1-2, 61-69) 63 

growth, which creates space for the future growth of consumption and demand, which 

creates the prerequisites for their further economic growth. 

Graph 2. The development of savings and investments in developed and emerging economies 

as % of GDP 

40 

35 

% of GDP 

30 

25 

20 

15 

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 

Advanced Economies Investment 

Advanced Economies Gross National Savings 

Emerging and Developing Economies Investment 

Emerging and Developing Economis Gross National Savings 


(2009 and 2010 – forecast of IMF) 

Foreign Exchange Reserves 

Since 2005, it has been possible to monitor the higher creation of foreign exchange 

reserves in emerging and developing economies rather than in developed economies. The 

largest foreign exchange reserves (data to June 2008) are held by China (1.7 billion USD), 

Japan (0.97 billion U.S. dollars), Russia (0.55 billion USD).

64 


Graph 3. Development of foreign exchange reserves in the world since 1995 to present 

8000000 

7000000 

6000000 

in millions of USD 

5000000 

4000000 

3000000 

2000000 

1000000 

0 

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 

Advanced Economies Emerging and Developing Economies Total Foreign Exchange Holdings 


Foreign exchange reserves are used to cover imports, foreign exchange interventions and 

balancing the movements in the capital and financial accounts of the balance of payments. 

As a result of more frequent financial crises in emerging economies, these incentives have 

been completed in order to protect the economy from the threat of loss of international 

liquidity (mainly due to a sudden outflow of capital). The main source of foreign exchange 

reserves in these countries is the net income from international trade and capital movements. 

Graph 4. Structure of global foreign exchange reserves from 2000 to present 

60 

50 

40 

% 

30 

20 

10 

0 

2000 2001 2002 2003 2004 2005 2006 2007 2008 

USD GBP JPY CHF EUR other 

Source: author’s own processing, data from www.imf.org


After the launch of EMU, there has been a visible increase of the EUR in the foreign 

exchange portfolio and a drop in dollars. However, the U.S. dollar still continues to hold a 

strong position in the currency structure of the foreign exchange portfolio (about 65%). 

Importance of currencies for the international market 

When talking about international currencies, we are interested in the extent to which a 

certain currency is used outside the domestic economy (the place of its issuance). Some 

authors, for example, E. G. Lim, refer to it as a currency that is used ʺoutside the domestic 

economy by non-residents for transactions with residents of the domestic economy or with 

residents of third countriesʺ E. G. Lim (2006). Another approach attributes an international 

attribute to the currency based on its scope of usage as a currency of debt denomination 

issued by non-residents on the capital market. 

The European Central Bank assesses the international role of a particular currency based 

on the extent to which this currency is used as denomination for various financial assets and 

liabilities outside the area of its issuance, as a nominal anchor, reserve and intervention 

currency for central banks in certain third countries and as a parallel currency used by 

private agents in some geographically adjacent economies. At the same time, it assesses its 

importance as a currency (vehicle currency) in some segments of the global foreign exchange 

market. Therefore, it assesses two major aspects: 

a) the importance of the currency for the international bond market, foreign 

exchange market and the international market for goods and services, 

b) the importance of the currency for third countries. 

The largest issuers in the international bond market are the globally operating financial 

institutions and corporations. As foreign currency denomination, they mainly use USD, EUR 

or GBP. The international debt securities in USD are issued by European banks and 

corporations, whereas these securities in EUR are issued by investment banks and 

corporations from the United States, Great Britain and some European countries outside the 

euro area. The importance of the international bond market in total activities of the 

international global capital market has fallen due to the development of further financial 

markets that are open to foreign investors. Therefore, the international bond market is 

becoming a less significant indicator of a currency of international importance. Central banks 

in emerging economies and sovereign wealth funds have become large global investors, and 

have become increasingly active in the issuance of government bonds, corporate bonds and 

shares in third countries. The stock market has gained a considerable market share and 

therefore, it dictates the denomination of its own assets, and the international role of 

currencies. 

For example, Ch. Thimann (2009, 10) in his study argues that: 

a) the international bond market is excessively denominated in USD and EUR, and 

accounts for about 80% of the market, while on the dollar market segment EUR 

emissions account for 60%, on the EUR market the emissions from the USA and 

non-euro area countries account for 70% of emissions,

66 


b) the international bond market is relatively narrowly structured, financial 

institutions constitute 80% of the market, businesses, governments or 

international institutions account for the rest 20%, 

c) the choice of currency has been significantly influenced by entrepreneurial 

motives (control of balance, project financing, taxes) and by short-term cyclical 

factors (exchange rate predictions and interest rate differential). 

The international bond market, from the perspective of the narrow supply of debt 

instruments, does not have such a significant impact on the evaluation of the currency 

position as on the international currency. In a broader definition of supply of debt 

instruments, however, its impact on the role of currency in an international context is more 

significant, according to the IMF data; up to 11.2 trillion USD bonds are held abroad out of 

the total volume of bonds (18.4 trillion U.S. dollars), whereas in the narrow definition, it is 

only 7.8 trillion USD. In comparison, foreign holdings of shares account for 8.8 trillion USD. 

Graph 5. Issuance of Bonds with variable rates of interest by Currency Denominations 

9000000 

8000000 

7000000 

6000000 

bil. USD 

5000000 

4000000 

3000000 

2000000 

1000000 

0 

Dec.2000 

Dec.2001 

Dec.2002 

Dec.2003 

Dec.2004 

Dec.2005 

Dec.2006 

Dec.2007 

Dec.2008 

Sep.2009 

US dollar Euro Yen Pound sterling 

Sw iss franc Canadian dollar Other currencies Floating rate total 

Source: author’s own processing, data from www.bis.org


Graph 6. Issuance of Bonds with fixed rates of interest by Currency Denominations 

18000000 

16000000 

14000000 

12000000 

bil. USD 

10000000 

8000000 

6000000 

4000000 

2000000 

0 

Dec.2000 

Dec.2001 

Dec.2002 

Dec.2003 

Dec.2004 

Dec.2005 

Dec.2006 

Dec.2007 

Dec.2008 

Sep.2009 

US dollar Euro Yen Pound sterling 

Swiss franc Canadian dollar Other currencies Straight fixed rate total 

Source: author’s own processing, data from www.bis.org 

The previous graphs can be used to monitor that the euro is used as a currency 

denomination of bonds to a much greater extent than the USD. This tendency in the world 

started to create the euro in 2002 (commercial papers and bonds with floating interest rates), 

in the case of other debt securities, two years later, in 2004. The biggest difference with the 

preference of the euro as denomination against the USD has been recorded in bonds with 

variable interest rate. 

A few years ago, there were concerns about a tripolar monetary system in which three 

currencies were to play a key role - USD, EUR and the Japanese yen. The current approach to 

the usage of currencies in the bond, foreign exchange and commodity markets in the world, 

however, suggests an entirely different trend. 

Graph 7. Development of the main pair USD/EUR 

1,7 

1,6 

1,5 

1,4 

1,3 

1,2 

1,1 

1 

0,9 

0,8 

I/99 

V/99 

IX/99 

I/00 

V/00 

IX/00 

I/01 

V/01 

IX/01 

I/02 

V/02 

IX/02 

I/03 

V/03 

IX/03 

I/04 

V/04 

IX/04 

I/05 

V/05 

IX/05 

I/06 

V/06 

IX/06 

I/07 

V/07 

IX/07 

I/08 

V/08 

IX/08 

I/09 

V/09 

IX/09 

Source: author’s own processing, data from www.ecb.int

68 


If we were to comment upon the first question, then, for example, M. D. Chinn and J. A. 

Frankel(2008, 4) argue that the USD will lose its position as the main currency due to the fact 

that the EUR is a much more serious rival than the mark or yen used to be in the past, and 

the USA have already had a chronic current account deficit of the balance of payments for 25 

years and 35 years of USD depreciation. It is assumed that this will happen in 2015. 

Conclusion 

All the previously mentioned factors indicate the fact that the future development of the 

international monetary system will not continue in its conventional manner, but it will be 

fully affected by the approach of developed countries to developing world. 

On the question of the relationship between the USD and the euro there have been 

several discussions. Jean-Claude Trichet (President of the ECB) has said that the further 

depreciation of the USD is unacceptable for the euro area since it would mean the artificial 

overvaluation of the euro, whose exchange rate would not reflect the real economic 

development of the euro area, which would cause additional risks to maintain its stability in 

the future. 

Of course, it is necessary to take into account the further progress of economic integration 

in other regions of the world. For example, the countries of the Gulf in 2010 are planning to 

launch a monetary union with a common currency. At present, the composition of a common 

currency basket is being analysed. The risk is that these countries are major oil exporters, and 

they have already joined the trade in this commodity in a currency other than USD, which in 

the future could mean a further depreciation of USD. 

Similar integration schemes can also be observed in Africa and Asia, but their 

implementation is a matter of the distant future. 

As for the Chinese yuan, China is among the economies with the highest foreign 

exchange reserves, increasing exports and high savings creation. Moreover, in the past, they 

purchased large amounts of bonds denominated in USD, much of which is approaching 

maturity. 

Moreover, the recovery of the U.S. economy is not realised in such a pace as it was 

planned by an optimistic scenario. 

The G20 requested, for example, the European Commission to accelerate a further 

expansion of the euro area countries, which would protect their economies against the 

excessive volatility of exchange rates due to the financial crisis. The answer by the EC, 

however, to this proposal was unequivocal; the euro area would not abandon its 

enlargement strategy based on the fulfilment of the Maastricht criteria, since it considers 

price and financial stability as its main priority. 

Commenting upon the future outlook of the international monetary system there have 

been several discussions. Perhaps, the proposal of France and Great Britain on the creation of 

the Bretton Woods II system, which would again mean a return to the gold standard, 

whereas the main currency should be the IMFʹs special drawing rights (SDRs). Although this 

proposal is more or less criticized. Major opponents argue that the IMF membership (185 

countries) is very different today than it was at its birth, since emerging and developing 

countries are more represented than developed ones, while those given the growing debts


can be a threat to the restoration of international stability. Moreover, the Triffin paradox, 

which is well known for the BWS I failure, should be remembered. The increase in current 

account deficits of the balance of payments associated with the growth of public debt does 

not guarantee the basis for the international monetary system, which must meet the stability 

and other features such as liquidity and symmetry in international monetary relations. 

In regard to foreign trade in goods and services, the dominant currency denomination of 

transactions is still the American dollar, but here we can see a downward trend. Changes in 

the exchange rate alternate the value of mutual obligations and claims of the parties entering 

into business. 

The future international monetary system has to meet three basic functions - liquidity, 

symmetry and stability in the international monetary relations, which requires a unique 

management style. It is necessary to revisit the basic principles of the functioning of market 

mechanism in conditions of a globalizing economy, since the latest trends such as 

liberalization, both economic and financial integration point to the fact that the market is not 

always able to regulate shocks, to which the global economy is exposed. 

References 

Aizenman, J., Chin, M. D. and Ito, H. 2008. “Assessing the Emerging Global Financial Architecture: 

Measuring the Trilemma’s Configurations over Time.” NBER Working Paper 14533, Cambridge 

December 2008 

Chinn, M. D. and Frankel, J. A. “The Euro May over the Next 15 Years Surpass the Dollar as Leading 

International Currency.” NBER Working Paper 13909 . Cambridge April 2008, p. 4 

Kotlebová, J. and Chovancová, B. “Medzinárodné finančné centrá (zmeny v globálnej finančnej 

architektúre).“ Bratislava: IURA Edition 2010 

Lim, E. G. “The Euro’s Challenge to the Dollar: Different Views from Economists and Evidence form 

COFER (Currency Composition of Foreign Exchange Reserves) and other Data.” IMF Working 

Paper No 06/153, Washington: IMF, June 2006 

Obstfeld, M., Shambaugh, J. C. and Taylor, A. M. “Financial stability, the Trilemma, and International 

Reserves.” NBER Working Paper 14217. August 2008 

Thimann, Ch. “Global Roles of Currencies.” ECB Working Paper No 1031, Frankfurt: ECB, March 

2009, p. 10 

Woodford, M. “Globalization and Monetary Control.” NBER Working Paper 13329, Cambridge 

Workie, M. T. “Dynamika svetovej ekonomiky v roku 2006 a perspektívy na roky 2007 a 2008: 

globálny pohľad.“ In: Vývoj a perspektívy svetovej ekonomiky – prínos informačných technológií a hrozby 

klimatických zmien. Workie, M. T. Bratislava: EÚ SAV 2007, ISBN 978-80-7144-159-5, p. 29 





Differences Between Harmonized Indices of Consumer Prices 

and Consumer Price Indices in Selected Countries 

Milecová Zuzana * , Technical University of Košice, Faculty of Economics, Slovakia 

UDC: 338.51 JEL: C12, E31, E58 

ABSTRACT – The aim of the paper is to analyse the differences between the harmonized indices of 

consumer prices and the national consumer price indices on the theoretical as well as on the practical 

levels. We are dealing with defining the differences between the indices not only in the euro area and 

in V4-countries, but also in Serbia. The main differences are geographic and population coverage and 

owner-occupied housing. For statistical testing we have used a paired two sample t-test, which allows 

us to test the null hypothesis that the difference between the indices has a mean value of zero. Out of 

all 21 realised tests we reject null-hypothesis in 14 cases. 

KEY WORDS: harmonized index of consumer prices, consumer price index 

Introduction 

The Consumer Price Indices (CPIs) constitute one of the key macroeconomic indicators, 

play an important role in monetary policy and economic analysis, are typically referred to in 

wage negotiations and often used for indexing prices in contracts. However, the underlying 

concepts and methods differ across countries. That is the reason why the Harmonized 

Indices of Consumer Prices (HICPs) were constructed, they facilitate the carrying out of 

international comparisons. In addition, the HICP serves as one of the convergence criteria to 

assess whether a member state is ready to join the euro area. By means of HICP the 

European Central Bank (ECB) defines price stability as a year-on-year increase in the HICP 

for the euro area of below but close to 2% over the medium term. The HICP has found an 

important place in the economy and has replaced the CPIs in several areas. 

On the other hand, the measurement of inflation in two different ways is after all 

confusing for consumers. That is one of the reasons why the significant differences between 

indices were not desirable. An example is the price progress in the Slovak Republic in 

August 2008. Inflation measurement by the CPI rises from 2.2 to 2.4 per cent and the HICP 

showed the decrease from 1.1 to 0.7 per cent year on year. We can not clearly say which 

index is correct. Simplest would be to have only one price index, but both have their 

justification in the economy. That is the reason why it is important to discuss the differences 

between the HICPs and CPIs. 

In each country the differences between these two indices were analysed. According to 

the results we can say that the most important differences are consumption expenditure 

coverage and treatment of owner-occupied housing (OOH). 

* 

E-mail: Zuzana.Milecova@tuke.sk

Milecová, Z., Differences Between Harmonized Indices, EA (2010, Vol. 43, No, 1-2, 70-82) 71 

This paper deals with the differences between the HICPs and CPIs on both theoretical 

and practical levels. The aim is to analyse the differences between the used indices in the 

euro area and in V4-countries and also in Serbia. For statistical testing a paired two sample t- 

test was used. We tested the null hypothesis that the difference between the indices has a 

mean value of zero. 

Differences between indices in euro area 

Both HICPs and CPIs measure the changes in the prices over time of buying goods and 

services. The used calculation method is the same, Laspeyres chain index. The HICPs and 

CPIs are based on the same data sources, but they measure inflation with different concepts 

or methods. [9] 

In each member state analyses were realised to identify the differences between the 

national indices and the HICPs. For example in Netherlands the indices were compared by 

Leendert (2001), in Belgium by Druant (2001). The differences between the indices in Austria 

were analysed by Fluch and Rumler (2005). Ray Barrell, Simon Kirby and Rebecca Riley 

analysed the differences in UK and the results were published in the National Institute 

Economic Review in 2003. In the Slovak Republic Kosseyova and Doliak (2005) published the 

analysis of the differences. Ahnert and Branchi (2005) analysed the main differences in all 

European Union countries. Some information about the differences is available on the websides 

of individual statistical offices. 

With respect to these studies, the most important difference is the geographic and 

population coverage. The CPIs applying the residence concept reflect price changes in all 

goods and services purchased by consumers living in the country concerned, including their 

purchases abroad. By contrast, the domestic concept covers all consumption expenditure in 

the country concerned, regardless of who (residents or non-residents) purchased the goods 

and services. The HICPs apply the domestic concept. [7], [9] Decision about including the 

domestic concept is not random. ECB needs an index to monitor price changes in the 

territory of an individual member state, not in individual households. [8] On the other hand 

the choice of concept may have important impact on the differences between the indices in 

small countries like Luxemburg. We could find the differences between the indices in 

coverage of institutional household’s spending too. Most national indices follow only 

spending of private households. As an example we can mention Estonia, Latvia, Slovenia, 

Sweden, Belgium, Luxemburg and Portugal. [1] 

The differences are also in the number and coverage of items in goods and services 

basket, especially in subsidized areas, such as in health, social protection, education and 

insurance services. [8], [9] For example in France are healthy services excluded from the CPI. 

The Netherlands’s national price index follows some costs paid within healthy care and 

includes membership fees in sport and social clubs. The national index in Sweden includes 

some items of social protection. Games of chance are excluded from the CPI index for 

example in Italy and in Germany. The national index in Germany includes lottery tax and 

motor vehicle tax. [1] 

But the most important factor affecting the international comparability between the CPIs 

is the treatment of OOH. Sixteen of twenty seven European Union countries exclude OOH

72 


by calculating the CPIs. [7] OOH is included in the CPI for example in Denmark, Sweden, 

Germany, Ireland, Netherlands, Austria and Finland, but this countries use different 

approaches to cover OOH. In the HICP is OOH still excluded, because it has not yet been 

decided how owner-occupied housing should be covered. [1] 

The differences are formed by rounding the indices on individual aggregation levels too. 

[9] Some national statistical institutes use different aggregation formulas in their national 

CPI and HICP for aggregation at the lowest levels of the index. [7] The consumption basket 

and the expenditure shares of the items covered in the national CPIs and the HICPs may be 

updated at different intervals. [7] France, Italy, Luxemburg, Portugal, Estonia, Latvia, 

Lithuania, Slovenia, Sweden and UK update weights in consumer basket for calculating the 

national CPIs annually. The other member states review basket weights mostly every five 

years. Updates interval in Greece is as late as six years. [1] Different update interval leads to 

the fact that there are many new goods and services which are in basket of the HICP, but the 

CPI does not cover them yet. For example organic food, air tickets, mobile phones and 

computers, were covered in the HICP sooner than in the CPI in Belgium. [6] The methods 

used to estimate prices for goods when their quality is changing over time are differ across 

countries. The differences are in coverage of price reductions during winter and summer 

sales periods. There may be also differences between the national classifications used for the 

CPI and the harmonized classification of the HICP. [8] 

The progress of the HICPs and the CPIs is shown in Picture 1 in the annex. 

Table 1 Differences Between Indices in Euro Area 

Belgium 

Germany 

Ireland 

Greece 

Spain 

France 

Italy 

Luxembourg 

Malta 

Netherlands 

Austria 

mean variance p-value 

HICP 1.97 1.53 

CPI 1.97 1.52 

1.000000 

HICP 1.49 0.70 

CPI 1.46 0.57 

0.168871 

HICP 2.91 2.80 

CPI 3.10 6.35 

0.069507 

HICP 3.26 0.95 

CPI 3.25 0.94 

0.844333 

HICP 2.84 1.51 

CPI 2.89 1.52 

0.041505 

HICP 1.68 0.83 

CPI 1.55 0.70 

7.38E-23 

HICP 2.26 0.47 

CPI 2.21 0.46 

0.022933 

HICP 2.48 2.19 

CPI 2.09 1.08 

1.83E-11 

HICP 2.64 1.56 

CPI 2.44 1.67 

0.003881 

HICP 2.24 1.40 

CPI 2.14 0.83 

0.00124 

HICP 1.70 0.77 

CPI 1.80 0.85 

9.75E-06


Portugal 

Slovenia 

Slovakia 

Cyprus 

Finland 

HICP 2.58 1.69 

CPI 2.64 1.55 

HICP 5.34 7.20 

CPI 5.31 7.15 

HICP 5.90 13.76 

CPI 6.11 12.51 

HICP 2.51 2.42 

CPI 2.65 2.01 

HICP 1.75 1.12 

CPI 1.72 1.62 

Sources: Eurostat, national data, own calculations 

0.001239 

0.008323 

9.46E-10 

0.000706 

0.513191 

For statistical testing of the differences between the indices we used a paired two sample 

t-test. We have assumed normal distribution, which was verified by visual methods. We 

tested the null hypothesis that the difference between the indices has a mean value of zero on 

significance level 5%. If the p-value is less than 0.05, we reject the null hypothesis and if the 

p-value is more than 0.05, we cannot reject the null hypothesis. The results of this analysis 

are in Table 1. 

We tested data from January 1998 to October 2009 for all sixteen countries, which 

gradually accessed the euro area (142 observations). In just five cases we could not reject the 

null hypothesis (Belgium, Germany, Ireland, Greece and Finland). According to this analysis, 

we could not clearly say that there are no significant differences between the national CPIs 

and the HICPs in the euro area. 

