Chinese business review2014 01 by Elizabath Disusa

Chinese Business Review Volume 13, Number 1, January 2014 (Serial Number 127)

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Chinese Business Review Volume 13, Number 1, January 2014 (Serial Number 127)

Contents Economics International Competitiveness of Export-oriented Industries in Bulgaria

Antoaneta Vassileva, Vasil Petkov, Paskal Zhelev Mixed Market Competition in a Quality Differentiated Duopoly Model —An Approach to Banking Sector

Ram Kumar Phuyal Effect of Macro Factor Volatility on the Returns of Financial Sector in Southeast Asian Stock Markets

Siriwun Wongsrida, Prasert Chaitip Public and Private Investment in the Port Sector in Mexico, 2000-2010: A Study Through Data Envelopment Analysis

Odette V. Delfín-Ortega, César L. Navarro-Chávez

Management Semantic Differential as an Assessment Tool of (Dis)Advantages of QMS in the Light of Accredited Certification in Poland

Katarzyna Hys, Liliana Hawrysz The Impact of Nationalisation on CSR Policy in Citadele Bank and CR Study of the Latvian Retail Banking Sector Aleksandrs Judins

Chinese Business Review, ISSN 1537-1506 January 2014, Vol. 13, No. 1, 1-18

DAVID PUBLISHING

International Competitiveness of Export-oriented Industries in Bulgaria Antoaneta Vassileva, Vasil Petkov, Paskal Zhelev University of National and World Economy, Sofia, Bulgaria 

With increasing globalization and Bulgaria’s accession into the European Union (EU), the question how to improve the country’s international competitiveness has become very important and urgent. The aim of the paper is to present the results of a research on the past decade’s competitiveness of Bulgarian export-oriented sectors, enjoying good positions in local and international markets and having a high development potential. The first part of the article presents a comprehensive review of the concept of competitiveness—its definitions, factors, and measurements at national, industry, and firm level. On the basis of the theoretical considerations, an empirical analysis on the current state of competitiveness of the selected export-oriented industries is performed. These include metallurgy, machine building, chemicals, clothing and textiles, furniture, wine production, tobacco, and food processing. The research answers the following questions: What are the major competitive advantages of Bulgarian export-oriented industries on the world market? What are their disadvantages? How did they change over the period 2002-2012, and what steps should be taken to meet the challenges? The employed methods of analysis are both quantitative—calculating various production, trade, and price indices, and qualitative—carrying out a survey among top managers of firms operating in the selected industries across all the regions of the country. Results show that the country’s competitiveness on international level has gradually improved but still remains at a comparatively low level as Bulgarian producers compete mostly on the price, invest very little in research and development (R&D), rely on low labor costs, and produce goods with low added value. The paper looks into the specific challenges to competitiveness faced by different sectors and the implications of addressing them. In conclusion, it puts forward some recommendations for boosting Bulgaria’s international competitiveness which are aimed at key stakeholders: companies, central and local government, and institutions promoting cooperation. Keywords: export competitiveness, industry analysis, competitive advantages, Bulgaria

Introduction After the dissolution of the former Eastern bloc, Bulgaria has started a process of transition to a market economy and fast integration in the world economy. In the course of this process, a deep structural Antoaneta Vassileva, Ph.D., Professor, International Economic Relations and Business Department, University of National and World Economy. Vasil Petkov, Ph.D., Assistant Professor, International Economic Relations and Business Department, University of National and World Economy. Paskal Zhelev, Ph.D., Assistant Professor, International Economic Relations and Business Department, University of National and World Economy. Correspondence concerning this article should be addressed to Vasil Petkov, Students Town, UNWE, office 3030, 1700 Sofia, Bulgaria. E-mail: vasil1979@yahoo.com.

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transformation was carried out leading to a significant shift in resources from some sectors to others and a complete change in the environment for doing business. These changes offer Bulgaria huge potential for significantly increased productivity of production factors and greater access to new resources and markets, but also pose a significant risk of economic retardation. To meet the challenges of economic transformation, European integration, and ever increasing globalization, the issue of the ability of Bulgaria to compete in the global market, particularly in sectors with good growth prospects bringing high added value comes to the fore. This justifies the great relevance of the need to assess the economic position of the country in terms of its international competitiveness during the last decade in which it became a full member of the EU and has been hit very hard by the global financial and economic crisis.