Ahnert and Branchi (2005) analysed the differences between the HICPs and the 

individual CPIs. The aim of their research was to prove that the differences are not 

significant and there is a decreasing trend. To confirm this hypothesis, authors draw up an 

index as simple weighted average of the CPIs of the euro area member states. The country weights are 

equal to the countries share of Household Final Monetary Consumption Expenditure 

(HFMCE) in total. This index was compared with the official Monetary Union Index of 

Consumer Prices (MUICP), which is configured by Eurostat of the HICPs of the member states 

participating in the EMU. [1] This analysis inspired us to repeat calculations of current 

information and review present situation. 

Von der Lippe (2001) states the compiation method of the MUICP index as follows [17]: 

k 

k 

= ⎛ ⎞ ⎛ ⎞ ⎛ ⎞ 

⎜ ⎟ ⋅⎜ 

⎟ ⋅ ⋅⎜ 

∑ 

k 

M 

0 t ∑cm1H 

m1 

∑cm2H 

m2 

... cmt 

H 

mt 

⎟ . (1), 

⎝ m= 

1 ⎠ ⎝ m= 

1 ⎠ ⎝ m= 

1 ⎠ 

where M stands for the MUICP, H for the individual HICPs, cm represents the country 

weights, k the individual member states (m = 1, ..., k) and t is for the time. Hmt is then the link 

(from t-1 to t) for country m. Formula (1) represents time series of the MUICP, which could 

by written as follows: 

M 

0 t 

= M 

1 

⋅ M 

2 

⋅... 

⋅ M t 

. (2), 

Greece accessed the euro area in the year 2001 and the MUICP index has been extended, 

as shown in Formula (3):

74 


k 

⎛ * 

⎞ 

M 

0, 

t+ 1 

= M 

0t 

⋅⎜∑cm, 

t+ 

1H 

m, 

t+ 

1 

+ ck 

+ 1, t+ 

1H 

k + 1, t+ 

1 

⎟ . (3), 

⎝ m= 

1 

⎠ 

M 

0 , t+ 1 

= M 

1 

⋅ M 

2 

⋅... ⋅ M 

t+ 

1 

. (4), 

where t+1 states for the year 2001. Star marks out the new country weights system after 

access of a new member state. The MUICP has been extended progressively with access of 

individual member states to the euro area. The index includes sixteen countries till today. 

Necessary data are published by individual national statistical offices, OECD and 

Eurostat. We found the differences of up to 1.3 percentage points between data published by 

OECD and individual statistical offices. The same data are published only for Germany, 

France and Italy. For our model we used data published by statistical offices of member 

states, because they are revised. The country weights used in individual years are published 

on the web-side of Eurostat. 

Figure 2. MUICP versus Aggregated CPIs 


The result of calculations is shown in Figure 2. We can confirm that the differences 

between the MUICP and the index composed from the CPIs have been diminishing over 

time. On the other hand, we tried to use the statistical test, to identify if the difference 

between the indices is significant or not. 

Table 2. Differences between MUICP and Aggregated CPIs 

Euro Area 


MUICP 1.96 0.67 

0.000184 

Aggregated CPIs 1.92 0.63 

Sources: [1], Eurostat, national data, own calculations


For statistical testing we used a paired sample t-test as in the previous case. We analysed 

data from January 1998 to October 2009. Considering the fact that the p-value of analysed 

data is less than 0.05, we decided to reject null-hypothesis that the difference between the 

indices has a mean value of zero. 

Differences between Indices in V4-Countries 

The differences between the HICPs and the national CPIs in V4-countries are collected by 

Eurostat and the statistical offices of the individual countries. 

The Hungarian national CPI includes approximately 900 items, which are observed in 35- 

150 outlets depending on their character. Altogether more than seventy-five thousand prices 

are collected monthly. [11] The main differences between the indices in Hungary concern the 

coverage of owner-occupied housing and games of chance which are excluded from the 

HICP and the expenditure of foreign visitors which are excluded from the national CPI. The 

national CPI does not monitor development of expenditure of institutional households. The 

weights are updated in Hungary every year, but weights for the HICP are updated every 5 

years, only if required, review is made annually. [10], [11] 

The number of price representatives in consumer basket for the CPI calculation in the 

Czech Republic (CR) is 729. Consumer prices are surveyed in 35 selected districts in the CR 

and in the Capital of Prague. Consumer basket represents approximately 55,000 prices to be 

surveyed monthly. [4], [13] Regarding the differences between the HICP and the national 

CPI in the Czech Republic, consumption expenditure of non-residents in the economic 

territory of the country is included in the HICP, but excluded from the national CPI. 

Institutional households are excluded from the CPI, unlike from the HICP. Expenditure of 

investments in the owner-occupied houses (major repairs) is included in the national CPI, 

but excluded from the HICP. The purchase of the house itself is excluded from both indices. 

[10] 

In Poland there were about 1,800 representative consumer goods and services chosen for 

completing the CPI in 2009. On average, there are about 292 thousand prices collected each 

month in 209 price survey regions. [3] Regarding the differences between the HICP and the 

national consumer price index in Poland, institutional households and consumption 

expenditure of non-residents in the economic territory of the country are included in the 

HICP, but excluded from the national CPI. Games of chance are included in the national CPI, 

but excluded from the HICP. Another contributory factor to the differences between the 

HICP and the national consumer price index concerns the use of different weights. The CPI 

is calculated with the use of weights from the Household Budget Survey for the previous 

year, while the HICP utilizes weights from the National Accounts. Owner-occupied housing 

is excluded from the HICP and from the CPI, too. Weights for the CPI are reviewed annually. 

[10] 

The Slovak CPI covers approximately 90 % of all households and the calculation is based 

on consumer basket with 709 representative items. Prices of goods and services are collected 

in about 13,400 outlets and business premises. Number of price quotations is about 90,000. 

[16] The main difference between the HICP and the national CPI in the Slovak Republic 

concerns the coverage of owner-occupied housing, in particular imputed rents and

76 


expenditure on major maintenance and repair which are excluded from the HICP. The 

weights for the CPI are reviewed annually. [10] 

The progress of the HICPs and the national CPIs in V4-countries is shown in Figure 3. 

Figure 3. Progress of CPIs and HICPs in V4 countries 

20,0 

18,0 

16,0 

14,0 

12,0 

10,0 

8,0 

6,0 

4,0 

2,0 

0,0 

1998M01 

1998M12 

16,0 

14,0 

12,0 

10,0 

8,0 

6,0 

4,0 

2,0 

0,0 

1998M01 

1998M12 

Hungary 

1999M11 

2000M10 

2001M09 

2002M08 

2003M07 

Poland 

1999M11 

2000M10 

2001M09 

2002M08 

2003M07 

2004M06 

2005M05 

CPI 

HICP 

2004M06 

2005M05 

2006M04 

2007M03 

2008M02 

2009M01 

CPI 

HICP 

2006M04 

2007M03 

2008M02 

2009M01 

16,0 

14,0 

12,0 

10,0 

8,0 

6,0 

4,0 

2,0 

0,0 

-2,0 

1998M01 

1998M12 

18,0 

16,0 

14,0 

12,0 

10,0 

8,0 

6,0 

4,0 

2,0 

0,0 

-2,0 

1998M01 

1998M12 

Czech Republic 

1999M11 

2000M10 

2001M09 

2002M08 

2003M07 

Sources: Eurostat and individual statistical offices 

Slovakia 

CPI 

HICP 

2004M06 

2005M05 

2006M04 

2007M03 

2008M02 

2009M01 

CPI 

HICP 

1999M11 

2000M10 

2001M09 

2002M08 

2003M07 

2004M06 

2005M05 

2006M04 

2007M03 

2008M02 

2009M01 

The introduction of the HICP is an advantage in terms of convergence criteria and 

monetary policy, especially in the Slovak Republic. The inflation measured by method of the 

HICP is less than inflation measured by method of the CPI. The reason for this progress is 

that the CPI includes the OOH, which significantly increased in last months. The OOH was 

recently monitored only as monthly payments for repairs and maintenance of owner 

occupied apartments calculated per an apartment’s square meter floor (regular payments to 

so-called repairs fund). The government decided to support insulating homes by interest-free 

loans within anti-crisis measures. Residents began to use them massively. This has led to the 

increase of payments to repair fund. Significant increase of the CPI and its deviation in the 

HICP is not due to inflation, but due to numerous projects of insulating homes. This progress 

forced statistical office to change the method to calculate the OOH. The repair fund is only 

60% of the OOH today, the other 40% are other items related to housing. Data of the CPI 

were revised retroactively from January 2009. [12] 

For statistical testing we used also a paired two sample t-test, as in the previous cases.


Table 3. Differences Between Indices in V4-Countries 


Hungary 

HICP 7.16 11.13 

CPI 7.17 10.89 

0.844968 

Poland 

HICP 4.59 12.49 

CPI 4.54 12.74 

0.030217 

Czech Republic 

HICP 3.16 7.97 

CPI 3.44 8.61 

8.38E-21 


We tested data from January 1998 to October 2009 for V4-countries (the analysis of 

Slovakia is in Table 1). In just one case we could not reject the null hypothesis (Hungary). In 

the other three cases we reject the null hypothesis, that the difference between the indices has 

a mean value of zero. According to this analysis, we could not clearly say that there are no 

significant differences between the national CPIs and the HICPs in V4-countries. 

Consumer price indices in the Republic of Serbia 

In the Republic of Serbia two retail price indices were used on national level until January 

2003. The first, the Retail Price Index (RPI) is used as national inflation measure and deflator 

of output and assets. Retail prices are the prices that retail outlets, individual agricultural 

producers and service providers apply in selling their products and services to end users, 

including the turnover tax. The second, the Consumer Price Index, is a type of cost of living 

index and is used for wages, pensions and other social benefits revaluation. The weights for 

the RPI are based on structure of retail turnover of goods and services. The weights for the 

CPI were calculated from structure of household consumption. [5] The national CPI in Serbia 

has different classification from COICOP and follows seven sub-categories of goods and 

services. Food; Tobacco and beverages; Clothes and footwear; Housing and household 

operations; Hygiene and health care; Education, culture and entertainment; Vehicles and 

services. [7] Serbian national statistical office started to calculate the CPI by COICOP in 

January 2007. [5] This index presents a special retail prices index that is being calculated 

according to the methodology that is harmonized with recommendations for retail prices 

index calculation in the European Union. CPI-COICOP is comparable with the HICP of the 

European Union. [15] 

Statistical office of the Republic of Serbia has published monthly series of indices on the 

web-side from January 2000 till now. For better demonstrations of the differences between 

the mentioned indices, we decided to construct Figure 4 from shorter time series (from 

January 2003 to October 2009).

78 


Figure 4. Progresses of CPI, CPI-COICOP and RPI in the Republic of Serbia (y-o-y) 

20 

18 

16 

14 

12 

10 

8 

6 

4 

2 

0 

0103 

0603 

1103 

0404 

0904 

0205 

CPI-COICOP 

CPI 

RPI 

0705 

1205 

0506 

1006 

0307 

0807 

0108 

0608 

1108 

0409 

0909 

Sources: Statistical office of the Republic of Serbia 

The main difference between the CPI-COICOP and the Index of Retail Prices is coverage, 

because the list of products and services also includes rent, financial services, educational 

services as well as catering trade services. The indices use different weight systems and 

classification by calculating. Also the formula for the index calculation at the lowest level of 

aggregating is different for the CPI-COICOP and for the RPI too. [15] 

Table 4. Differences Between RPI and CPI-COICOP 

The Republic of Serbia 


RPI 8.89 5.19 

0.894883 

CPI-COICOP 8.93 11.97 

Sources: Statistical office of the Republic of Serbia, own calculations 

For statistical testing we have used a paired sample t-test as in the previous cases. We 

tested data from January 2007, when the CPI-COICOP was introduced in to the practice to 

the present (October 2009). Considering that the p-value of analysed data is more than 0.05, 

we cannot reject null-hypothesis that the difference between the indices has a mean value of 

zero. We could test only the 35 observations this time. 

The RPI was the official measure of inflation in Serbia for a long time, but from the start 

of 2009 the CPI became the main inflation indicator, which is targeted by the National Bank 

of Serbia. Their aim is to have measurements for inflation comparable with EU. [14] 

Time series of the HICP for Serbia are not available so far. 

Conclusion 

The harmonized index of consumer prices replaced the national consumer price index in 

several areas. The harmonized index is used as one of the convergence criteria, which


assesses the readiness of a member state to join the euro area. European central bank defines 

price stability through the harmonized index of consumer prices. But in economy there are 

differences between the indices. The main differences are geographic and population 

coverage and owner-occupied housing. 

For statistical testing we used a paired sample t-test, which allows testing if the difference 

between the indices has a mean value of zero. We tested data from January 1998 to October 

2009 from all euro area member states and V4-countries. From 19 realised tests in the 

countries of the European Union, we cannot reject the null-hypothesis in only six cases 

(Belgium, Germany, Greece, Ireland, Finland and Hungary). In the other cases we had nullhypothesis 

rejected on a significance level of 5 per cent. Considering the realised analysis we 

could not clearly say that the differences between the indices are not significant. 

In the next step we have drawn up an aggregated CPI index. This analysis confirmed that 

the differences between the indices have been diminishing over time. On the other hand, the 

statistical test did not confirm the null-hypothesis. 

In the Republic of Serbia three retail price indices are followed; the Retail Price Index, the 

Consumer Price Index by national structure and the Consumer Price Index by COICOP. 

While the National Bank of Serbia used the Retail price index as the main indicator until 

December 2008, from the start of 2009 it is targeting the CPI-COICOP. Considering the 

statistical analysis we cannot reject the null-hypothesis that the difference between the 

indices has a mean value of zero. 

References 

[1] AHNERT, H., BRANCHI, M. The HICP as an anchor for European consumer price statistics 

[online]. 2005 [cit. 2009-12-21] available on the Internet: 

. 

[2] ASTIN, J. The European Union Harmonized indices of consumer prices (HICP) [online]. 1999 

[cit. 2010-01-16] available on the Internet: 

. 

[3] Central statistical office of Poland Consumer Price Index [online] 2009 [cit. 2010-01-15] 

available on the Internet: 

. 

[4] Czech Statistical office Consumer Price Indices - User’s methodological manual [online]. 2010 

[cit. 2010-01-06] available on the Internet: . 

[5] JANKOVIC, M. Price collection in unstable market conditions [online]. 2006 [cit. 2010-01-17] 

available on the Internet: 

. 

[6] DRUANT, M. Belgian HICP: A Major Step Forward in the accurate measurement of inflation 

[online]. 2002 [cit. 2010-01-16] available on the Internet: . 

ISSN 1725-1338. 

[7] ECB Understanding price developments and consumer price indices in South-Eastern Europe 

[online]. 2007 [cit. 2010-01-16] available on the Internet: 

. ISSN 1725-6534.

80 


[8] Eurostat HICP-CPI Differences [online]. [cit. 2009-12-21] available on the Internet: 

. 

[9] Eurostat Harmonized indices of consumer prices (HICPs): A short Guide for Users [online]. 

2004 [cit. 2009-12-21] available on the Internet: 

. 

[10] Eurostat Information Note on the Harmonized Indices of Consumer Prices, Compliance 

Monitoring [online]. 2008, 2009 [cit. 2010-01-12] available on the Internet: 

Anex 1 

Picture 1. Progress of Harmonized Indices of Consumer Prices and National Consumer Price Indices in Euro Zone Member States 

Belgium 

-4 

-2 

0 

2 

4 

6 

8 

1998M01 

1998M10 

1999M07 

2000M04 

2001M01 

2001M10 

2002M07 

2003M04 

2004M01 

2004M10 

2005M07 

2006M04 

2007M01 

2007M10 

2008M07 

2009M04 

CPI 

HICP 

Germany 

-1,0 

0,0 

1,0 

2,0 

3,0 

4,0 

1998M01 

1998M12 

1999M11 

2000M10 

2001M09 

2002M08 

2003M07 

2004M06 

2005M05 

2006M04 

2007M03 

2008M02 

2009M01 

CPI 

HICP 

Ireland 

-8,0 

-6,0 

-4,0 

-2,0 

0,0 

2,0 

4,0 

6,0 

8,0 

1998M01 

1998M12 

1999M11 

2000M10 

2001M09 

2002M08 

2003M07 

2004M06 

2005M05 

2006M04 

2007M03 

2008M02 

2009M01 

CPI 

HICP 

Greece 

0,0 

1,0 

2,0 

3,0 

4,0 

5,0 

6,0 

1998M01 

1998M12 

1999M11 

2000M10 

2001M09 

2002M08 

2003M07 

2004M06 

2005M05 

2006M04 

2007M03 

2008M02 

2009M01 

CPI 

HICP 

Spain 

-2,0 

-1,0 

0,0 

1,0 

2,0 

3,0 

4,0 

5,0 

6,0 

1998M01 

1998M12 

1999M11 

2000M10 

2001M09 

2002M08 

2003M07 

2004M06 

2005M05 

2006M04 

2007M03 

2008M02 

2009M01 

CPI 

HICP 

France 

-2,0 

-1,0 

0,0 

1,0 

2,0 

3,0 

4,0 

5,0 

1998M01 

1998M12 

1999M11 

2000M10 

2001M09 

2002M08 

2003M07 

2004M06 

2005M05 

2006M04 

2007M03 

2008M02 

2009M01 

CPI 

HICP 

Italy 

-1,0 

0,0 

1,0 

2,0 

3,0 

4,0 

5,0 

1998M01 

1998M12 

1999M11 

2000M10 

2001M09 

2002M08 

2003M07 

2004M06 

2005M05 

2006M04 

2007M03 

2008M02 

2009M01 

CPI 

HICP 

Cyprus 

-2,0 

-1,0 

0,0 

1,0 

2,0 

3,0 

4,0 

5,0 

6,0 

7,0 

1998M01 

1998M12 

1999M11 

2000M10 

2001M09 

2002M08 

2003M07 

2004M06 

2005M05 

2006M04 

2007M03 

2008M02 

2009M01 

CPI 

HICP 

Luxemburg 

-2,0 

-1,0 

0,0 

1,0 

2,0 

3,0 

4,0 

5,0 

6,0 

7,0 

1998M01 

1998M12 

1999M11 

2000M10 

2001M09 

2002M08 

2003M07 

2004M06 

2005M05 

2006M04 

2007M03 

2008M02 

2009M01 

CPI 

HICP 

Malta 

-2,0 

-1,0 

0,0 

1,0 

2,0 

3,0 

4,0 

5,0 

6,0 

7,0 

1998M01 

1998M12 

1999M11 

2000M10 

2001M09 

2002M08 

2003M07 

2004M06 

2005M05 

2006M04 

2007M03 

2008M02 

2009M01 

CPI 

HICP 

Netherlands 

-1,0 

0,0 

1,0 

2,0 

3,0 

4,0 

5,0 

6,0 

1998M01 

1998M12 

1999M11 

2000M10 

2001M09 

2002M08 

2003M07 

2004M06 

2005M05 

2006M04 

2007M03 

2008M02 

2009M01 

CPI 

HICP 

Austria 

-1,0 

0,0 

1,0 

2,0 

3,0 

4,0 

5,0 

1998M01 

1998M12 

1999M11 

2000M10 

2001M09 

2002M08 

2003M07 

2004M06 

2005M05 

2006M04 

2007M03 

2008M02 

2009M01 

CPI 

HICP

Portugal 

-3,0 

-2,0 

-1,0 

0,0 

1,0 

2,0 

3,0 

4,0 

5,0 

6,0 

1998M01 

1998M12 

1999M11 

2000M10 

2001M09 

2002M08 

2003M07 

2004M06 

2005M05 

2006M04 

2007M03 

2008M02 

2009M01 

CPI 

HICP 

Slovenia 

-2,0 

0,0 

2,0 

4,0 

6,0 

8,0 

10,0 

12,0 

1998M01 

1998M12 

1999M11 

2000M10 

2001M09 

2002M08 

2003M07 

2004M06 

2005M05 

2006M04 

2007M03 

2008M02 

2009M01 

CPI 

HICP 

Slovakia 

-2,0 

0,0 

2,0 

4,0 

6,0 

8,0 

10,0 

12,0 

14,0 

16,0 

18,0 

1998M01 

1998M12 

1999M11 

2000M10 

2001M09 

2002M08 

2003M07 

2004M06 

2005M05 

2006M04 

2007M03 

2008M02 

2009M01 

CPI 

HICP 

Finland 

-2,0 

-1,0 

0,0 

1,0 

2,0 

3,0 

4,0 

5,0 

6,0 

1998M01 

1998M12 

1999M11 

2000M10 

2001M09 

2002M08 

2003M07 

2004M06 

2005M05 

2006M04 

2007M03 

2008M02 

2009M01 

CPI 

HICP 

Source: Eurostat and individual statistical offices


Do Minimum Wage Changes Influence Employment? 

Vokorokosová Renatá * , Technical University of Košice, Faculty of Economics, 

Department for Banking and Investment, Slovakia 

UDC: 331.526 JEL: J31; J24 

ABSTRACT – Greater number of foreign working studies does confirm the theoretical assumption 

that minimum wage increases negatively change the amount of employed people. Contrary to these, 

there is, however, a completely different persuasion on this issue among some economists. This article 

picks out minimum wage as an important part of employment research investigating two files; the 

number of working people aged 15 – 64 and all working labours. 

KEY WORDS: working force, minimum wage, ageing index, labour productivity 

Introduction 

Although there are several factors (like economic growth, foreign investments, education 

of workers, average wage, living wage 1 ), effecting the number of employed persons, 

discussions are, however, held at the most about the relation between minimum wage 2 and 

employment just on when setting in new level of minimum wage. Among majority of 

employment and minimum wage empirical literature 3 (e g. Brown, Gilroy and Kohen 1981; 

Neumark and Wascher 1992; Card and Krueger 1994; Welch 1976; OECD 1998; Eriksson and 

Pytlikova 2004) there are papers testing the relationship between minimum wage and 

employment of teens and young generation, skilled workers (e. g. Brown, Gilroy and Kohen 

1983; Ragan 1977). 

Test results for minimum wage influences upon employment rest on existing theoretical 

models. There is a basic competitive model (neoclassical theory accepts that employment 

declines when minimum wage rises; if the level of minimum wage exceeds the market 

clearing wage, supply of labours increases while demand declines), followed by alternative – 

modified specifications. The basic competitive model posits a labour market with many 

identical companies and homogeneous workers (Zavodny 1998). It rests on the behaviour of 

a labour force so that the additional unit of labour takes the work only if wages are 

enhanced. Thus the value of the last unit of labour (marginal product) declines as labour 

increases. However, this approach (model) does not consider any differences as to ability, 

experience or knowledge of labour forces (Samson 2008). 

* 

Address: Nemcovej 32, 040 01 Košice, Slovakia, e-mail: Renata.Vokorokosova@tuke.sk 

1 

Living wage: a wage which is enough to buy the necessary things in daily life (Longman Dictionary, 

1978). 

2 

Minimum wage: the lowest wage permitted by law, by a rule, or by agreement, for certain work 

(Longman Dictionary 1978). 

3 

In Slovakia there is a need of empirical research papers devoted to minimum wage and employment. 

For more information see e. g. Vokorokosová 2008; Barošová 2008; Eriksson and Pytlikova 2004.

84 


On the contrary, alternative or sometimes called dynamic models 4 (e.g. substitution 

model of labour force) focused on two types of labours: skilled and no skilled and compare 

the level of minimum wage with that of a market clearing wage 5 . Skilled and unskilled 

workers if being employed, one can suppose, that minimum wage changes increase the 

number of skilled workers employed while decrease the number of unskilled workers in the 

working process. Monopsony model – another alternative model denotes a single employer 

that, if requiring additional unit of labour has to increase the wage levels of all his workers. 

The aim of this paper is to examine the impact of minimum wage changes upon the 

employment status of employed people regardless the age as well as of that aged 15 – 64. The 

paper proceeds as follows: section two provides a brief history of minimum wage relating to 

Slovakian legal environment. Section three puts details to empirical arrangement and the 

outcomes. Section four concludes. 

History of minimum wage 

Minimum wage was for the first time approved in New Zeeland (1896) later in Australia 

(1899), followed by Great Britain (1909). In 1912 the state Massachusetts in the USA 

appointed the minimum wage to women and children work. Minimum wage was legally 

introduced in the USA in 1938, in France in 1950 and in Holland in 1968. 

Within the EU setting the minimum wage is in the competence of individual economies. 

According to Eurostat and The European Foundation for the Improvement of Living and 

Working Conditions there are 20 countries which introduced some kind of national 

minimum wage (set legally or through collective bargaining). Six countries (Denmark, 

Finland, Germany, Austria, Italy, and Sweden) approved minimum-wage tariff settled in 

sector collective bargaining. e. g. Cyprus introduced the minimum wage for six selected 

professions (Barošová 2008). 

Minimum wage in Slovakia 

Minimum wage along with mechanism for its setting are in Slovakia defined in the Law 

633/2007, Collection of Laws, on Minimum wage, involved in Law 354/2008, Collection of 

Laws, and in Law 460/2008, Collection of Laws 6 . Thus in Slovakia, according to the latest 

version of the Law, the minimum wage level is for the appropriate calendar year appointed 

by the government of the Slovak Republic. For individual sectors, it is, however, allowed to 

settle up a higher minimum wage level than that legally defined. 

The sum of the minimum wage is adjusted owing to the economic and social conditions of 

two previous years coming just before the calendar year for which the level of minimum 

4 

Dynamic models do not consider negative impacts of minimum wage changes on employment due 

to e. g. substitution effects among workers regarding their qualification. 

5 

Market clearing wage is the result of an upward-sloping labour supply curve and a downwardsloping 

labour demand curve. The market labour supply curve is upward sloping; individual firms 

are however, facing a horizontal labour supply curve. 

6 

Introducing a new law on minimum wage the hitherto legislative regulations became void. The 

previous law set reduced rates towards selected groups of employees titled to lower rate of 50 % and 

75 % from the minimum wage.

Vokorokosová, R., Do Minimum Wage Changes Influence, EA (2010, Vol. 43, No. 1-2, 83-90) 85 

wage is to be determined. The sum of monthly minimum wage for the coming calendar year is 

adjusted according to the national average wage index (Law on Minimum Wage in Slovakia, 

current version). 

Description of model and data 

Models based upon time series usually apply for lagged variables (e. g. minimum wage) 

assuming that a certain time has to pass since the effects of minimum wage changes can 

occur (Brown, Gilroy and Kohen 1981). Lags are usually set empirically (Hatrák 2007). 

Standard statistical model takes a form 

k 

Y 

t 

= ∑ β 

i 

X 

ti 

+ γT 

+ 

i = 1 

u 

t 

(1) 

whereas Yt is employment to population ratio, Xti stands for relevant variables e g. minimum 

wage, price index, unit labour costs, etc; T is a time variable, ut is random error term, t stands 

for time, β1, ..., βk are parameters, which ceteris paribus indicate relation between 

independent variables and dependent variable, γ points out relation between trend variable 

and employment. In this article the testing of effects of minimum wage 7 (see values of Kaitz 

index on graph 1) for changes upon employment 8 (see graph 2) rests on the standard 

statistical model (1) using quarterly data (1996 q2 – 2009q1) from the database of the 

Statistical Office of the Slovak Republic (SOSR). 

Graph 1. Kaitz index 

Reference: Graphical layout based upon SOSR data. 

7 Variable Minimum wage is expressed as proportion of minimum wage to national average wage. 

8 

Employment denotes employment rate which is the ratio of the working labour force 

currently employed to the total population in given age. The Organization for Economic Co-operation 

and Development defines the employment rate as the percentage of the working age population (ages 

15 to 64 in most OECD countries) who are currently employed.

86 


Models (Model 1: Age groups together; Model 2: Ages 15 – 64) meet assumptions of 

classical regression. Variables are integrated of first order I (1). They are co integrated, that 

means, their linear combination is I (0), and it is stationary. Lags of exogenous variables were 

set empirically. 

It is evident that the value of Kaitz index expressed as a share of minimum wage to 

average wage level in national economy under Slovak conditions moved from about 33 % at 

the beginning of the observed period to about 42 % in the first quarter of the year 2009. Value 

of the Kaitz index varies along with the level of average wage in national economy in 

corresponding quarter. The level of minimum wage is set forth in advance and remains 

unchanged for the entire year in Slovakia. 

Regression (2) expresses the relation between minimum wage and employment of both of 

the investigated structures - files (one that encompasses all employed people; second that 

involves workers in the age 15 - 64) along with a control variable - labour productivity. 

Y β + β X + β X 2 + β Y + u , 

(2) 

t = 0 1 1t 

−1 

2 t −1 

3 t −1 

t 

whereas Yt is a time series expressing rate of employment of observed file; X1t is a share of 

minimum wage to average wage; X2t denotes labour productivity; ß0,1,2,3, express parameters; 

ut denotes random error term. Tables 1, 2 present the results – values of coefficients. 

Graph 2. Employment rate 


Employment rate of observed files seems to be quite stable although some changes 

occurred during 1998 and 2003. A disemployment between 1998 and 2001 was a result of 

reforms provided for e. g. public finances, taxes, social system and public administration. In 

the following period, there was an increasing demand for labour mainly in those companies 

absorbing foreign capital that flew e. g. to automobile industry and attendant establishments. 

Peculiar for 2001 was the increased number of economically active population year-on-year 

by 44 800 people. Year-on-year rose the employment by 22 000 people (Domonkos and


Pániková 2007). In addition to this one must also take into consideration the demographic 

changes in the economy. The share of inhabitants at the post productive age to that of pre 

productive age (see graph 3: Ageing index9 of inhabitants together; men; women) keeps 

rising. 

Graph 3. Ageing index 


The ageing of inhabitants tends to increase as the values of the ageing index becomes 

larger for all observed files (men and women; men; women) achieving the highest values for 

women category (its value changed from 108.92 % in 1996 to 184.21 % in 2008). From 2007 to 

2008 the value of the index increased in the corresponding file (women) for about 7.31 

percentage point. 

Ageing index for men finished in 1996 at the value of 55.07 % while in 2008 at the value of 

85.44 %. In 1996 the value of the ageing index in the category of men and women together 

obtained about 81 % while in 2008 it got about 134 %. So it seems that in 2008 there were 

about 134 inhabitants at the post productive age coming to 100 inhabitants at the pre 

productive age (0-14). 

The number of inhabitants decreases in general, however, as death rate declines and the 

length of life becomes longer; there are more and more older people at the post productive 

age (over 65 years). This is, however, a general tendency also in other countries. This may 

result in the shortage of labours necessary for a certain type of economic sector (Puchá 2005). 

A possible solution might be the inflow of foreign labours which could reduce existing gap 

on the labour market. 

9 

Ageing index is calculated as the number of persons 60 years old or over per hundred persons under 

´+ 

65 

age 15. In Slovakia it takes following form: Ai = ∗100 

. 

0 −14

88 


Table 1. Values of coefficients and standard errors. LS (Least Squares) 

Variables 

Model 1 (Age groups together: men 

and women) 

Constant -8.413664** 

(2.995541) 

MW_AW(-1) 0.144191** 

(0.028492) 

ER(-1) 1.077487 

(0.048238) 

PROD(-1) -0.067289** 

(0.028022) 

R 2 0.931 

N number of observations 52 

Elasticity 

0.102 

-0.047 

Numbers in parentheses denote standard errors, R 2 – coefficient of determination. 

**Significance at 5 % 

Investigation results (see table 1) of minimum wage changes (expressed as a share of 

minimum wage - MW - to average wage – AW -) and their effects upon employment status 

(expressed as employment rate - ER - of men and women) did not confirm a negative 

relation between these two variables. There is a negative connection between employment 

and labour productivity – PROD. If the share of minimum wage to average wage changes by 

1 % 10 , the employment rate increases by about 0.102 %. All variables are used in a lag form. 

Any changes in minimum wage/average wage or in labour productivity tend to take some 

time until their effects become evident. The lags of variables were set empirically (for one 

period of observation that is one quarter). 

Table 2 .Values of coefficients and standard errors. LS (Least Squares) 

Variables 

Model 2 

(Age groups 15 – 64) 

Constant -9.997505 

(3.552217) 

MW_AW(-1) 0.168097** 

(0.033406) 

ER15_64(-1) 1.081321** 

(0.049301) 

PROD(-1) -0.080012 

(0.032629) 

R 2 0.929 

N number of observations 52 

Elasticity 

0.119 

-0.056 

Numbers in parentheses denote standard errors, R 2 – coefficient of determination. 

** Significance at 5 % 

dY X 

10 

Based upon calculations of arc elasticity which takes the following form: E Y / X 

= * . 

dX Y


There is a positive relation between minimum wage changes and employment rate of 

labours aged 15 – 64 (see table 2). Like in previous model (model 1), a negative relation was 

proved among employment rate of corresponding file and labour productivity. A 1 % 

increase of minimum wage/average wage in national economy seems to increase the 

employment rate of the file under review by about 0.119 % while a 1 % increase of labour 

productivity tends to decline the employment rate of labours aged 15 – 64 by about 0.056 %. 

Conclusion 

Outcomes obtained in this paper do not confirm the theoretical assumption that 

minimum wage changes have disemployment effect. In both of the files observed 

(employment of men and women regardless age; employment of labours aged 15 – 64) the 

positive effect of minimum wage/average wage changes to employment status were found 

out. If economy is rising, minimum wage can be rising too. This in fact motivates people 

working even those voluntary unemployed (discouraged) ones. As there is a lack of 

empirical studies in Slovakia coping with minimum wage influences upon employment, this 

article may reduce the existing gap in this research and be useful for institutions having 

decision right about minimum wage settings. Pros and cons of minimum wage in economy 

are often discussed, but a certain level of minimum wage can protect domestic labour market 

from the outflow of domestic labours to foreign countries mainly in the neighbourhood 

where they can earn minimum wage higher than it is in their domestic country. It can even 

prevent the labour market from the inflow of a cheap labour from abroad. Nowadays it is 

not about abolishing the minimum wage in countries where it already exists, but it is often 

discussed in economies which still do not have any kind of guarantee of minimum earning. 

Beside other advantages it presents a country´s interest to handle the issue of poverty and 

willingness to ensure a certain level of living also for those which earn the lowest amount of 

money. Since there are still different opinions on how the minimum wage changes effect 

employment, working papers relating to this issue in different countries are a good source of 

valuable information for all subjects involved in this matter. 

References 

Barošová, M. 2008: Fungovanie a vývoj minimálnej mzdy v Slovenskej republike. FÓRUM SOCIÁLNÍ 

POLITIKY 5/2008. 

Brown, Ch. - Gilroy, C. - Kohen, A. 1981: Effects of the Minimum Wage on Employment and 

Unemployment. Journal of Economic Literature. Vol. XX. 

Brown, Ch. - Gilroy, C. - Kohen, A. 1983: Time-Series Evidence of the Effect of the Minimum Wage on 

Youth Employment, Journal of Human Resources. . 

Card, D. - Krueger, A. 1994: Minimum wages and employment: A case study of the fast-food industry 

in New Jersey and Pennsylvania. American Economic Review. 

Domonkos,T. – Pániková, L. 2007: Analýza a modelovanie dopytu po práci v podmienkach slovenskej 

ekonomiky. INFOSTAT, Bratislava. 

Eriksson, T. – Pytlikova, M. 2004: Firm-level Consequences of Large Minimum-wage Increases in the 

Czech and Slovak Republics. Labour, Vol. 18, No. 1. 

Hatrák, M. 2007: Ekonometria. Bratislava: Iura Edition.

90 


Neumark, D. – Wascher, W. 1992: Employment effects of Minimum and subminimum wages: Panel 

Data on State Minimum Wage Laws. Industrial and Labour Relations Review, Vol. 46, No. 1. 

OECD 1998: Statutory Minimum Wages, Employment and Poverty. OECD Employment 

Outlook. 

Puchá, N. 2005: Komparatívne a konkurenčné výhody v novej ekonomike. In: Zborník príspevkov zo 

4. Medzinárodnej doktorandskej konferencie: Ekonomické, politické a právne otázky medzinárodných 

vzťahov. Ekonomická univerzita Bratislava, Fakulta Medzinárodných vzťahov. 

Ragan, J. 1977: Minimum wages and the youth labour market. Review of Economics and Statistic 59. 

Samson, Š. 2008: Dejiny ekonomických teórií – Ekonomické myslenie v predhistórii, klasická 

a neoklasická ekonómia. Košice: Elfa. 

Vokorokosová, R. 2008: Minimálna mzda a konkurencieschopnosť. Košice: Elfa. 

Welch, F. 1976: The minimum wage legislation in the United States. Evaluating the labour market 

effects of social programs, Princeston University. 

Zavodny, M. 1998: Why Minimum Wage Hikes May Not Reduce Employment. Federal Reserve Bank 

of Atlanta. Economic Review, Q2. 

Law on Minimum Wage in Slovakia (current version of Minimum Wage Law) 

www.wikipedia.com 

www.statistics.sk 

Longman Dictionary of Contemporary English, 1978. 




SCIENTIFIC REVIEW 

Information Resources for Financial Monitoring 

in Enterprises 

Kościelniak Helena * , Czestochowa University of Technology, 

The Management Faculty, Poland 

UDC: 65.012.12 JEL: D83 

ABSTARCT – For their operation, organizations employ a particular combination of human, 

financial, material and information resources. Except for land, capital and labour, information has 

become the fourth means of production since it is used for achievement of the goals. Not all 

information that appear in economy becomes a means of production; this happens only in the case of 

information which shows nature of economic resources. W. Olejniczak emphasizes that a set of 

information, in order to become an economic value for an enterprise, must form an ordered set. 

Financial monitoring is one of the most creative tools for management, allowing for creation of new 

information and decision-related resources. 

KEY WORDS: financial monitoring, production, management, enterprise, decision-making, 

information 

Information gap in the process of decision-making 

Under conditions of changing economy, information performs three functions (Penc 

2001): 

• it is a commodity; transactions might concern information-related products 

(particular type of information saved on a suitable carrier) or information services 

which consist in acquisition and making available a particular piece of 

information, 

• it is a resource, i.e. a group of particular pieces of information collected in suitable 

carriers, available to potential users, used in widely understood social and 

economic life, 

• it is a production factor. 

• It is emphasized that information sets might be analysed in three aspects 

(Olejniczak 1989): 

• syntax – by investigating the relationships between symbols representing 

economic information, without consideration of its content, 

• semantics – by investigating the content of economic information and the method 

of its representation by means of symbols, 

* 

Address: Armii Krajowej 19B, 42-200 Czestochowa, Poland

92 


• pragmatics – by investigating economic information from the point of view of its 

value for the recipient. 

Solving decision problems is connected with continuous accumulation of information. 

The difference between information which decision-makers would like to have and the 

information that can be actually acquired is termed ‘information gap’; it denotes sensation of 

lack of information, knowledge or understanding of a problem, which is necessary in 

decision-related situation. 

This indicates that it is of a highly subjective nature while its main properties include: 

• reference to a particular subject (lack of information sensed by a person is not 

necessarily sensed by another), 

• susceptibility to time factor (with the course of time and acquisition of 

information, the gap can be extended or reduced), 

• fuzzy information (limits opportunity to define its scope) (Flakiewicz 2002). 

Figure 1. The concept of information gap in the process of decision-making 

Progress in definition of the problem and acquisition 

of information 

Needed 

information 

Collected 

information 

Moment of final definition 

of the problem and 

making a decision 

Information gap 

Resoruces used for definition of the problem (money, 

Source: (Rabin, Jackowski 1988) 

For the purposes of management, it is essential that a particular quality of the prepared 

information, being the basis for decision-making, is ensured. This problem was emphasized 

by J. Penc. The author argues that proper decision is composed of 80% of information, 10% of 

inspiration (invention) and 10% of managers’ intuition (sensing) (Penc 2001). 

Functional properties of information obtained from users are presented in Table 1.

Kościelniak, H., Information Resources for Financial Monitoring, EA (2010, Vol. 43, No. 1-2, 91-98) 93 

Table 1. Quality features of output information 

Feature 

Reliability 

Selectivity 

Addressability 

Relevance 

Right on time 

Requested form 

Characteristics of output information 

factual (according to actual state) description of economic events and 

states 

Adapted to the characteristics of the problem or used method of 

management 

Adapted to individual need of a particular recipients, determined by 

the nature of the tasks they perform 

Relevant to particular demand for information (providing recipients 

with convenient tools for searching and extraction of data) 

Delivered on demand in right time (during decision situation) or 

periodical data within clearly defined deadlines 

Alphanumerical (text, tabular or graphical) with the level of detail 

(elementary data or aggregated, levels of summaries) and the carrier 

(screen, printouts, magnetic carriers) according to the recipients 

demands 

Source: (Niedzielska 1998) 

Maintaining quality features of information affects its value, suitability and usefulness 

within information base in a particular enterprise. 

Position of financial monitoring in information base in enterprises 

Monitoring is an informational mechanism which allows for tracking quantitative and 

qualitative changes of some predetermined objects of observations, using particular 

techniques of registration. 

Subject literature points to the following functions of monitoring: 

• collecting and processing of information and distribution of this information 

(Kowalczyk 2003), 

• formation of normative models, formation of empirical models and assessment of 

information and information processes (Oleński 2001), 

• definition of research areas in enterprises subject to monitoring, definition of 

standards and criteria for these areas, selection of rules for response to deviations 

and creation of organized forms of informational feed (Leszczyński 2002), 

• identification and selection of object of observation, description of objects by 

means of a pattern, registration of the results of object operation, comparison of 

patterns to the results, ordering and making available the results and patterns 

(Mytlewski 2007). 

On the basis of the abovementioned functions, it can be concluded that monitoring can be 

perceived as: 

• observation and suitably organized registration of all the parameters, events, 

situations connected with object operation, which might affect functioning of the 

whole object or its considerable part,

94 


• current control of execution of the plan along with confrontation of the degree of 

using budget with the plan for the performed tasks, 

• arduous research work allowing for assessment of decision accuracy and its 

correction as need arises, 

• informing decision-makers about possible threats and forcing them to respond. 

Application of the concept of monitoring for operation of companies allows for 

separation of a research area for financial monitoring from the wholeness of its business 

activity. 

Financial monitoring is a tool for management in the area of functioning of financial 

processes in enterprises. It is understood as a process of continuous economic and financial 

analysis supporting the process of making decisions by managers. 

Figure 2. Place of financial monitoring in management system 

Management Function 

Management Tools 

Planning 

Organization 

Leadership 

Controlling 

Key Areas 

Analysis 

Methodology 

Standards 

High Frequency 

Financial Monitoring 

Decision and Information Flow 

Source: (Skowronek_Mielczarek, Leszczyński 2007) 

Implementation of financial monitoring calls for meeting the following conditions: 

• definition of the need for continuous analysis, 

• proper description of financial events resulting from company’s operation using 

particular methodology. 

Investigating of information needs in a company requires methodical approach; example 

of such approaches are presented in Table 3.


Table 3. Methodical approaches used to define information needs of users 

Method Description Application 

By-Product Investigation of needs is a sideeffect 

since its main goal is to 

investigate final product 

Used during development of subsystem 

problems; advantages include laboureffectiveness 

and short time necessary 

for investigations; disadvantages: in 

most of cases decision – maker needs 

are only partially met 

Total Study 

Critical Success 

Factor 

Key Indicator 

System 

Business 

Information 

Characteristics 

Study 

Business Process 

Model 

Investigating of bigger group of 

executives 

The areas which should be under 

constant supervision of 

management are defined 

Rests on selecting of key indicator 

of ‘health’ within an organization 

aimed at collecting of the data 

which can be processed into 

different sets of information 

On the basis of information model 

of organization, so called unique 

resources are defined, which 

facilitates analysis of current 

databases and problems 

encountered by management, a set 

of unique identifiers, characterizing 

management objects within an 

organization are created. The 

identifier and relating data 

comprise ‘resources’ with actual 

data, which allows for highlighting 

problems which impact on 

company performance. 

Aims at recognition of basic, initial 

units which initiate processing of 

input information realized in next 

phases, such as: preparation of 

general plan, verification of 

economic processes in companies 

and their units. 

The critical areas of activities are 

defined, however, it requires use of 

considerable resources 

Analysis of progress in realization of 

tasks allows on current assessment of 

management performance; high labourconsumption 

of work 

It allows for separation of common 

types of functions, whose performance 

requires relevant information. An 

attempt to identify environment and to 

define hierarchy of goals is also made; 

difficulties include objective definition 

of these goals/functions and 

decomposition. 

Elimination of ‘information scatter’ 

between information system and needs, 

shortens the process of improving of 

insufficient information which can not 

be recognized through another analysis; 

it accelerates production of software 

fourfold on average. 

It is possible to create, in a written form, 

a model of the processes which occur in 

organization and the analysis of the 

needs and flows in organization 

connected with these processes and, in 

consequence, it allows for recognition 

of data transferred between economic 

processes in the organization.

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Method Description Application 

Enterprise Activity 

Matrix 

Information Control 

Net Model 

Rests on a theory of organization 

with limited number of tasks 

(activities) and these tasks being 

performed by means of subject of 

labour available in a company. In 

consequence, a matrix including all 

activities within an organization 

can be created. It mainly requires 

definition of activities in 

organization (what is being done), 

environmental conditions (how it is 

being done) and subjects of 

activities (what is used to perform 

the activities) 

Formal model of determination of 

users needs in office environment; it 

is formed by graphical techniques 

and standard notation, which forms 

a framework for collecting data, 

imposes coherence, completeness, 

logical organization and is 

conducive to comparison of 

alternative procedures, preparation 

of forms and data sets. 

Source: (Kisielnicki, Sroka 1999) 

It gives management a view of 

everything what happens or should 

happen through the method of task 

assignment and a demanded 

information system characteristics 

Used for representation and analysis of 

flows of information in progress, 

procedures for activities simplifies them 

and automates overlaying activities. 

Financial monitoring suits very well to the methodical approaches listed in the table. It 

combines features of all the described methods used for determination of users’ 

informational needs. 

Financial monitoring is a system which integrates the methods of processing and flow of 

different streams of information with management system (Komorowski 2001) and supports 

management in supervising the most significant components in operation of entities 

(Kisielnicki, Sroka 1999). 

A. Skowronek-Mielczarek and Z. Leszczyński point to important and specific features of 

financial monitoring, including (Skowronek-Mielczarek, Leszczyński 2007): 

• selection of key areas of management of company’s finance, 

• definition of standards and reference bases, which become the basis for 

assessment and verification of activity, 

• application of tools for modern financial analysis, 

• continuous observation and registration of changes in the investigated financial 

processes. 

In consideration of the features of monitoring it is remarkable that it comprises the basis 

for creation of new informational and decision-related resources for enterprises. System of


monitoring supports management of enterprises through early warning and assessment of 

threats during operation of businesses. It also reduces information gap (see Figure 3). 

Figure 3. Information System and Financial Monitoring 

Real area of enterprise 

Information system in enterprise 

Information gap 

Collected information 

Needed information 

Financial monitoring 

Gap reduction 

Source: own study on the basis of (Mytlewski 2007, Rabin, Jackowski 1988) 

Summary 

To sum up, it can be concluded that monitoring system, being a subsystem for 

information systems in enterprises, overtakes the tasks of information system and is in tune 

with it in terms of functions, language and tools. Moreover, monitoring system integrates 

management and formal requirements. In target model, it should lead to reaching a 

compromise between interests of all parties which communicated the demand for 

information in enterprises through giving them access to any profile of information. 

References 

Flakiewicz W., Systemy informacyjne w zarządzaniu (uwarunkowania, technologie, rodzaje), Wydawnictwo 

C.H. Beck, Warsaw 2002 

Kisielnicki J., Sroka H., Systemy informacyjne biznesu. Placet, Warsaw, 1999 

Komorowski: Planowanie finansowanie w przedsiębiorstwie. ODiDK, Gdańsk 2001 

Kowalczyk S., Informacja w monitorowaniu otoczenia organizacji, [in] red. R. Borowiecki, M. Kwieciński, 

Monitorowanie otoczenia. Przepływ i bezpieczeństwo informacji. W stronę inteligencji, KW, Zakamycze 

2003 

Leszczyński Z., Monitoring finansowy w zarządzaniu małym i średnim przedsiębiorstwem; [in] Zarządzanie 

małym i średnim przedsiębiorstwem. Uwarunkowania europejskie. Red. M. Strużycki, Difin, Warsaw 

2002 

Łukasik-Makowska B., Niedzielska E., Społeczeństwo informacyjne – już teraźniejszość czy dopiero 

perspektywa? [in:] Informacja w społeczeństwie XXI wieku, red. A. Łapińska, Uniwersytet Warmińsko-

98 


Mazurski, Olsztyn 2003Mytlewski A., Monitoring ekonomiczny przedsiębiorstw, Wydawnictwo 

Uniwersytetu Gdańskiego, Gdańsk 2007 

Niedzielska E., Informatyka ekonomiczna, Wydawnictwo Akademii Ekonomicznej, Wrocław 1998. 

Olejniczak W., Projektowanie systemów informacji ekonomicznej w przedsiębiorstwie, PWE, Warsaw 1989 

Oleński J., Ekonomika informacji, PWE, Warsaw 2001 

Penc J., Decyzje menedżerskie – o sztuce zarządzania. Beck, Warsaw 2001 

Rabin J., Jackowski E. M., Handbook of Information Resource Management, Marcel Dekker, New York 

1988. 

Skowronek-Mielczarek A., Leszczyński Z., Controlling. Analiza i monitoring w zarządzaniu 

przedsiębiorstwem, Difin, Warsaw 2007. 





Business Relations in Reverse Logistics Outsourcing 

Grabara Janusz * , Kot Sebastian, Czestochowa University of Technology, 

The Management Faculty, Poland 

UDC: 65.011.1 JEL: M1; M2 

ABSTRACT – Nowadays cost reduction is a fundamental strategy used in companies during 

fighting for survival, keeping or increase in sales levels and profits. More and more often observed 

tendency to concentrate commercial and production companies leads to rise of demand for outsourcing 

in a reverse logistics chain. In the paper Authors present concept of outsourcing in logistics processes, 

advantages of outsourcing in reverse logistics and types of relations between outsourcing partners as 

well as areas and stages of collaboration: engagement, improvement and communication. 

KEY WORDS: business relations, outsourcing, logistics processes, commercial companies, 

production companies 

Outsourcing idea in logistics services 

A strategy commonly termed ‘outsourcing’ is nothing more than a subcontracting, to a 

specialized companies, a part of functions and processes previously performed on your own. 

The scope of operations encompassed by outsourcing is becoming wider and wider. The 

subcontracting concerns e.g.: transport and forwarding (organizing of transport by the 

shipper), advertising, market survey, security services, social facilities (holiday and sport 

facilities), health care, legal services, training, financing of transactions, banking services and 

contract insurance. Outsourcing concerns exclusively services. 

Another words Henry Ford characterized very appositely phenomenon which is 

specified today with name of outsourcing. ʺIf there is something we cannot do more efficiently, 

more inexpensively and better than our competitors, so there is no sense we do it. We should employ 

somebody for executing this work who will do it betterʺ (Michałek 2005). He didnʹt foresee at the 

same time probably that the assertion just even often unwittingly is a base for todayʹs 

entrepreneursʹ wondering reflections above applying outsourcing to oneʹs companies. 

Outsourcing describes the deliberate movement of a series of connected business 

processes to a which manages them on behalf of the company. The classic processes were IT, 

warehousing and distribution, facilities management, and payroll – and to these can now be 

added call centers, manufacturing, web development, home shopping, credit cards, and even 

merchandising and design. In these movements the commercial risk and assets are usually 

passed to the outsourcing company (Waters 2007). 

No doubt that outsourcing has become big business. From early beginnings in the mid- to 

late 1970s, many companies have traveled the outsourcing road, and as technology and 

* 

Address: Armii Krajowej 19B, 42-200 Czestochowa, Poland, e-mail: grabara@zim.pcz.pl

100 


accessibility to shared electronic data have increased so has the range of services offered by 

outsourcing companies. 

The global logistics market has an estimated value of 972 billion US dollars (Transport 

Intelligence 2006). The Asia Pacific market was the largest with the share of 412 billion USD 

spent on logistics. Europe, Middle East and Africa regions spent about 290 billion USD, 

while Americas accounts for the balance of 270 billion USD. 

It is estimated that 265 billion USD (27%) was spent for outsourced logistics activities. 

Western European firms are more likely to outsource logistics and supply chain activity. 

Capgemini study (Capgemini and Langley 2004) showed that Western European businesses 

spent 61% of their logistics spend on their third-party provider services against 44% in North 

America and 49% in Asia Pacific. 

Globalization and increase in world trade has made the fast growth in the outsourcing 

market. As more products are sourced across borders, the complexity of the supply chain 

increases, driving many companies to outsource to third-party providers. This is particularly 

true as companies move manufacturing and operations to regions such as Asia, Eastern 

Europe or South America, where they seek to mitigate risk by outsourcing their logistics and 

supply chain operations. 

Outsourcing of logistics services may take a variety of sizes and shapes. In its most 

extreme form it leads to total liquidation of own logistics system and taking on responsibility 

for logistics management by external operator. 

In logistics outsourcing the lead is taken by international operators with necessary 

competence in terms of logistics strategic consulting and the execution potential connected 

with the branch experience. The operator must ensure their customers as best services as 

possible at the competitive price. In Polish market two following groups of logistics services 

can be characterized: 

• transport services, which should be treated as fundamental services resulting 

from the necessity to move things and persons from one place to another, 

between the source and the goal, with the limited scope of consulting, which 

might concern, in case of e.g. international deliveries, the most favourable supply 

base. Relocation- transport is an activity performed in order to satisfy particular 

needs, which requires to cover the distances either by a person or by goods in 

order to satisfy such needs. (Szczepaniak 2002) 

• forwarding services, which, in its fundamental form consist in organization of the 

transport processes, insurance, preparation of necessary documentation and 

customs services. More advanced shipping services, which bring great cost 

benefits in case of general cargo or pallet cargo (as opposed to full truck load), 

include services provided by the consolidated shippers on the basis of the 

network of several or more than ten terminals, which consists in consolidation or 

deconsolidation of a particular cargo, custom packaging, with warehousing 

option and in more modern version of cross docking and thus in transition of 

cargo through terminal (without warehousing) and stopping their movement 

only for the time necessary for order picking, changes in cargo shape and changes 

in means of transport.

Grabara, J., et al., Business Relations in Reverse Logistics, EA (2010, Vol. 43, No. 1-2, 99-107) 101 

• logistics services, which, apart from transport and forwarding activities, 

encompasses terminal services, starting from cross-docking, through warehousing 

to order picking (including picking and packaging) and additional activities: 

labelling, re-packing, foil packing, minor repairs, creation of promotional sets etc. 

(sometimes referred to as co-packing). Moreover, logistics companies often 

control their clients’ inventory, undertake complex servicing of distribution or 

logistic consulting – reaching far more than a selection of the route for deliveries 

or a supply base. The basis for creation of logistics services is to own a wide area 

computer network which might be connected with a client’s network in a variety 

of configurations. 

A company, which intends to subcontract logistics services to another external company 

should realize that they will partially or totally lose control over some processes connected 

with logistics. A considerable role is played by successful cooperation based on partnership 

of both companies and mutual trust (Rydzkowski 2004). 

In order for this goal to be achieved, companies often abandon performance of various 

traditional activities e.g. legal services, research, pay policy, accounting services through 

transfer of these service to specialized external companies. Such a policy enables company to 

focus their assets and efforts on what they can do best, e.g. on production, commercial 

activity or providing the services. Many companies which need to reduce its organizational 

structure finds logistics to be an activity, which can be disposed of in order to reduce costs 

and to improve the customer service. 

While highlighting the concept of outsourcing one should consider what makes the 

companies order logistics activities from specialized external services. The reasons 

for such activities are numerous, however, the most important include the need for 

having logistics activities performed in best way as possible, which is possible in case 

of these activities being performed by a specialized entities with appropriate 

infrastructure and capacity which enable logistics services to be provided on possibly 

highest level. Thus it seems that the argument for such a cooperation is lack of 

workload within the company which can focus on its core activities as well as 

easiness of flexible response to any changes within its environment. The advantages 

concern also economical aspect, through reduction in costs and service area both 

inside the company as well as services for customers. Obviously, such a solution has 

particular disadvantages due to the possibility to be dependent on external service 

provider as well as loss of own know-how in terms of technology and logistics 

knowledge. Therefore, a company which makes a decision on outsourcing should 

consider arguments both for and against it. Main factors for outsourcing include 

(Duck and Schotz 1998): 

• the costs related to logistics activity are clearer, mainly through easiness of their 

recording, 

• cost reduction is possible through selection of most competitive offer in the 

market, which enable more flexible use of the owned resources, 

• levelling of internal problems which make performance of tasks difficult.

102 


The arguments against implementation of outsourcing include: 

• probability of being dependent on service provider, 

• risk of deterioration in quality of own products (e.g. improperly transported), 

• necessity of exact calculations in terms of costs, especially in the aspect of cost 

reduction, 

• lack of possibility to use experience in logistics obtained during operation in the 

market. 

The companies who decide to subcontract logistics activities outside focus more on 

coordination of operation within the area of cooperation with service provider and they can 

organize their logistics system so that it functions more efficiently within the chain. The 

solutions for organization of logistics processes enable formation of such structures which 

will enable using of all advantages of the described solutions. It should be considered if the 

companies are able to form their logistics chains so that all logistic activities and processes 

connected with their coordination are performed in a way that enables formation of an 

efficient structure adapted to the needs so that the achievement of the predefined goal of 

logistically managed organization is possible, i.e. finding right customers and ensuring them 

availability of the offered goods. From the company’s point of view the processes should be 

efficient both organizationally and economically. 

The processes which occur in contemporary economy indicate evolution, leading to the 

situation in which traditional divisions which separated production, commerce and service 

companies are fading away. More and more often logistics systems of separated companies 

are being replaced by whole logistics systems of logistics chains. The definition of the essence 

of logistics activities is becoming more and more difficult, mainly due to the fact of faded 

borders between companies. Evolution of outsourcing leads to the situation where instead of 

normal subcontracting of services such as transport or warehousing a so called third party, 

and even the fourth-party logistics, is implemented for virtually total acquisition of the 

logistics area. The concerns may arise if employing external service provider, particularly a 

close cooperation with them, do not lead to losing control over the processes, which is very 

important as the companies which provide outsourcing services are on the supplier-customer 

interface. Thus, they should organize the processes, to the benefit of the client, so that the 

customers are satisfied and buy goods from our company. On the other hand, the fact that 

logistics services providers are actually only an intermediaries, who not necessarily identify 

themselves with the company’s goals, might cause that they are not intent on satisfying the 

customer. This situation is dangerous and might lead to losing positive image by the 

company, which, in consequence, negatively impacts on the sales. On the other hand, despite 

some threats of using outsourcing, proper operation of companies (especially those operating 

in global markets) without using logistics services is actually not possible. This happens 

because one company is not able to specialize so much as to become a leader in production, 

marketing and logistics and other areas of operation. The competition between supply chains 

has become so strong that it is necessary to look for new solutions which enable to gain 

competitive advantage (Schary, Skjott-Larsen 2002). One of them is outsourcing in reverse 

logistics.


Typical activities of reverse logistics include processes which the company uses to collect 

worn out, damaged, unwanted or outdated products and the processes of packaging or 

sending materials from final user to manufacturer. 

If the products are returned to the company, the company has a variety of possibilities to 

handle them. If there is possibility to return a product to supplier at the full cost 

reimbursement, the company might choose this option as first. If the product has not been 

used yet, it can be re-sold to another customer or might be re-sold in the manufacturer’s 

shop. If the product is not of full value to be sold, it is passed to the repair services company, 

which, after appropriate repairs and improvements will export this product to the market. 

If a product can not be sold in current condition or if the company can considerably 

increase its price through renovation, recovery or processing of the product, the company 

can perform such activities before the product is sold. If the company does not perform such 

activities in its location, the intermediary companies, cooperating on the basis of contract or 

through outsourcing, can be involved in this procedure or the product might be sold 

immediately to the company which renovates, recovers or processes products. 

After performing these activities, the product might be sold as a renovated product or a 

processed product but not as a new one. If the product can not be renovated due to its bad 

condition or the environmental law does not permit to do this, the company can try to use 

this product at the lowest possible cost of production. The reverse logistics might involve a 

wide variety of activities. These activities might be performed in the following way: goods, 

materials, product or package in reverse flow return from end user or other user in 

distribution channel such as retailer or distribution centre. Independently of its final 

designation, all products in the reverse flow must be stored and sorted before despatch to 

the final destination locations. 

If a product gets to reverse logistics flow from the customer, this might be a damaged 

product. The customer might also only think that the product is damaged while it is actually 

in good repair. This might result from customer’s lack of knowledge on using a particular 

product. 

If a product has not reached the final stage of its life, the customer may return the 

product to the service shop or directly to manufacturer. If the product has reached its final 

stage of usability, the customer may, in some cases, return product to manufacturer and a 

producer might use it in an appropriate way or to recover materials. 

If a product is returned by the partner in supply chain, this occurs because the product 

has not been sold or the partner wanted to get rid of it. The product might also reach its final 

stage of life or final stage of regular sales season. The product might also be damaged or 

destroyed. 

Reverse logistics is strategically used mainly to enable users of a traditional channel – 

such as retailers and wholesalers – to take opportunity of reduction of risk of buying 

products which might not sell perfectly. For example, a company might create a software 

which controls the number of returns for various products depending on different elements 

which characterize particular groups of products. 

Strategy which involves possibilities of reverse logistics considerably impacts on 

company’s cost. The goal of almost each business is to attach its customers to the company so 

as the customer do not change the supplier. There are many methods to build relationships

104 


which make it difficult to the customer and which put customers at risk of losing the benefits 

in case they change suppliers. An important services which supplier can offer to the 

customer is to give opportunity to return not sold or damaged products immediately, which 

credits customers on a temporary basis. 

Initiation of reverse logistics might be a strategic response to a situation of growth in 

competitive environment. Most of sellers and manufacturers have in recent years liberalized 

its policy of returns, due to the pressure from competitors. The companies still believe that 

the satisfied customer and ensuring possibilities of returns of unwanted products (which, 

according to the customers do not match their needs) are essential. 

Cooperation in reverse logistics might concern its all aspects and activities such as 

collective planning, forecasting, design or marketing. This is essential due to the following 

benefits resulting from cooperation: 

• possibility of integrated information; 

• possibility of tracking and monitoring of events in supply chain; 

• improvement in clarity in supply chain; 

• possibility of managing the processes through corrective actions. 

Advantages of reverse logistics outsourcing 

Reduction of costs connected with logistics is justified in case when it leads to increase in 

profits. Currently the most popular form of saving in logistics departments is outsourcing of 

supply chain (Skowron-Grabowska 2008). Such a decision might impact on flows and 

financial results. 

First remarkable advantage is cumulating of commitments in the moment of the whole 

process of delivery. The settlements between individual suppliers are transferred to a 

logistics companies. The ordering entity gets the elongated deadline for payments and better 

opportunities to negotiate the price. The financial sources released in such a way increase its 

current assets. 

In order to execute the logistics processes it is necessary to involve fixed assets with a 

considerable value. They are mainly used for maintenance of distribution systems. In such 

systems, the resources of enormous value are employed – warehouses, distribution centres, 

local storage areas. The physical flow of goods between points of sale is realized also by the 

fleets which usually belong to the companies themselves and not to the specialized service 

providers. More and more often a tendency appears to rationalize distribution systems, e.g. 

through using specialized services of suppliers of complex logistics solutions. This tendency 

arose from the popular belief that actual cost of financing of investments with fixed assets is 

sometimes much higher than the cost generated by the investment. 

Another element which makes companies to abandon the attempts to extend fixed assets 

connected with logistics is the efficiency of their use. The logistics companies show higher 

flexibility in terms of warehousing facilities and fleet. Another advantage of subcontracting 

the supply chain maintenance to a specialized logistics company is a fact of savings, which 

appears as a result of liquidation of the transport/warehousing departments. Such units, 

apart form labour costs, absorb a lot of expenditures connected with purchase of software 

(Kot and Slusarczyk 2009). A drawback of most of these systems is the price and lack of


possibilities to be used in other departments. Logistics companies also make use of advanced 

systems, however, the cost of their purchase might be spread among a few clients. 

Among numerous benefits connected with a supply chain outsourcing, having influence 

on financial standing of the company, the most important include: 

1. Increase in current assets through more profitable form of liabilities and 

opportunity to achieve time compression. 

2. Better use of fixed assets. 

3. Reduction in costs not connected with core activities in the company. 

Relationship in outsourcing activity 

The 3pl/customer relationship is one where “partnership” can provide the basis for the 

business relationship and outsourcing success. The confirmation of this can be words of J. 

Rodriguez: “If you understand the customer’s business model, the markets and geographies it wants 

to penetrate, the verticals it wants to target, its different manufacturing options and so on, you can 

continue to find low-hanging fruit. But if your relationship is just as a vendor of logistics services, 

you hit a brick wall.” (Murphy 2005) 

Continuing, partnership has to be on both fronts. The customer has to allow the service 

provider to become an intricate part of its business and look beyond the service it currently is 

providing. Good partnerships share joint development, benefits and common strategic 

vision. 

Collaboration with high degree of trust is next step of engagement in relation between 

outsourcing partners. J. Grubic (Grubic 2006) writes that the degree of trust in a relationship 

determines the level of flexibility a customer will allow the 3PL in operating the best of its 

capability. He also argues that this flexibility is necessary to deliver best-in-class process and 

solutions and in turn achieve the required performance and cost objectives. Good 

collaboration will support business change and challenges, allowing both parties to review 

continually the current state against the vision and to agree actions to be taken to stay on 

course. 

Sometimes outsourcing partners went to a business trap when thinking that all problems 

with logistics and supply chain processes have gone away to the 3PL. In fact some problems 

may now be a responsibility of the 3PL, others still remain firmly the responsibility of 

customers, and moreover there are some new issues to do how to manage the relationship. 

Outsourcing will not work unless the customer stays deeply involved (Bowman 2006). It is 

really important that customers stay involved but they should focus on managing the 3PLs 

on strategic level, not to be involved in every decision taken by the 3PL. However, a good 

customer will want to collaborate around those activities that directly impact on service and 

where is a touch-point with their business. 

We can point on following stages of collaboration between outsourcing partners: 

Engagement where IT system integration, account management and implants are most 

important. Part of the engagement between 3PL and its customer is the way of data 

interchange. It is extremely important to tightly integrate the 3PL system with the client’s 

ERP system. High level of integration allows for fast flow of high volume data. The process

106 


is extremely reliable, with leading integration platforms having audit techniques that can 

signal an alert if message leave one system but are not received or processed in the other. 

The 3Pl providers have also seen the opportunity for embedding implants into their 

customers operation for some time now. There is no better way to meet the customer 

requirement and understand its aims than to provide an implant working side by side in a 

planning or other supply chain role. Account management is also important, because of it 

can help in the retention of customers, lead to more business with clients, potentially leading 

to improved profits for the 3PL and customers as well. By helping the customer to improve 

its operations, costs or sales, the 3PL is adding value. 

In continuous improvement stage, we can point on the sector expertise, process 

improvement and innovation as a main elements. One of the factors that 3Pl offers their 

customers is expertise in the industry sector concerned. This provides the opportunity to 

help clients understand industry best practices and to provide benchmarking data. 

Moreover, many times 3PLs provide customers ideas they had learned in other industries. 

The continuous improvement contains also process improvement. Resulting in cost and 

service benefits. Also, it is clear that innovation brought from 3PLs can be an element of 

outsourcing collaboration influencing on whole supply chain market position. Innovations 

such as RFID, picking by voice are the sort of solutions that customers are looking for to 

enhance their operations. 

At last, communication should be pointed as a key ingredient for ensuing a good 

relationship between provider and customer. Communication is the responsibility of both 

parties in the relationship, and to ensure good level of communication they both need to 

provide channels for this to happen. Regular meetings provide a forum to discuss business 

changes and its impact on needs and priorities, it is also the best time to understand 

customer vision. 

Summary 

To achieve a success in outsourcing relationships in every logistics functions including 

reverse logistics, the customer expectation should be properly aligned with the 3PL business 

model and relationships structure. The customer expectations focuses mainly on: superior 

service and execution, trust, openness and information sharing, solution innovation, ongoing 

executive level support. The Capgemni study (Langley and Capgemini 2005) showed that, 

although relations between outsourcing partners are satisfactory, there is still much to be 

done and that both parties desire a more collaborative and strategic relationship. One of the 

reason this has not happened is that customers see the issue as the 3PLs’ responsibility, and 

vice versa. In truth of course it takes two parties to really work hard to make any form of 

relationship work. 

References 

Bowman R. J.: In managing outsourced relationships, there are no simple solution. Global Logistics and 

Supply Chain Strategies, July 2006 

Capgemini and Langley C.: Logistics Outsourcing is an Important Driver of Topline Growth and Corporate 

Strategy, According to New Global Study. FedEx, Philadelphia 2004


Duck O., Schotz S., Gospodarka materiałowa. Poradnik praktyczny, Wyd. Alfa-Weka, Warsaw 1998 

Grubic J.: Leveraging logistics outsourcing relationships. http://logistics.about.com/library/uc040303a.htm 

Kot S., Slusarczyk B., , Process Simulation In Supply Chain Using Logware Software, Annales 

Universitatis Apulensis Series Oeconomica, 2009, Vol. 2, Issue 11 

Langley J., and Capgemini: 2005 Third-Party Logistics, Results and Findings of the 10 Annual Study, 

Capgemini 2005 

Michałek M.: Nie tylko koszty, czyli co trzeba wziąć pod uwagę przy podejmowaniu decyzji o 

outsourcingu, [in:] Gospodarka Materiałowa i Logistyka no. 11/2005 

Murphy J.V.: Finding value In mature outsourcing relationships, Global Logistics and Supply Chain 

Strategies, June 2005 

Rydzkowski W., Usługi logistyczne, Instytut Logistyki i Magazynowania, Poznań 2004. 

Schary, T.Skjott-Larsen P.B., Zarządzanie globalnym łańcuchem podaż, Wyd. PWN Warsaw 2002 

Skowron-Grabowska B.: Position of Logistics Centers in Reverse Supply Chains. [in:] Enterprise, 

Logistics and Innovations in Knowledge Based Economy. Ed.by Maria Nowicka-Skowron & Ralph 

Lescroart, Haute Ecole “Blaise Pascal”, Arlon 2008 

Szczepaniak T., Transport i spedycja w handlu zagranicznym, PWE, Warsaw 2002. 

Transport Intelligence 2006. Global Supply Chain Intelligence Portal. www.transportintelligence.com 

Waters D.(ed.): Global logistics. New Directions in Supply Chain Management. Kogan Page, London and 

Philadelphia 2007 



Accepted: 25 February 2010


Social Aspects in Buyer-Supplier Relationships of SMEs 

in Hungary 

Gubik Andrea, University of Miskolc, Institute of Economic Theory, Hungary 

UDC: 658.11(439) JEL: P43; P31; N84 

ABSTARCT – Cooperation among companies was brought to the focus of attention by the fast 

changes of economic circumstances and the role it can play in coping with risk, appreciating all those 

characteristics which can help fast reactions and adaptability, like faith among business partners and 

long run relationships. The entrepreneur him/herself has a great influence on the characteristics of 

cooperation as well, besides these processes pushing them to the direction of cooperation, whose 

intention to get involved depends on his/her skills, abilities, but such characteristics of the company 

like scale, fields of activities affect it too. Economic, social and cultural circumstances are of major 

importance too, among which the above mentioned factors pursues their effects. Cooperation among 

companies can happen on any fields of the firms’ activities, for example research and development, 

marketing, purchase, or trading. This present paper intends to introduce the reader to the 

characteristics of supplier-purchaser relationships of small- and medium sized enterprises, based on an 

empirical research’s experiences. According to our opinion, we can draw conclusions on the intention 

to cooperate concerning the nature of the buyer-supplier relationships of companies, so a wide range of 

information can be concluded on small- and medium sized enterprises’ partnerships. 

KEY WORDS: supplier-purchaser relationships, SMEs, Hungary 

Introduction 

Small- and medium sized enterprises receive more and more attention these days all over 

the world considering their economic, and their social importance. Economic processes and 

their fluctuations caused an increase in the uncertainty of economic decisions and 

appreciated flexibility on all fields of companies’ management. The ever stronger 

competition and permanent change in circumstances forces the actors of the economy to 

renew themselves from time to time, to search for new methods and new solutions to their 

problems. Networking and the evolution of a broad scale of international relations among 

companies can be regarded as one of these innovative solutions. 

Partnerships have always been playing an important role in the lives of the majority of 

the small- and medium sized enterprises, mainly because of the limited nature of their 

resources. But uncertainty accompanying changes and the requirement of enhanced 

flexibility brought about major changes both in the quality of company cooperation and in 

the circle of the participants. 

The evolution and development of Hungarian small- and medium sized enterprises 

shows major differences from the international trends. This specialty is explained by several 

factors by the authors (for example by historical traditions, and by socialisation inheritance

Gubik, A., Social Aspects in Buyers-Supplier Relationships, EA (2010, Vol. 43, No. 1-2, 108-116) 109 

of loose business faith, by the lack of in heritage effect, by the valuable nature of political 

relationships and their economic effects, etc.) (See for example: Róbert 1999, Román 2007, 

Kuczi 1998, Czakó et al. 1995, Gábor 1997.). Hungary’s small-and medium sized enterprises 

show resemblance to neither the development process based on economic logic characteristic 

for the Western part of Europe, nor with the SME sector of Asian countries which is based on 

social traditions. Its evolution and development can be regarded as an organic process as its 

major fragment had evolved based on obligations after the changing of the Regime. On the 

other hand social traditions had not played major role in its development. All these factors 

determine the operation, attitudes and practice of the actors of the Hungarian SME sector. 

All these specialities are of major importance even if Hungarian SME sector does not 

show major differences concerning statistical data from other European countries. This is the 

reason why we will have to be careful in using the results of international researches (for 

example Observatory of European SMEs, 2003). This is even more important in case of the 

data of the North-Hungarian Region. 

Our research intends to fill in this gap, searching the answer for the question what type of 

work distribution specialties can be observed in the chosen circle of the small-and medium 

sized enterprises on the one hand, while on the other hand what kind of characteristic 

differences can be found compared to international surveys. Based on these researches we 

intend to answer the important question of whether the analysed circle of Hungarian 

entrepreneur had already managed to form real cooperation or not. 

Methodology 

In my empirical work I used the questionnaire accomplished in the framework of the 

FKFP 0015/2002. education and research project. The data basis constructed based on the 

results of the survey contains representative data according to employee number and field of 

activity of 217 small- and medium sized enterprises of Borsod-Abaúj-Zemplén county (10- 

249 employees). Furthermore, 16 micro enterprises’ (1-9 employees) answers were also used, 

but only case of the questions concerning the subjective opinions of entrepreneurs about 

tendencies. In case of these questions I always guided the attention to treat these results with 

precaution. The county’s structure of SMEs concerning the scale of enterprises shows major 

differences from neither national nor European statistics. If analysing only enterprises 

employing more than 10 people the distribution of small-and medium sized enterprises is 80- 

20 percent. 

For the analyses of the data I used SPSS 14.0 software package. I analysed the sample by 

descriptive statistics, multi-variable analyses, cluster-, factor analyses and by correlation 

showing the strength of stochastic relationship among variables. 

In order to able to draw general conclusions based my sample I paid special attention to 

the structure of my sample. I used the layered sample technique belonging to the group of 

random samples. The reliability of the sample was 95 percent, the sampling error ± 6,16 

percent. During the analysis I used pair wise method when treating missing values, I only 

used the full answers in case any questions. In my research I considered 0,05 significance 

level to be relevant and gave the probability values by the distinct questions if they differed.

110 


The situation of Borsod-Abaúj Zemplén County 

In this paper we would like to demonstrate the county’s situation only by laying some 

data, given the limited framework of this paper. The per capita GDP is 1355 thousands HUF, 

which is 67 per cent of the national average (KSH, 2006a). The same fallback is perceptible in 

investments, where the county’s per capita performance is 70.3 per cent of the national 

average (KSH, 2006a). The county shows underdevelopment in terms of the economic 

organisation’s statistics as well. Low enterprising willingness implies unfavourable economic 

situation as well. 4.8 per cent of the country’s registered organisation can be found in the 

county, about 63 thousands, which are enterprises in almost 90 per cent of the cases. This 

statistic proves that enterprising here is far below the national average. The number of 

enterprises vested for a thousand inhabitant is 77 while the national average is 120 (KSH, 

2006a). It partly contradicts the GEM’s subsequent survey, as according to it the Northern- 

Hungarian region is the 4-5th in the region’s hierarchy in terms of enterprising activity. 

According to the authors the better data can be the sign of convergence, in which motorwaybuilding 

can act as a catalyser. (Szerb, Varga, 2004). In terms of research-expansion, 

performance is below the national average again. (KSH, 2005a, 2005b). 

Unfavourable economic situation reflects in the social indices as well. The unemployment 

rate was 11.7 per cent in the first quarter of 2006, whilst the national average is 7.7 per cent. 

We can find further unfavourable social tendencies while analysing emigration and 

polarization. 

Results of the empirical research 

In the course of the research the cooperation declared by companies (when the company 

filling in the questionnaire declared involvement in cooperation) and latent cooperation were 

treated separately. In this paper we focus on this latter. (The question was the following: Are 

you involved in any types of cooperation beyond buyer-supplier relationships (cooperation: 

long run partnership among independent small- and medium sized enterprises which aims 

to achieve some kind of common goal going beyond a distinct action, a one-time 

transaction.) 

Latent cooperation was analyzed by the characteristics of buyer-supplier relationships, their 

share, geographical distance and the time-horizon of the relationship. Companies had to give 

the characteristics of their three most important buyer and supplier. 

Literature emphasizes the advantages of long run cooperation, because of the routines 

and the evolution of mutual faith, by which companies can realize economic benefits. A 

possible benefit of this kind can be the ever decreasing cost of processes. 

According to our work hypothesis rational companies will form permanent partnerships as 

strategic decisions within a relatively narrow geographical area. 

In order to be able to test this hypothesis we asked the companies about their three most 

important partners. 

The average share of the most important purchaser is higher than 50 percent, but we face 

a high level of standard deviation (St dev=27,9). The most important supplier’s share is 

slightly beyond this, it is 48,3 percent (St dev=25,2). A weak but significant relationship can 

be found between the shares of purchasers and suppliers (p=0,01, Pearson Correlation=0,302)


which mean that the concentrated nature of purchaser and supplier relationships are 

interrelated, companies with a concentrated circle of purchasers tend to have more 

concentrated supplier relationships. 

After analysing the share of the most important partners, the length of the surveyed 

companies’ buyer-subcontractor relationships was analyzed. 

Table 1. The average length of buyer relationships according to type of the buyer and size of the 

company 

Size Type of the buyer Average (year) N Standard Deviation 

Consumer 10,10 31 5,31 

Small and medium sized 

10,33 12 6,41 

enterprise 

10-19 

Large enterprise 7,95 19 4,74 

Local government 7,50 2 3,54 

Total 9,42 64 5,33 

Consumer 13,58 12 4,38 


8,13 23 3,92 

enterprise 

20-49 



Total 9,83 59 4,85 

Consumer 23,25 8 19,73 


9,71 7 4,64 

enterprise 

50-249 



Total 13,58 31 11,94 

When analysing the length of partnerships it can be concluded that the average length of 

relationship with the most important buyer is over 10 years (St.dev=7,059). Partnerships 

among companies and their suppliers also last for almost 10 years on average (St.dev=6,04). 

The analysis of buyer-supplier relationships of companies is made more difficult by the 

fact that companies’ chances to survive differ according to their size, so the average age of 

the groups of companies also differ. So the average age of partnerships increases with the 

increase of the scale of companies. 

That’s’ why we introduced a new variable by filtering the age of companies to decide the 

permanent nature of these relationships by measuring the length of the relationships as a 

share (%) of the companies’ age. 

The variable expresses the faith of buyers to the company and the company’s loyalty to 

its suppliers. 

Length of the partnership as 

a share of the companies’ age 

= 

Time period of the partnership (year) 

Age of the company (year)

112 


The average value of the permanency index is 0.783 in case of the most important buyers, 

while 0.72 in case of suppliers which shows that companies’ relationships can be regarded to 

be stable. 

It can be concluded based on these tests that there is a connection between the permanent 

natures of the surveyed companies’ relationships: if a company decides to be involved in a 

permanent relationship, it is more likely to act so in all of its partnerships (p=0,000, the most 

important and second important buyer’s Pearson Correlations 0,721; the most important and 

second important supplier’s Pearson Correlations 0,657). This means companies tend to 

harvest the additional gains of cooperation as strategic decisions. 

After this the buyer-supplier relationships were analysed according to their geographical 

concentration. According to our working hypothesis there is a connection between the size of 

companies and the geographical concentration of their relationships and the geographical 

concentration and the permanent nature of cooperation. 

Local markets are generally very important for the surveyed companies. The smaller the 

size of a company is, the more likely it is to be connected to the local environment, to the 

local market, because of its limited resources and the characteristics of its purchasers. It was 

cleared that personal contacts and human factors generally are decisive in respect of the 

cooperation’s success. That is why they play a major role in forming permanent cooperation. 

When analyzing the partnerships from the geographic point of view it can be concluded 

that there is a statistically significant relationship between the geographical distance and the 

size of the company involved in cooperation (p=0,01, Eta 0,341). That means, that the smaller 

the company is, the more like its partnerships are concentrated. These are demonstrated by 

the following figures. 

Figure 1. Geographical concentration of suppliers according to the size of the company 

100% 

80% 

60% 

40% 

20% 

0% 

10-19 20-49 50-249 

Same region Other Hungarian region Foreign


Figure 2.Geographical concentration of buyers according to the size of the company 

100% 

80% 

60% 

40% 

20% 

0% 

10-19 20-49 50-249 

Same region Other Hungarian region Foreign 

The further extent of cooperation proved to be matched with the more permanent nature 

of relationships. 

On the other hand, both the characteristics of activities and their types are decisive in the 

aspect of geographical situation of the partners (p=0,000, Cramer’s V=0,259). Buyers of 

companies in the fields of merchandise and services are more concentrated geographically; 

more distant partnerships and international activity are rather characteristic for industrial 

companies. The main connections are shown on figure 3. 

About 90 percent of the partners of companies supplying directly consumers or local 

governments can be found in the same region the firm is situated in. Buyers of those who sell 

to small- and medium sized or large enterprises are less concentrated, but even in their case, 

partners pursuing their activities in the same region play a major role (63,7 and 49,3 percent). 

Figure 3. Geographical concentrations of buyers according to the affiliation and field of 

activities of the buyers 

100% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

Consumer 

SME 

Large enterprise 

Local government 


100% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

Industry 

Trade 

Services 


Suppliers’ geographical positions differ both according to the type of supplier and the 

field of activity. Suppliers of small enterprises can usually be found in the same region where

114 


the company is situated in. With the increase of the supplier company’s size the probability 

of having more distant partners increases too (p= 0,000, Cramer’s V= 0,304). This context is 

shown on figure 4. 

Inter-regional relationships of both industrial and service sector firms are over-average 

important (56,5 and 59 percent). In case of services major differences can be found according 

to branches of services pursued (transportation and financial activities are less concentrated). 

Figure 4. Geographical concentrations of suppliers according to the affiliation and field of 

activities of the companies 

100% 

100% 

80% 

80% 

60% 

60% 

40% 

40% 

20% 

20% 

0% 

Small enterptise 

Medium sized enterprise 

Large enterprise 


0% 

Industry 

Trade 

Services 


The time-horizon of the surveyed companies’ buyer-supplier relationships and the 

geographical concentration was analysed separately. The stochastic relationship between the 

permanent nature of relationships (the length of the partnership as a share of the companies’ 

age) and the geographical location of the buyer-subcontractor was tested. 

Based on the edification of the sample the more close partners are situated to each-other 

(the buyer and its supplier), the more lengthy their relationship will be. We can conclude 

that personal relationships favour the length of partnerships and human factors of 

cooperation can be decisive for its success. 

Table 2. The average length of buyer relationships according to the geographical location of buyers 

Geographical location of buyers Average (year) N Standard Deviation 

Same seat as the company 12,41 32 4,655 

In 50 km round of the company 9,93 41 8,878 

Same region 9,46 37 4,959 

Other Hungarian region 9,24 33 3,873 

EU member state 9,29 14 5,797 

Other country 3,00 3 1,732 

Total 9,99 160 6,144 

High values of deviation warn us that the sample is not homogenous, so the context was 

analysed distributing buyers to types as well. According to the type of purchaser small- and 

medium sized enterprises show a significant, while large enterprises show no significant 

relationship between the geographical position and the length of the partnership, which


means that in case of large companies, purchaser partners’ geographical distance does not 

play an important role in the permanent nature of the relationship. 

The permanency of the partnership (percentage form) and the geographical position of 

the purchaser also show the same context, geographical closeness of the purchaser increases 

with the permanency of the partnership (p=0,02, Éta2=0,117). 

The above mentioned observations concerning the cooperation among companies shed light 

on the contradiction of the time-horizon and geographical aspects of partnerships. 

The geographical concentration of partnerships is beneficial for the companies involved 

as it contributes to the permanent nature of relationships on the one hand, giving additional 

economic advantages for the companies, but on the other hand, concentration denies the 

requirement of economic rationality as it causes the company to be dependent on the 

economic fluctuations of its close environment. 

Summary 

Interrelation can be found between the permanent nature of the surveyed companies 

most important partnerships: if a company forms permanent relationship on any fields of its 

activity, it will try do act so in all of its partnerships. Companies tend to harvest the 

additional advantages of cooperation by making strategic decisions. Permanent partnerships 

are usually made within a relatively narrow geographic region and as the concentration of 

partnerships increases so will increase the time-horizon of the relationships as well. 

Permanent and geographically concentrated partnerships of small- and medium sized 

enterprises contribute to harvesting the additional advantages of cooperation while on the 

other hand make them more dependent on their economic environment. Economic 

rationality appears in a paradox way in this case. 

This is why rationally behaving companies have to find the balance between forming 

economically beneficial permanent partnerships and bearing additional risk of geographical 

concentration. 

The survey of the county was a one time, cross section research, but we see the 

opportunity to broaden it to the North-Hungarian Region, with some adaptation of the 

questionnaire. This would enable us to make a regional comparison and moreover, to 

compare our results with the Observatory of European SMEs results on small- and medium 

sized enterprises. 

In the framework of the Laky Teréz Foundation’s grant an experts’ questionnaire will be 

accomplished in the course of which we would like to get to know the opinions of other 

parties (supporting institutions, authorities) too. The results of empirical researches will be 

controlled by this expert questionnaire and interviews will be made for the situation of 

small- and medium sized enterprises too, asking the representatives of institutions which 

influence small- and medium sized enterprises directly, or indirectly. 

Further qualitative research should be made, as the barriers of our research showed, 

which evolved from the complex nature of relationships among companies. This complexity 

of the system of relationships and the analysis of embeddedness requires qualitative 

methods to be used. Data standing at our disposal did not enable us to fully map all the

116 


relationships between factors of partnerships, mainly in case of reasoning, so further efforts 

should be made to answer all questions. 

References 

Róbert, P. (1999): Kikből lettek vállalkozók? A vállalkozóvá válás meghatározó tényezői 

Magyarországon a kommunizmus előtt, alatt és után. Közgazdasági Szemle XLVI. évf. 403-427. 

oldal 

Román, Z. (2007): A vállalkozás a magyar gazdaságban – nemzetközi tükörben. Köz-Gazdaság 2007. 

II. évf. 2. pp. 67-84. 

Kuczi, T. (1998): Vállalkozói kultúra – az életutak finalitása. Replika 29. szám 1998. 

Czakó, Á., Kuczi, T., Lengyel, GY. Vajda, Á. (1995): A kisvállalkozások néhány jellemzője a 90-es évek 

elején. Közgazdasági Szemle, XLII. évf. 1995. 4. sz. 

Gábor, R. I. (1997): Belső versus foglalkozási munkaerőpiac – a posztszocialista átalakulás elhanyagolt 

dimenziója. Közgazdasági Szemle XLIV. évf. 457-473. oldal 

KSH (2006a): A gazdasági fejlődés regionális különbségei Magyarországon 2005-ben. Országos 

statisztika, Központi Statisztikai Hivatal Debreceni Igazgatósága 

KSH (2005a): Kutatás és fejlesztés 2004 Központi Statisztikai Hivatal 

KSH (2005b): Innováció 2003. Központi Statisztikai Hivatal 

Szerb, L., Varga, A. (2004): A vállalkozói aktivitás regionális és lakóhely szerinti különbségei 

Magyarországon 2004-ben. Megjelent: Vállalkozásindítás, vállalkozói hajlandóság és a vállalkozási 

környezeti tényezők alakulása Magyarországon a 2000-es évek első felében. Global 

Entrepreneurship Monitor, 2004 Pécs 

Observatory of European SMEs (2003/5): SMEs and Cooperation. KPMG Special Services and EIM 

Business & Policy Research in the Netherlands, European Network for SME Research, Intomart 

Luxembourg. 





Competition in Banking Market in Slovakia 

Střelecká Zdenka * , Ekonomická univerzita v Bratislave, Národohospodárska fakulta, 

Bratislava, Slovakia 

UDC: 336.7 (437.6) JEL: G21; N24 

ABSTARCT – The process of fundamental changes of Slovak banking sector has had essential 

influence on the concentration and on the character of banking products. The article is oriented on 

analysing the competition level using Herfindahl index and CR3 and CR5 indexes. Indeces are used to 

compare the level of competition using following balance items: total assets, bank loans and deposits to 

corporate and retail sector. This approach brings us different conclusions. 

KEY WORDS: competition, banking sector in Slovakia, Herfindahl index, CR3, CR5, balance 

sheet 

Introduction 

Competition is a basic component of a well-functioning market mechanism. It is a rivalry 

between individuals or economic groups with their differentiated interests and goals. In 

general, we recognize competition on the supply or demand side, price or non-price and 

perfect or imperfect competition. Imperfect competition is further characterized as 

monopolistic competition, oligopoly and monopoly. Information about the level of 

concentration is important not just for the evaluation of market structure, but they help in 

the process of creating recommendation for concrete measures of monetary policy. 

Because of its special position it is important to determine the level of the competition in 

the banking market. Firstly, it is because banking market belongs to the markets with high 

and strict regulation. Supervision on the banking sector is carried out by specialized 

departments of the Ministries of Finance, separate offices or central banks. In Slovakia, the 

supervision is operated by National Bank of Slovakia (NBS). Secondly, entry in the market is 

a subject to several restrictions. For example the management has to be qualified enough; it 

has to obtain a banking license from the supervisor and has to own a sufficient level of 

capital. Furthermore, during their activity commercial banks have to meet the requirements 

of domestic supervisor and the minimum capital requirements known as Basel II. On the 

other hand it is known that banks undertake high risk and their actions affect the overall 

development of the economy. That is the main reason why the banking sector is a subject to a 

higher degree of regulation than other sectors are. In the past the importance of healthy 

functioning of the banking sector forced the governments in many countries to undergo 

restructuring process of banking sectors to avoid the negative impact on the entire sector and 

on the whole economy. 

* 

E-mail: zdenka.strelecka@gmail.com

118 


The bank is exposed to risks on both sides of its balance sheet. On the asset side it runs the 

market and credit risk (counterparty default risk). On the liabilities side there is a risk of 

availability of the bank´s funds and their time restriction. 

Measures of competition 

Frequently and easily used way how to determine the concentration in a particular sector 

are concentration ratios, the Herfindahl index and Hirshman index. With these indices it is 

possible to determine the level of market concentration; the higher the concentration is the 

weaker market competition will be. 

Recent studies dealing with the competition in the banking market use a Boone indicator, 

which is based on the opposite approach - the more efficient bank is the greater market share 

of competitive market it gains. In some cases, especially when comparing banking markets 

with various sizes, the Boone indicator appears as a more appropriate and flexible variable. 

Concentration ratio is designed as a sum of variable rk which represents market share of 

the i th largest firm. 

Herfindahl index (some sources refer to Herfindahl-Hirschman Index, HHI index) is 

based on the theory of industrial organization of Harvard School. This theory deals with the 

relationship between the industry structure – conducting the business - and its performance 

(so-called SCP paradigm “Structure - Conduct – Performance”). Highly concentrated 

structure is associated with monopolistic behaviour (Tokárová Mária, Rievajová Eva (2007)). 

It is defined as the sum of the squares of market shares of all firms. Index takes into account 

the number of firms in the industry and their market share. Analytical transcript of 

Herfindahl index (Kočišová Kristína (2008, p. 20)) is as follows: 

h - real function of n variables 

n - number of firms in the industry 

qk - the value of the variable for the i th firm, k = 1, ..., n 

Q – the value of the variable for the industry 

rk – the market share of the company in the industry converted in the percentage 

By definition of the U.S. Department of Justice, the market is considered as highly 

concentrated if the HHI exceeds 1800 1 . If the value is below 1000 the market is considered as 

not concentrated. When the value of the index is close to zero it is a symbol of a competitive 

environment without a dominant player. If all firms in the market have equal market share, 

then inverse value of the index represents the number of firms performing on the market. 

1 

[cit. 2009/12/31] http://www.justice.gov/atr/public/testimony/hhi.htm

Střelecká, Z., Competition in Banking Market in Slovakia, EA (2010, Vol. 43, No. 1-2, 117-125) 119 

Modified version of HHI index is a Hirschman Index, the analytical entry is defined as 

follows: 

The index can take values [0.1]. Low value of Hirschman index shows highly competitive 

environment, by contrast, value close or equal to 1 indicates maximal concentration 

(Kočišová (2008, p. 21)). 

These indicators have one disadvantage. They do not distinguish between large and 

small countries. The fact that the concentration may occur as a result of a natural competition 

when the effective company eliminates its market rivals is also ignored. 

Competition in the Slovak banking market 

As a measure of the competition in the Slovak banking market National Bank of Slovakia 

uses three indices: CR3, CR5 indeces and the HHI index. For comparison, Czech national 

bank uses different measure and that is a Lerner index. 

• CR3 index is defined as the share of the three banks with the highest volume of 

the variable on total volume of the variable in the banking sector; only institutions 

with the positive value of the variable are included in calculation 

• Analogically CR5 presents the share of five banks with the highest volume of the 

variable on the total volume of the variable in the banking sector; only institutions 

with the positive value of the variable are included in calculation 

• Herfindahl Index (HHI) is defined as the sum of the squares of individual banksʹ 

share on the total volume of the variable, expressed in percentage; only 

institutions with the positive value of the variable are included in calculation. 

The following chart shows the evolution of all three indices since the year 2005 till the 

second quarter of 2009 using the total assets as a variable. Looking at the development of the 

HHI index it is best to see that level of competition does not stagnate and during the period 

2005 - 2Q 2009 several changes in various indicators occurred. Increase in the value of the 

HHI index means an increase in market concentration (and vice versa the reduction of 

competition). In the year 2005 HHI index reached the value 1084 and in the second quarter of 

2009 the value of the 1220. Although the values are within the zone of moderate market 

concentration, it should be noted that since the year 2005 there has been a substantial 

increase of the concentration ratios in the banking market. 

During the years 2006, 2008 and during the second half of 2009 CR3 indicator and the 

HHI index reached the highest values. The share of five largest banks (CR5) on total assets 

more or less copied the development. The exception is the year 2006 when there was a 

decline in the share of the five largest banks and increase in the share of three largest banks. 

We could say that during this year three largest banks reinforced their leading market 

position. Looking on the decrease of CR3 and HHI parameters between 2005 and 2007 thus 

caused an increase in competition. In the same time variable CR5 had an opposite 

development. The share of five largest banks on total assets increased at the expense of the

120 


share of three largest banks, which can be defined as a positive development. The highest 

degree of concentration was observed at the end of 2008, which was due to the big amount of 

cash deposits from population. The reason for cash deposits was a euro adoption and 

conversion of Slovak crowns to euro currency. Later on commercial banks imposed these 

funds through the deposit facility in the NBS. In comparison with the study of European 

central bank the average value of CR5 indicator for 25 European countries is 72% (European 

central bank (2005)). 

Chart 1. Development of the HHI index, CR3 and CR5 indeces on the total assets market 2 

Analyzing the values of indices for different sectors (retail and corporate) and for each 

balance sheet item (client´s credits and client´s deposits) it allows us to observe in which 

sector the concentration reaches the highest level. The values of individual variables are 

shown in the following two tables. The first table is an analysis of market concentration for 

credits to corporate and retail sector. The second table monitors developments on the deposit 

market. (CR3 R – CR3 indicator for retail sector, CR3 C – CR3 indicator for corporate sector, 

CR 5 R – CR5 indicator for retail sector, CR5 C – CR5 indicator for corporate sector, HHI R – 

HHI index for retail sector, HHI C – HHI index for corporate sector) 

Table 1. CR3, CR5 a HHI index values on the loan market 1 

credits CR3 R CR3 C CR5 R CR5 C HHI R HHI C 

2005 64% 40% 81% 58% 1610 907 

2006 63% 43% 81% 63% 1588 981 

2007 61% 48% 82% 68% 1587 1088 

2008 63% 47% 82% 67% 1607 1096 

2009Q1 64% 47% 82% 67% 1618 1096 

2009Q2 64% 47% 83% 67% 1639 1088 

2 

[cit. 2009/12/1] http://www.nbs.sk


Table 2. CR3, CR5 a HHI index values on the deposit market 3 

deposits CR3 R CR3 C CR5 R CR5 C HHI R HHI C 

2005 61% 52% 75% 68% 1612 1314 

2006 62% 53% 76% 69% 1636 1344 

2007 63% 55% 75% 74% 1625 1480 

2008 64% 58% 76% 75% 1614 1485 

2009Q1 63% 56% 75% 74% 1580 1459 

2009Q2 63% 56% 75% 74% 1567 1503 

Using individual balance sheet items instead of total assets demonstrate us higher values 

of concentration indices. Values for deposit market differ at most. In comparison with the 

value of the HHI index for total assets they vary approximately from 300 to 500 points. 

Competition in the credit market developed in different way. Compared with the 

analysis of total assets, the values of the HHI index in the retail sector are higher by 400 to 

500 points and in the corporate sector are even below around 200 points. The concentration 

on the credit market for the retail sector is substantially higher than the concentration for the 

corporate sector. Similar development can also be seen on the deposit market even though 

there is not so high disparity. 

Chart 2. HHI index for loans and deposits to retail and corporate sector 2 

The values of the HHI index for retail sector on both markets reached the value around 

1600 (see Chart 2). This level of concentration indicates that a low level of competition 

dominated in this sector. It should be noted that the market with the HHI index value of 1800 

is considered as a highly concentrated. 

In the corporate sector, the situation on the market with deposits and loans is different. A 

high level of competition dominates on the credit market. The values of the HHI index in 

deposit market for corporate sector are catching up with the index values in deposit market 

for retail sector. This is a sign of lower competition than on the credit market. 

3 


122 


Chart 3. CR3 and CR5 indeces on credit market 4 

The development of the CR3 and CR5 indeces for credit market gives us interesting 

conclusions. While the share of five largest banks for the retail sector changed over the 

period very slightly, in 2007 the proportion of three and five largest banks in the credit 

market for the corporate sector reached the highest level. An important and surprising fact is 

that the difference between the share of three largest banks in the retail sector and the share 

of five largest banks in the corporate sector is minimal. What once again is a demonstration 

of the low level of competition in the services for retail sector and the dominant position of 

the three largest banks. 

Until 2007 deposit market for retail sector had substantially higher concentration than the 

corporate sector. But since 2007 the share of five largest banks in both sectors is almost equal 

(the difference is 1 percentage point.). Although the share of three largest banks in the 

corporate sector is lower than in the retail sector, around 10%, there is a similar trend with 

the share of three largest banks in the retail sector. It should be noted that during the 

watched period in the retail sector minimal changes took place. 

Chart 4. CR3 and CR5 indeces for deposit market 3 

4 



An alternative method of determining the competition 

An alternative way how to determine the competitive environment is to compare the 

difference between the individual market shares of market players. Total assets are 

considered as an appropriate indicator for determining the market share. In the following 

section the share of assets of the i th bank on assets of total banking sector (MS i) is compared 

with the share of assets of j th bank on total assets of banking sector (MS j). 

Chart 5. Development of market shares (variable – total assets) 5 

The difference between the market share of bank with the strongest position (leding 

bank, MS 1) and bank with the second largest share (MS 2) reaches the highest value in 2006. 

Comparing the difference between the market shares of leading bank and bank with the 

third largest share (MS 3) a similar trend can be seen. The development of these indicators 

gives us interesting results. While during years 2004 - 2006 leading bank affirmed its position 

(see Chart 5), between years 2007 and 2008 lost this favourable position and what is 

interesting the difference between the leading bank and position of the second and the third 

bank decreased. In the future we can expect the exchange of the positions between bank with 

the second and third largest market share. 

If in the calculation of market shares is variable “total assets” replaced by balance sheet 

items: client´s credits or clientsʹ deposits, it would bring us interesting conclusions, too. The 

development on the deposit market is slightly different. Till 2006 there is a widening gap 

between the market shares of leading bank and the bank with the second highest market 

share. During the years 2006 and 2008 there is a reduction of this difference. On the contrary, 

the difference between leading bank and the bank with the third largest market share (MS 1 - 

MS 3) during years 2004 and 2008 decreased (Chart 7). Leadership on the market with 

deposits and with total assets belongs to the same bank. 

5 

Author´s calculations. [cit. 2009/12/1] http://www.nbs.sk/sk/statisticke-udaje/menova-abankovastatistika 

/menova-statistika-penaznych-financnych-institucii#AM1-12PF

124 


Chart 6. Market shares (credits) 4 Chart 7. Market shares (deposits) 4 

The situation on credit market during the years 2004 and 2008 changed significantly. The 

bank with leading role in 2004 dropped to second place in 2005 and since 2006 it declined to 

third rung. The bank which won the leadership in 2005 remained at first place until 2007. 

In the following year the difference between MS 1 and MS 2 was minimal and the leading 

position was overtaken by the bank with the second largest market share of loans. These 

findings correspond with the development of the recent years. Due to the high economic 

growth we could observe easening of credit conditions and competitive fights between 

commercial banks. 

Analyzing the level of competition by using the market shares of 3 major banks brought 

us, especially for the credit market, opposed conclusions as the analysis of market 

concentration using the HHI index. While the HHI index (and also partly CR3 and CR5 

index) informed us about the stagnation or increase of market concentration, market share 

analysis demonstrated a highly competitive fight between commercial banks. 

Conclusion 

A general rule about countries with a small market is that they have a high degree of 

concentration. In Slovakia, more than 50% of banking sector assets is held by the three largest 

banks and approximately 70% is held by the five largest market players. Such a situation 

refers to a higher concentration, but compared with other ʺnewʺ EU countries we belong 

among the moderate above-average. 

Analysis of the market share of three largest banks has shown us competition and a 

decreasing position of the leading bank. On one hand, the situation in retail sector, where 

there is a permanently higher level of concentration than in the corporate sector, is caused by 

unconcerned consumers. On the other hand, the fact is that the three largest players on the 

banking market are banks with the longest history. Two of them operate on the Slovak 

market for more than 50 years and they inherited a number of clients from the previous 

socialist era, when bank did not need to fight for a client.


Recently, the situation has changed dramatically. Except for the entry of few new players 

(most recently in November 2007), the Slovak banking sector was marked by the adoption of 

the euro and economic crisis. These two factors caused the decrease of profitability of the 

banking sector and both sides of the balance sheet were affected. One of the potential 

benefits of euro adoption should be an increase of competition but so far the development 

did not show such benefit. It will be questionable whether the future development will bring 

strengthening or weakening of the position of three biggest players. 

References 

European central bank. 2005. EU banking structures. Frankfurt am Main: European central bank. 

Kočišová, Kristína. 2008. “Konkurencia na slovenskom bankovom trhu”. Biatec, 16/2008 (10): 20-25 

Tokárová, Mária, and Rievajová, Eva. 2007. “Inovácie vo vývoji prístupov k teóriám konkurencie, 

súťaživosti, resp. protimonopolnej politiky.” http://semafor.euke.sk/zbornik2007/pdf/tokarova 

_rievajova2.pdf 





Innovation Policy Based on Network Paradigm 

Pachura Piotr * , Czestochowa University of Technology, The Management Faculty, 

Czestochowa, Poland 

UDC: 330.354 JEL: 031 

ABSTARCT – The aim of this paper is to present the role of cluster and network collaboration in 

innovativeness process and knowledge based economy. The paper describes the clustering pagadigm in 

EU policy and examples of the network creating process and organizing cluster initiatives in EU 

countries. 

According to the results of literary research it is possible to univocally state that the 

geographical proximity between enterprises of a similar profile of activity facilitates the 

achievement of a higher level of productivity and innovativeness. The clusters covering the 

spatial sphere of its location: producers, suppliers, service providers, research units, 

educational institutions and other units supporting a given sector became an important 

factor in the economic development of regions. The trend towards interaction and basing on 

the resources of business partners operating in a given location results from the new trends 

of management, among others, the school of resources in strategic management at the top 

with key competences and the open innovation paradigm. 

Directing the regional policies of the EU along the concept of clusters also results from 

the wide impact of the progressing globalization on the essence of inter-regional 

competitiveness as well as regional cohesion (Matlovič R., Matlovičová K. 2008). Increasingly 

lower costs of transport and communication and the simultaneous liberalization of 

international trade revealed the weaknesses of regional economies and exposed them to 

global competition. With regard to the increasing number of locations with attractive 

conditions for investment, European regions faced the necessity of offering foreign investors 

even more unique benefits. Clusters became in this situation a magnet attracting a bunch of 

highly specialized resources of knowledge in a given sector which are not present in other 

locations. 

Therefore, due to its practical application, the concept of the theoretical clusters 

regardless of whether the work of M. Porter or as a stage in the evolution of industrial 

districts of Marshall in the direction of the systems of innovation became one of the most 

important elements of economic, innovative and regional policies of the EU. The reasons for 

such a turnaround in the activities of the European Commission have been previously 

indicated. It is possible to add that the traditional instruments of supporting economic 

growth and the competitiveness of regions, for instance by supporting whole branches of the 

industrial sector, have not succeeded and had to be replaced by a mechanism that is more 

adjusted to the challenges of the global economy. 

* 

Address: Armii Krajowej 19B, 42-200 Czestochowa, Poland, e-mail: ppachura@zim.pcz.pl

Pachura, P., Innovation Policy Based on Network Paradigm, EA (2010, Vol. 43, No. 1-2, 126-133) 127 

The network approach to innovation and the according theory of clusters became the 

central point of interest for the EU. A key element in the policies of innovation of the EU 

became the cluster-based policy. This type of policy is defined as a grouping of activities and 

instruments used by the authorities at various levels for the improvement of the level of 

competitiveness of the economy by stimulating the development of the existing cluster 

systems or their creation at first and foremost the regional level (Brodnicki, Szultka, 2004). 

Among the elements that decide on the effectiveness of policies of supporting clusters the 

following assumptions can be listed (EDA, 1997): 

• The driving strength of the cluster policy is the free market; 

• This combines various units of the regional economy; 

• This is based on cooperation and mutual activity; 

• This takes the form of a strategic nature and helps to shape a common vision; 

• This creates new value. 

Involvement in initiating policies based on clusters can be naturally explained by the 

determination of EU member countries in the realization of the aims of the Lisbon Strategy 

whose achievement at the first deadline turned out to be impossible. Clusters seem to be the 

appropriate direction for the realization of the innovative policies of the EU. From the point 

of view of the European Commission, promoting policies based on clusters is to lead to the 

achievement of the aims of the Lisbon Strategy. The competing conglomeration of 

enterprises provides the possibility of access to the network filled with skills and abilities to 

generate innovation. They are becoming an effective environment in which it is easier to 

realize the initiation of new products immediately after their development in research 

laboratories. 

A policy based on clusters is not a separate element of activities on the part of national 

and regional authorities, but should be rather treated as an integral element of various 

policies. This is most frequently reflected in the assumptions of scientific policy or scientific 

and technological, innovative, economic, and regional development. In this way the idea of 

clusters penetrates into the strategy of development for regions, but is also taken into 

account in state programmes that are financed by the EU structural funds. Most often 

however, the philosophy of policies based on clusters takes on a horizontal nature and finds 

itself in all the afore-mentioned policies. It fits in perfectly into the policies of regional 

development based on the model of the innovation system. Clusters as a way of arousing the 

innovativeness of regions usually find themselves among the priorities of regional strategies 

of innovation. The cluster policy is part of the model of strengthening interactions within the 

framework of the so-called triple helix, or in other words, the system of interactions between 

the key players of the system of innovation: enteprises, scientific and research units and local 

authorities. 

The concept of clusters became a topic of interest for national and regional governments, 

organizations of entrepreneurs, international organizations particularly OECD countries and 

the EU in the second half of the 1990s. This interest can be observed through successive 

cluster initiatives, starting from the theoretical work explaining the essence of clusters to the 

attempts of working out the methodology of their identification and finally the guiding rules 

in the sphere of the policies of stimulating clusters in regions. These last initiatives are worth

128 


devoting more time to in order to illustrate the factors of success in undertaking activities 

within the framework of regional policies on behalf of the development of clusters, which 

has been done in the later stages of this paper. The guiding rules of the programme and the 

strategic documents of the EU took account of the concept of clusters relatively late as it 

occurred at the beginning of this century but it is necessary to explain this as a rather 

different approach to the issue of the innovativeness of regions. The efforts in this area were 

from the very beginning directed towards the issue of the systems of innovation, industrial 

districts and local innovative environments, which in their own essence are also based on the 

network paradigm of innovativeness. 

Apart from the initiation of the afore-mentioned models of regional development, 

another trend of activity in the EU associated with clusters was the creation of networks of 

interaction between regions. The stimulation of networks of interaction appears in various 

aspects and policies of the EU. The scientific and research policies can be used here as an 

example together with its main instrument in the form of the Framework Programmes that 

support the networks of interaction of scientific centres and their relations with industry. In 

the middle of the 1990s, the EU started to place particular emphasis on the issue of regional 

innovativeness. The breakthrough moment was the passing of the Lisbon Declaration by the 

European Council in 2000 and the acceptance of the aim of transforming the EU economy in 

the most competitive market based on knowledge in the world. In this context the policy of 

supporting clusters in EU member countries grew in importance and the regional authorities 

acknowledged that the foundation of competitiveness is that of small enterprises. The 

creation of an environment that is friendly towards the development of small firms became a 

priority, particularly through the stimulation of interaction between them and also creating 

interaction with the R&D sector. The strategy of development for EU member countries 

initiated with the aid of programmes financed by EU funds that were assigned priorities in 

the sphere of supporting networks of interaction at the level of enterprises and the area of 

R&D. The network model of innovativeness was accepted as binding, in which the theory of 

clusters fits perfectly. 

The activity of the EU Commission in the area of creating a favourable regulatory 

framework and the popularization of knowledge on the topic of clusters is confirmed by 

many conceptual papers and documents among which the following can be mentioned: 

• “Industrial Policy in an Enlarged Europe” from 2002, in which the creation of 

innovative clusters became acknowledged as the key priority of the new 

industrial policy, 

• Communiqué entitled “Some Key Issues in Europe’s Competitiveness – Towards 

an Integrated Approach”, according to which one of the proposed activities was 

to be the European project of identifying the best practices in the sphere of of 

initiatives of developing clusters, 

• Programme document entitled “Industrial Policy in an Enlarged Europe” from 

2004, in which the innovative policies and supporting initiatives based on clusters 

were listed as being of key importance (Ślusarczyk B., 2008), 

• Consultation document entitled “Innovate for a competitive Europe”, which 

states that the structural funds can support the internationalization of regional


clusters, which according to the European Commission became the effective 

mechanism of stimulating innovation. 

The policy of regional development based on clusters can be the effect of bottom-up 

initiatives, as well as resulting from top-down initiatives. The second type of operation is the 

effect of the activity of the local authorities, however the bottom-up activity is usually 

characterized by the activity of the branch environment. Regardless of the way of realization 

of the cluster initiatives, a significant role should be attributed to the public authorities. 

According to M. Porter, the role of the public factor in creating and stimulating the 

development of the cluster in the area of shaping the factors of production, related and 

supporting sectors, conditions of demand, as well as the strategy and rivalry between 

enterprises (Porter M. 2001). 

The first paper that carried out a complex analysis on the effects of policies based on 

clusters realized in selected countries is the document entitled “The Cluster Initiative 

Greenbook”. In this document the results of research into cluster initiatives were presented 

within the dimension of their effectiveness and range. Interesting results were also presented 

within the framework of a range of OECD projects (OECD 2001) directed at the analysis of 

practical aspects of the functioning of clusters. The afore-mentioned projects were aimed at 

diagnosing the existing state in the area of cluster initiatives, as well as working out the 

guiding principles in the area of formulating and initiating innovative policies based on 

networks. A compendium of knowledge and a type of guidebook on the topic of shaping 

policies based on clusters is constituted by the work prepared by the non-governmental 

organization IKED (International Organization for Knowledge Economy and Enterprise 

Development) (Anderson 2004). In the identification of the recommendations and factors of 

success in the realization of cluster initiatives the report prepared at the request of the 

Ministry of Trade and Industry of Great Britain was also used (A Practical Guide...) . 

On the basis of the afore-mentioned documents it is possible to indicate the experience of 

particular countries in the area of initiating policies based on clusters. The results of research 

facilitate the creation of the basic recommendations for the practical formulation and 

initiation of the policies of regional development based on the concept of clusters. 

Cluster initiatives most frequently appear in highly developed countries, mainly in the 

sectors of large technological intensities with regard to the following: IT, 

telecommunications, medical equipment, production technology, pharmaceuticals, 

automotive. Most initiatives were directed at the development of a specific cluster and were 

started between the years 1999 – 2002. The aims of creating cluster initiatives are very varied 

and can be classified within the framework of the following 6 categories: research and the 

creation of network interactions, education and training, innovation and technology, 

expansion of cluster, political activity, commercial interaction. Within the framework of the 

distinguished categories of aims, most participants of clusters (over 75%) indicate the main 

aims of their participation in cluster initiatives as follows: the creation of interaction between 

enterprises and creating relations between people, development of their own company, 

easier access to new technologies and the ability to create innovation. Initiatives that have a 

priority goal in promoting innovation and new technology achieve significantly greater 

success in the area of improving the competitiveness of particular enterprises.

130 


The process of creating and organizing cluster initiatives takes on different forms despite 

the fact that the nature of such initiatives enforces the principles of creating a partnership 

between the industrial sector, research and public authorities. The participation of particular 

parties is varied in individual cases. The idea of constructing a cluster is most frequently 

becoming an initiative of local authorities and the sector of enterprises at a more or less equal 

pace. A decidedly greater role in the aspect of financing cluster projects is played by public 

authorities. In over half of the clusters analysed, the main source of financing was the 

regional budget or national public units. In turn, the involvement of colleges in initiating 

clusters in their initial phase of development was very small, which clearly confirms the low 

financing coming from these units. A dominating role in managing clusters is played by the 

sector of enterprises, while the role of public authorities in some decisions is also envisaged. 

The involvement of local authorities, most often in the form of neutral organizational units, 

is to lead to the balancing of interests of the competing enterprises. The source of financing 

does not seem to have great significance in achieving results both in the aspect of 

competitiveness as well as the numbers of members of a cluster. 

According to the theory of clustering, most initiatives are directed in their own sphere in 

a given industrial branch or geographical zone. Most existing clusters include units that are 

located within a radius of one hour’s drive. The aspect of geographical distances was 

indicated as a significant factor in facilitating mutual personal contact. Clusters are not 

limited to the type of enterprises which can become its member. Both direct competitors and 

foreign business units can freely participate in the aforesaid initiatives. The only restriction 

in this regard refers to one level in the value chain, which means for instance a greater role in 

including specific producers but not their suppliers and clients. 

The fundamentality of initiating policies based on clusters is becoming univocally 

confirmed by the benefits indicated which are provided to enterprises in these types of 

initiatives. Entrepreneurs identify the success resulting from the membership of a cluster 

through the prism of competitiveness and achievement of business goals. Most 

entrepreneurs confirm that the initiatives led to the improvement of their competitiveness 

and the most frequent effect is the tightening of interaction between the industrial sector and 

the R&D area. The factors that are decisive in the success of clusters include the following: 

the quality of the business environment, structure and way of running economic policies, as 

well as the internal strength of the cluster itself. Within the framework of the first category 

two key factors should be listed which attract other firms to participate in the cluster 

initiative to the highest degree: the presence of an advanced scientific society and a high 

level of trust between firms, while also the public and private sectors. Economic policy is also 

significant with such elements as: promotion of scientific research and innovation, the 

possibility of taking economic decisions at a regional level, protection of the high level of 

market competition. The trend of achieving better results in the area of competitiveness is 

visible through cluster initiatives directed at strong clusters. Clusters with a significant 

economic meaning on the scale of the whole region or country and a longer history of 

existence are more attractive for new members. They usually attract the presence of 

enterprises that compete on an international scale. 

Within the framework of research presented in the Green Book a range of factors was 

diagnosed that are decisive to the failure of cluster initiatives. The greatest significance is


attributed to the lack of consensus in the area of taking action, as well as a clearly formulated 

vision for the initiatives and undefined aims of a quantifiable nature. Significant meaning in 

the failure of initiatives is played by the issue of insufficient resources, both in infrastructure 

and financing. Other elements that lead to unsatisfactory results are as follows: restriction of 

the range of membership to only groups of large enterprises, one level in the value chain or 

enterprises belonging to the location dictated. Large significance in the failure of cluster 

initiatives is also played by a lack of trust in the initiatives undertaken by public authorities. 

A survey of the reports prepared up to now on the topic of cluster initiatives in various 

countries enables us to note that the policy of supporting clusters takes on various forms. In 

reality it does not only vary from the level of analysis accepted and the methodology applied 

in supporting the process of networking, but also the degree in which the policy based on 

clusters was initiated, as well as the instruments used for this purpose. 

The most frequent elements in the strategies of the development of clusters include: 

• Strong competiveness of the economy and the reforms of economic policy in the 

area of market regulations, 

• Supplying strategic information by way of foresight type projects, cluster analysis 

and internet portals, 

• Agencies dealing in contacts with entrepreneurs and units supporting 

innovativeness e.g. innovation centres; 

• Development programmes for the development of clusters financed by public 

funds; 

• Establishment of centres of excellence connecting the industrial sector with the 

R&D area; 

• Adhering to public procurement (public tenders); 

• Construction of platform for public and private dialogue. 

In many countries the process of clustering was initiated by the establishment of 

allowances, platform and regular meetings involving enterprises and organizations from the 

business environment associated with a given branch. The motive for starting dialogue was 

the results of research projects, particularly the technological foresight, which aroused 

discussion and prompted joint action. Generally speaking, the process of initiating clusters 

and other networks of interaction in a dimension of European regions takes on various forms 

depending on the political culture, way of institutionalizing the dialogue between the public 

sphere and the private sector, the size of the regional economy, but also depends on the scale 

of intervention of public authorities in economic life, as well as the degree of industrial and 

technological specialization of the region. 

In the afore-mentioned reports and expert analysis a set of key recommendations in the 

area of initiating policies based on clusters indicates the factors of success listed below 

(IBNGR, 2002): 

• The main role should be accepted by the sector of enterprises, however public 

authorities take on the role of a catalyst in the development of the cluster in 

question. In such an arrangement, the expansion of the public and private sector 

partnership is key, 

• The aims of the initiated policies should be transparent and measurable,

132 


• Clusters should be built on the basis of existing potential and avoid creating 

initiatives in branches which are not sufficiently developed or generally do not 

appear in a given location, 

• The presence of a large enterprise in a given branch which is seen positively as a 

source of new technologies, acquisition of expertise, client base and suppliers, as 

well as space for the development of human resources, 

• Adequate technical infrastructure is essential together with a developed network 

of transportation and telecommunication connections, as well as an accessible 

base of attractive real estate for investors. Institutional mechanisms are helpful 

here in the form of entrepreneurial incubators, scientific, technological and 

industrial centres, due to the conditions of mutual work in a specified physical 

space offered by them; 

• The presence of an entrepreneurial spirit, especially among employees of a 

scientific and research unit and large innovative enterprises which is to lead to the 

formation of spin-off and spin-out firms; 

• The possibilities of access to financial capital in the form of high risk capital 

(venture capital), networks of investors searching for innovative and prospering 

enterprises (the so-called business angels), loan funds and finally public 

programmes, finance programmes e.g. EU funds; 

• The development strategy of a cluster should be realized at an appropriate level of 

local government which facilitates the effective initiation, 

• In the initial phase of development of a cluster an analysis of the potential or 

existing concentration of enterprises of a given branch should be analysed making 

use of the existing clusters in other locations. The results of this analysis should be 

used for public debate with the aim of working out a wide social consensus, 

• The action taken should enable the increase in the specialization of cooperating 

enterprises and institutions with the aim of realizing economies of scale and 

range, division of labour, as well as development on a local scale of specialized 

factors of production which facilitates the strengthening of the competitive 

position of the cluster, 

• Using the benefits accruing from the geographical proximity should be promoted 

by the establishment of associations of sub-suppliers or other forms of mutual 

interaction (e.g. associations of mutual credit guarantees) stimulating diffusion of 

knowledge and technology, as well as the processes of mutual learning, 

• In the case of highly technological clusters, one of the fundamental activities 

should be acknowledged as stimulating and creating flexible interactions at the 

level of industry and the academic sector, 

• For the achievement of success, it is essential to build clusters on the basis of 

formal and informal networks of interaction within which the information flows 

can take place. This type of social network that emerged on the basis of a high 

level of trust and social capital can be stimulated by strong institutional structures 

divided by cultural values and common goals;


• The market success of a cluster is conditioned by the access to the base of skills 

understood as the highly skilled workforce; 

• Mechanisms should be created that enable resignation from cluster initiatives in 

the case of their failure. 

In summing up, the results of the analysis of the conditioning of the initiated innovative 

policy directed at clusters, it should be first and foremost underlined that the key aim of this 

policy should be to strive towards the creation of a long lasting competitive advantage in the 

economy of the region. The way for achieving the afore-mentioned aim can become a strong 

innovative cluster or group of smaller innovative clusters functioning within the framework 

of a coherent system of innovation. The policy based on clusters should be supported by a 

set of other complementary actions within the framework of related policies, which leads to 

the gaining of synergy effects. This is therefore the policy which penetrates into other 

policies and in its own essence takes on a nature of horizontal activities. The concept of 

clusters is according to other models of development for innovative regions and should be 

treated in this way as a supplement for the models of the learning regions, regional systems 

of innovation and the innovative environment. All the afore-mentioned theories of regional 

development are based on the network paradigm of innovation and enable local spatial 

arrangements to meet the challenges of the global knowledge economy. 

References 

A Practical Guide to Cluster Development, Department of Trade and Industry, DTI, London 

Andersson T., et al., The Cluster Policies Whitebook, IKED, 2004 

Boosting Innovation. The Cluster Approach, OECD, 1999 

Brodnicki T., Szultka S., Tamowicz P., Polityka wspierania klastrów. Najlepsze praktyki. Rekomendacje dla 

Polski, Niebieskie Księgi, Rekomendacje (Policy of supporting clusters.Best practices. 

Recommendations for Poland) No. 11, IBNGR, Gdańsk 2004 

Cluster Based Economic Development: A Key to Regional Competitiveness, EDA, 1997 

Innovative Clusters. Drivers of National Innovation Systems, OECD, 2001 

Matlovič, R., Matlovičová K., Regionálne disparity a regionálny rozvoj na Slovensku s osobitným zreteľom na 

Prešovský kraj. [In:] E. Rydz, A. Kowalak (eds.), Świadomość ekologiczna a rozwój regionalny w 

Europie Środkowo-wschodniej. Wydawnictwo Naukowe Akademii Pomorskiej, Słupsk, 2008 

Porter M., Porter o konkurencji, PWE, Warszawa 2001 

Ślusarczyk B., The EU Adjustments in the Sphere of Industrial Policy [in:] microCAD 2008. International 

Scientific Conference. Economic Challenges. Miskolc 2008 



Accepted: 22 April 2010


Foreign Direct Investment and Global Economic Crisis 

Ślusarczyk Beata * , Czestochowa University of Technology, The Management Faculty, 

Czestochowa, Poland 

UDC: 339.727.22 JEL: 016 

ABSTARCT – In the article author defines globalization its features and effects. Furthermore, it 

presents the characteristics of foreign direct investment with its crucial role in the process of 

globalization and development of national economies. Then author discuss the reasons of the latest 

world economic crisis and its dissemination all over the world. In the light of economic crisis the 

article presents the role played by foreign direct investment in global economy. Author also presents 

changes in the juxtaposition of top sources and influx countries of foreign direct investment. Finally, 

author considerate government actions accelerating influx of foreign direct investment. 

Globalization of world economy and foreign direct investments 

Contemporary world economy is completely different from the economy of twenty or 

thirty years ago. One of the most important differences is the intensification of the process of 

globalization. This trend results in the widening influence of international capital on national 

economies and the changing characteristics of company operation. The location of 

production plants, research and development, as well as other activities of companies more 

and more often becomes independent of the existing national borders. (Buiter, Lago, Stern 

1997; Nowicka-Skowron, Kot 2003) 

Globalization is not a new phenomenon; it was a long time ago that people and 

corporations began to engage in long distance trading. What is more, for thousands of years 

people have invested into economic enterprise in foreign countries. Actually, the waves of 

globalization observed nowadays are very similar to those observed in the past. However, 

the politics and technological development of the last several decades has caused an 

extraordinarily accelerated development of foreign trade, cross border investments and 

migration of population in comparison to what was observed in the past. For instance, since 

1950 the value of world trade has increased twenty times, and the value of foreign 

investments between the years 1997 and 1999 nearly doubled, increasing from $468 billion to 

$827 billion. Having these facts in mind, Thomas Friedman summarized the present wave of 

globalization with the words “further, faster, cheaper and deeper.” (Friedman 2002) 

Globalization is defined in a variety of ways. According to A. Szymański, “the process of 

globalization refers to the increase in free flow of capital, goods and production factors 

among countries. Thus, it is a gradual disappearance of economic borders and a sharp 

quality improvement in the mobility of production factors.” (Szymański 2001) 

* 

Armii Krajowej 19B, 42-200 Czestochowa, Poland, e-mail: jagoda@zim.pcz.czest.pl

Ślusarczyk, B., FDI and Global Economic Crisis, EA (2010, Vol. 43, No. 1-2, 134-141) 135 

G. Gierszewska and B. Wawrzyniak define globalization as “the process of changing the 

national perspective from which one views the rules and regulations of conduct, occurrences, 

behavior, activity, and principles held, into a global perspective [translation mine].” 

(Gierszewska, Wawrzyniak 2001) 

Globalization can be defined as the process of interaction and integration among people, 

enterprises and governments of various countries, a process shaped by international trade 

and supported by information technology, and influencing the environment, culture, 

political systems, economic development, and the quality of life of societies all over the 

world. (www.globalisation101.org) 

Regardless of a definition of and an approach to the phenomenon of globalization (e.g. 

J.A. Scholte describes it as a five-dimensional phenomenon (Scholte 2005)) it can be proved 

that globalization functions within two main spheres: economic and social one. The first of 

these comprises finance, technology (in connection with research and development as well as 

the knowledge-based economy), market and market strategies (especially competition). As 

for the social sphere, it comprises culture, lifestyle, consumption models, management, legal 

regulations, and also political concepts. (Pakulska, Poniatowska-Jaksch 2008) 

On the other hand, A. Zorska points out the following characteristic features of 

globalization (Zorska 2007): 

• in the sphere of foreign direct investments (FDI) there have occurred the changes 

in the structure of their branches and geography, and all over the world there has 

been recorded an increase of their share in general gross investment expenditure 

with reference to fixed assets; 

• the expansion of the process of globalization is possible due to an intensity of 

international connections within branches and sectors of industry, etc.; 

• the range of forms of steady cooperation between companies is widening (joint 

venture, strategic alliances) in all value chain links and the partnership enterprises 

in the international market; 

• the number and significance of transnational corporations is growing in the 

economic structures of the world, entailing the change of relations between the 

state and the corporations (more and more often corporations influence the 

decisions of governments in particular countries). 

These are the foreign direct investments that play a crucial role in the process of 

globalization, at the same time supporting the development of national economies. The flow 

of capital in the shape of FDI facilitates an access to technologies, know-how and 

management skills, accelerating the integration of national economies with international 

markets, production and distribution networks, and strengthening the international 

competition of companies and whole national economies (UNCTAD 2002). 

Foreign direct investment (FDI) is the most advanced way of entering foreign markets, 

being an international transfer of capital in order to open an affiliated company in another 

country and exercise control over it. First of all, FDI is about capital investments, but also 

about intra-company re-invested profits and loans. The word “direct” indicates that the 

foreign investor has an influence over the activity of a company abroad. This fact differs FDI

136 


from a portfolio investment, which does not make it possible to influence the activities of 

companies abroad. (Pakulska, Poniatowska-Jaksch 2004) 

Foreign direct investment is a type of investment which entails long-term relationships 

and continuous involvement and control of an entity which has its headquarters in one of the 

national economies towards another entity, which has its headquarters in another country. In 

the case of FDI the investor can directly influence the management of a company in another 

country. The invested capital amounting to 10% of shares constitutes a defining feature of a 

FDI (UNCTAD 2004, Kot 2006). 

Foreign direct investment is not only a simple transfer of financial capital aiming solely at 

making profit within the framework of the global company strategy. It is more accurate to 

say that the financial capital constitutes an instrument which renders it possible to transfer 

across borders a set of production factors in order to exploit them in a more effective manner, 

and also facilitates making a better use of competitive advantage in the foreign market. Thus, 

apart from the transfer of capital, there takes place also the transfer of technology, 

knowledge, management methods and the marketing. 

There can be distinguished two basic forms of foreign direct investment: (Krzak 2005) 

• greenfield investments (independently starting new operational facilities from the 

ground up); 

• brownfield investments (taking over an already existing company and 

restructuring it, or a cooperation with a local partner in the form of a joint venture 

enterprise). 

Greenfield investments are characteristic of developing countries and consist in a foreign 

investor building new facilities from the ground up in the host country. Each country looks 

forward to greenfield investments, since this type of investments entails increasing 

production assets and creating new jobs (assuming that the national competition is not 

eliminated in this way). (Krzak 2005) On the other hand, brownfield investments in the 

shape of mergers and takeovers are a dominating form of investment in developed countries 

and usually take place when the controlling interest in one business entity is acquired by 

another business entity, or when two entities, situated in two different countries, agree to 

join their activities. If the invested capital is utilized to purchase the already existing assets, 

there follows modernization and more rational organization of work. 

Foreign direct investment at the time of global economic crisis 

The still growing economic, financial and social interdependencies which result from 

globalization have twofold consequences. On the one hand, these consequences are positive: 

influx of foreign capital, scientific and technological development, expansion of potential 

customers’ market, increasing effectiveness of economic activities, investment boom, and 

economic growth. On the other hand, a disadvantage of globalization is the fact that national 

economies become very sensitive to economic fluctuations in geographically distant regions. 

This is especially noticeable in the sphere of finance. The present world economic crisis has 

its roots in the subprime mortgage loans. Over the years of economic boom, the 

intermediaries responsible for organizing mortgage loans, given the incentive of high 

commissions, persuaded the people with small loans to accept mortgage loans with low


upfront fee or no upfront fee, and without checking out the loans. A serious crisis in the field 

of subprime mortgage loans started in July 2007, with the bankruptcy of two hedge funds 

(making their profit on small disparities in the exchange rate of various currencies) of the 

American investment bank Bear Stearns (The Economic Times, 2008). The world economic 

market has undergone considerable change since 2007, when the continuous noninflationary 

growth took place. As was forecast, the year 2008 proved that the crisis was 

endangering not only American economy, but world economy as well. (Sachs 2008) Towards 

the end of summer 2008 it seemed that the influence exercised by growing prices of energy 

would be diminished and the slumping economy was on its way to recovery. However, the 

autumn of 2008 brought a series of various interdependent upheavals. The improvement in 

housing economy triggered off credit crunch and continuous drop of stability in the financial 

market, combined with the threat of increasing inflation, dramatic fluctuations in the price of 

petroleum, and raising prices of goods accelerated by the weakening of American dollar. The 

results of all these factors became even more severe with a sudden rise in food prices 

(Committee on Economic… 2008). Between September 2008 and March 2009 the economy 

was receding at the pace of 5.5%. Financial institutions lost trillions of dollars, euros and 

French franks. Financial liquidity of a majority of institutions became threatened and the 

stock exchanges suffered severe drops. Central banks provided the support of hundreds of 

trillions worth, and the scope of their intervention was not limited to supporting markets but 

also included preventing the bankruptcy of individual institutions. 

According to the forecasts of a majority of economists, the crisis had to influence mainly 

“ripe” economies, such as the ones found in western Europe, since they were tightly 

connected financially with the USA. However, in reality the crisis has made an impact on the 

whole world. (Jahnson 2008) 

One of the results of the crisis in the mortgage market in 2007 in the USA was the 

unprecedented influx of investment funds into developing markets and markets which were 

undergoing a transformation. In September 2007, the funds investing money in the frontier 

markets gathered 15.7 billion dollars net from the investors. This was the largest sum in the 

history of this type of investment. Between early September and 25th October 2007, the funds 

in question gathered nearly 34 billion dollars, i.e. more than during the whole 2005 and 2006. 

(Jóźwik 2007) Therefore, it can be concluded that in 2007 there already took place another 

increase in portfolio investments. The funds which attract the most money of the investors 

are especially those which invest in Asia, Latin America, and specialize in BRIC countries 

(Brazil, Russia, India, China), and are global emerging funds. 

The year 2006, when the tendency for growth was observed, was actually the third year 

in a row of the increase in foreign direct investment, the situation being a worldwide 

phenomenon (UNCTAD 2007). In 2006, the considerable influx of foreign direct investment 

(FDI) amounted to USD 1.3 trillion, which meant the increase by another 38% in comparison 

with 27% in 2004 and 29% in 2005, as well as reaching the level close to that observed in 2000, 

when the record value of 1.3 trillion dollars was set up for FDI. The influx of FDI was 

noticeable in all major subregions: in developed countries, developing countries, and in 

countries undergoing transformations, i.e. in southeastern Europe and in the 

Commonwealth of Independent States. The growth tendency discussed above has been 

present throughout the last 26 years. However after uninterrupted growth in FDI activity in

138 


the period 2003–2007, global FDI inflows fell by 14% in 2008 to $1,697 billion, from a record 

high of $1,979 billion in 2007 (see Figure 1). 

Figure 1. FDI influx worldwide and in particular groups of economies, 1980-2008 (bln USD) 

2000 

1800 

1600 

1400 

1200 

Developing economies 

Developed economies 

Transition economies 

1000 

800 

600 

400 

200 

0 

1980 

1982 

1984 

1986 

1988 

1990 

1992 

1994 

1996 

1998 

2000 

2002 

2004 

2006 

2008 

Source: Author’s elaboration based on UNCTAD FDI/TNC database 

FDI flows fell further as the financial crisis entered a tumultuous new phase in September 

2008 following the collapse of Lehman Brothers (one of the largest financial institutions in 

the United States), and as major developed economies fell into, or approached, economic 

recession. In contrast, developing and transition economies saw FDI inflows rise in 2008 to 

record levels for both. 

Worldwide foreign investment reached the value of USD 12 trillion; the type of 

investment in question was made mainly by transnational corporations (TNC). The group of 

transnational corporations comprised about 82 000 parent companies and 810 000 foreign 

affiliate companies. (WIR 2009) According to business forecasting, the turnover, value added 

and export of the TNC in 2006 increased by 18%, 16% and 12% respectively. While the influx 

of FDI into developed countries increased by 45% and reached the value of USD 857 bln, the 

influx into developing countries amounted to USD 379 bln (21% increase), and the influx into 

economies undergoing a transformation amounted to USD 69 bln (68% increase), reaching 

the highest level in history. However, the international stature of TNC has not insulated 

them from the worst global recession in a generation. The 4.8% reduction in inward FDI 

stock worldwide was reflected in the decline in value of gross product, sales and assets, as 

well as employment of TNCs’ foreign affiliates in 2008, a marked contrast to huge doubledigit 

growth rates in 2006 and 2007. 

The United States regained the leading position with reference to the influx of foreign 

direct investment, leaving behind Great Britain and France. Among developing countries


and the countries whose economies were undergoing a transformation, nearly all regions 

noticed a considerable increase in the influx of FDI in 2006. Only in Oceania, South America 

and the South African Republic there was an outflow of FDI. In the group of developing 

countries the influence of FDI was the most significant in China, Hong Kong (China) and 

Singapore. As for the economies undergoing a transformation, the largest influx of FDI was 

observed in Russia. 

Developed countries still remained the major source of investments (84% of all 

investments made). In 2006, the largest exporter of foreign direct investments were the 

United States (USD 217 bln). The USA was followed by the EU countries, i.e. France (USD 

115 bln), Spain (USD 90 bln) and Great Britain (USD 79 bln). The role played by developing 

economies and economies undergoing a transformation as a source of foreign direct 

investment was still growing. In the group of developing economies, the most important part 

was played by Hong Kong (China), with USD 43 bln, and in the group of economies 

undergoing a transformation the most important role was played by Russia, with USD 18 

bln. The value of foreign direct investments flowing out of these two groups of countries 

amounted to USD 193 bln, i.e. 16% of the overall world outflow of FDI. United States stayed 

still on the top FDI source country all over the world after crisis effects dissemination but 

there are changes on next places of the juxtaposition of top sources of FDI outflows. There 

are France, Germany, Japan and then United Kingdom as a main FDI sources (see Figure 2). 

Figure 2. Developed countries: top 10 sources of FDI outflows 2007-2008 (bln USD) 

Netherlands 

Belgium 

29 

58 

68 

94 

2007 

Spain 

77 

96 

2008 

Canada 

Switzerland 

50 

60 

78 

86 

United Kingdom 

111 

275 

Japan 

74 

128 

Germany 

156 

180 

France 

225 

220 

United States 

312 

378 

0 50 100 150 200 250 300 350 400 

Source: Author’s elaboration based on UNCTAD FDI/TNC database

140 


Conclusions 

Governments actions are very important in FDI acceleration, it is especially important in 

case of crisis. The governments implemented measures accelerating the influx of FDI during 

2006 and at the beginning of 2007, however, at this time in some sectors of industry, 

especially those of “strategic” significance, there were introduced new restrictions with 

reference to takeover of assets by foreigners, or such measures which assured a larger share 

of governments in the profits. Such tendencies were observed especially in mining industry. 

In 2006 there were made the total of 147 government decisions making a given country more 

FDI-friendly, while the 37 government decisions were made to the contrary, in 2008, 110 new 

FDI-related measures were introduced, of which 85 were more favorable to FDI, compared 

to previous year, percentage of less favorable measures for FDI remained unchanged (WIR 

2009). In 2008 and the first half of 2009, despite concerns about a possible rise in investment 

protectionism, the general trend in FDI policies remained one of greater openness, including 

lowering barriers to FDI and lowering corporate income taxes. 

References 

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Szekely P. (eds): Development strategy and management of the market economy, Vol. 2, Clarendon 

Press/Oxford University Press, Oxford, 1997. 

Committee on Economic Affairs and Development Provisional Report “OECD and the World economy” 

July 11th, 2008. 

Development and globalization: facts and figures. United Nations, New York and Geneva 2004. 

Friedman T. L.: Longitudes and Attitudes. Exploring the World After September 11., Farrar, Straus and 

Giroux. New York 2002. 

Gierszewska G., Wawrzyniak B.: Globalizacja. Wyzwania dla zarządzania strategicznego, Poltext, 

Warszawa 2001. 

Jahnson P.: Americans should mount their blessings. Forbes, June 30, 2008. 

Jóźwik T.: Pieniądze płyną na rynki wschodzące, Forbes 12/2007. 

Kot S.: Global Trends in Foreign Direct Investment, [in:] Kościelniak H (ed): Processes of Capital Supply in 

Production Enterprises, Wyd. WZPCzęst Częstochowa 2006. 

Krzak M.: Źródła wzrostu. Forbes 12/2007. 

Nowicka-Skowron M., Kot S.: Logistic Aspects of the Economyʹs Globalization and Integration [in:] R. 

Borowiecki (ed): Management of Organizations During Economic Integration and Globalization, Wyd. 

AE Kraków, Warsaw-Cracow 2003. 

Pakulska T., Poniatowska-Jaksch M.: Korporacje transnarodowe a globalne pozyskiwanie zasobów, Oficyna 

Wydawnicza SGH, Warszawa 2009. 

Pakulska T., Poniatowska-Jaksch M.: Bezpośrednie inwestycje zagraniczne w Europie Środkowo- 

Wschodniej. Koncepcja kapitału zagranicznego w Polsce, Oficyna Wydawnicza SGH, Warszawa 2004, 

Sachs J.: Ameryka w końcu zapłaci swoje rachunki. Europa nr 14 (209), 2008. 

Scholte J.A., Globalization: a critical introduction, Palgrave Macmillan; 2Rev Ed edition 2005. 

Szymański A.: Globalizacja, wyzwania i zagrożenia, Difin, Warszawa 2001. 

The Development Dimension of Foreign Direct Investment: Policies to Enhance the Role of FDI, in the National 

and International Context – Policy Issues to Consider, United Nations Conference on Trade and 

Development, Washington DC, 23 September 2002. 

The Economic Times: Global financial crisis: The story so far. September 21, 2008.


World Investment Report 2009, Transnational Corporations, Agricultural Production and Development. 

United Nations, New York and Geneva, 2009. 

www.globalisation101.org 

Zorska A., Korporacje transnarodowe. Przemiany, oddziaływania, wyzwania, PWE, Warszawa 2007. 



Accepted: 21 April 2010

REVIEW 

BOOK REVIEW 

INFLATION AND UNEMPLOYMENT 

by 

Bojan Dimitrijević 

There’s no book or a study guide in contemporary macroeconomic literature which don’t 

deal with a Phillips curve as analytical instrument that explains relation between 

unemployment rate and a rate of wage changes. The Phillips curve became obligatory part of 

macroeconomic theory, subject of numerous empirical examinations, theoretical discussions 

and controversies, conclusions and recommendations for concrete application in shaping 

economic policy. A modern version of Phillips curve in combination with IS - LM and AS – 

AD model indicates how inflation, unemployment, and GDP can be affected through 

monetary and fiscal policy, as well as managing aggregate demand and supply. 

The author’s objective is to show theoretical fundamentals of Phillips curve and Phillips- 

Okun’s model; to point out the place of this concept in leading theoretical schools – it’s 

genesis and numerous research related to it. 

The book consists of six chapters. In the first chapter, author deals with theoretical 

fundamentals and genesis of Phillips curve, as well as development phases of this concept. 

Intellectual influences and predecessors of Phillips concept are displayed. Furthermore, the 

original Phillips curve, Lipsey model and modification of this concept, Friedman – Phelps’ 

hypothesis of natural rate of unemployment (NRU) and vertical Phillips curve in rational 

expectations theory. 

The second chapter displays Phillips-Okun’s model originated by synthesis of Phillips 

curve and Okun’s curve. Phillips-Okun’s model could be simply articulated as a relation 

between gross domestic product and rate of inflation. In this chapter author presents Okun’s 

law, associating Okun’s and Phillips curve and comparing economic policies and 

macroeconomic aggregates in the Phillips-Okun’s model and IS – LM model. At the end of 

chapter, author deals with theoretical aspects of inflation, it’s quantification and economic 

policies concerning this economic phenomenon. The third chapter presents comparative 

analysis of relevant schools of economic thought: Neoclassical, Keynesianism, Monetarism 

and Rational expectations school (RATEX); their basic postulates and relationship to labor 

market. Furthermore, it explains concept and characteristics of natural rate of unemployment 

(NRU) and non - accelerating inflation rate of unemployment (NAIRU). 

The fourth chapter is heterogeneous and presents numerous researches related to Phillips 

curve: labor market models and analysis of institutional factors on labor market, role and 

significance of syndicate, empirical research on behavior of Phillips curve in OECD 

countries, etc.

Lovre, I., et al., Book Review, EA (2010, Vol. 43, No. 1-2, 142-143) 143 

In the fifth chapter author examines economic system of Yugoslavia, assessing empirical 

and theoretical research of inflation, unemployment and GDP in the period between 1956 

and 1990. Moreover, this chapter provides a review of economic literature which is dealing 

with Phillips and Okunʹs curve and an attempt of creating empirical foundations of these 

two theoretical concepts in Yugoslavian economic system. 

In the sixth chapter author is analyzing contemporary research of Phillips curve and its 

implementation in modern concepts of macroeconomics and economic policies. In this 

chapter following issues are elaborated: hysteresis as an answer of New Keynesianism, 

alternative hysteresis theories, relation between adaptive and rational expectations, Lucas 

supply function and Lucas critiques, implementation of Phillips curve in welfare economics 

and game theory, analysis of Phillips curve in developing and transition countries; with 

special interest in behavior of Phillips curve during stagflation period from 1980 to 2000. 

As a supplement to this book, author presents his empirical research about possibility of 

existence of Phillips curve in Yugoslavian economy in the period between 1982 to 1990. 

The book contains numerous contemporary methods, a number of charts and 

spreadsheets, and portrayal of basic relations of Phillips curve and macroeconomic models. 

Author used voluminous literature and a great number of empirical researches related to this 

topic. A vast number of statistical and econometrical methods, as well as comparative 

analyses of myriad scientific papers, theories and economic schools are employed. 

The author is trying to find an answer for the following basic question: Could Phillips 

curve be used as an economic tool in macroeconomic policy? By using relatively modest 

econometric methodology, he gets to the right conclusion that Phillips curve is not applicable 

in Yugoslavian economy and couldn’t be used as useful theoretical instrument in 

macroeconomic policy. 

The book is logically structured with valid conclusions. On the basis of presented 

analysis of Phillips curve, its reflection on contemporary economic schools, comparative 

analysis of leading theoretical schools – as well as analysis of labour market – it presents 

useful and current macroeconomic study guide for economists, academics, researchers, 

business people and students. 

Lovre Ivan, Perić Mladen 

University EDUCONS, Faculty for business economics, Sremska Kamenica

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