Research Question The aim of the research is to present the results of analysis and assessment of the international competitiveness of Bulgaria’s export-oriented industries in the period 2002-2012 and to recommend macro, meso, and micro level measures for its improvement. The paper answers the following questions: What are the major competitive advantages of Bulgarian export-oriented industries on the world market, what are their disadvantages? how did they change over the period 2002-2012? and what steps should be taken to meet the challenges? To this end, the following research tasks are set:  To make a comprehensive review of the concept of international competitiveness at national, sectoral, and company levels and the most common and relevant indicators for its measurement;  To identify the sectors with highest export orientation and future potential in Bulgaria;  To collect, process, and analyze output, export, import, price data, and indices on RCA, RTB, and unit labor costs;  To design and distribute a questionnaire among firms in the selected industries which include questions related to firms’ internal strengths—quality and price of products, used technologies, managerial practices, internationalization strategies, etc.;  To evaluate the competitive advantages and disadvantages of the sectors under study;  To formulate conclusions and recommendations to the government, business, and supporting institutions for the improvement of the international competitiveness of Bulgaria’s export-oriented industries. Based on the research tasks set in the paper, the authors have adopted the following structure. The first section of the article analyzes the concept of competitiveness at different level of analysis from theoretical and methodological perspective, outlining the major definitions, factors and indicators for its evaluation. The second part of the paper is devoted to presentation of the results of the performed quantitative and qualitative analysis of the international competitiveness of the selected export-oriented Bulgarian industries. Finally, in the third section of the paper, the conclusions from the study and some policy recommendations, directed at the various stakeholders are put forward.

Analytical Framework The study uses a set of general scientific and specific methods of assessing the international competitiveness of Bulgarian export-oriented industries such as analysis and synthesis, abstraction and generalization, induction and deduction, statistical methods, strength, weakness, opportunity, and threat (SWOT) multifactor and comparative analysis. Main sources of information are the Bulgarian National

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Statistical Institute and the Eurostat Directorate-General of the European Commission for secondary data and the specially developed for the project survey carried out among 234 small and medium sized firms in all the regions of Bulgaria for primary data.

Competitiveness—Theoretical and Methodological Aspects Growing globalization directs rising attention to national ability to compete in world markets. Despite widespread usage and frequent study, the concept of competitiveness is not defined unambiguously in economics. Competitiveness features implicitly in many theories, yet possesses neither a theoretical basis that would enable analysis, nor a formal conceptual construct. Many authors avoid precise definitions of competitiveness in their studies, leaving readers to interpret it as they would. The multitude of approaches, definitions, and indicators of competitiveness is partly due to the fact that the concept emerged more in business circles than in theoretical economics. As a category, competitiveness features more in business and management titles than in economics ones. The first contentious issue related to the concept of competitiveness stems from the level of analysis, i.e., whether the focus falls on companies, economic sectors, regions, or nations. While companies need to be competitive in order to survive and withstand the competitive pressure of market forces, countries cannot declare bankruptcy and cease operations. Thus, the concept of competitiveness is well defined at the micro level as regards companies’ ability to survive and improve their market positions vis-à-vis their competitors. At all other levels, however, the objectives of industries, regions, or nations might differ from those of the individual units that make them up. For that reason, any mechanistic stretching of the meaning of competitiveness from the reasonably clear company level to higher levels results in serious defects and over-generalizations that skew any analysis. This is why the selection of a sound concept for measuring competitiveness remains essentially open, with diverse options suitable on a case-by-case basis, depending on the specific thrust and purpose of analyses. In 1985, the United States (US) Presidential Commission on Industrial Competitiveness formulated one of the most widely used macroeconomic definitions of competitiveness: “A nation’s competitiveness is the degree to which it can, under free and fair market conditions, produce goods and services that meet the test of international markets while simultaneously maintaining or expanding the real incomes of its citizens”. This definition stresses that the ultimate purpose of competitiveness is to maintain and raise the real income of citizens as reflected in a nation’s standard of living. From this perspective, national competitiveness is not an end in itself, but rather a means to an end. It refers to raising national living standards through investment, production, and participation in international trade. The European Commission gave another popular definition for assessing the overall economic competitiveness of a nation: “the ability of the economy to provide its population with high and rising standards of living and high rates of employment on a sustainable basis” (European Commission, 2001). The World Economic Forum focuses on similar ground in defining competitiveness as: The set of institutions, policies, and factors that determine the level of productivity of a country. The level of productivity, in turn, sets the sustainable level of prosperity that can be earned by an economy. In other words, more competitive economies tend to be able to produce higher levels of income for their citizens. (World Economic Forum, 2010-2011, p. 4)

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The idea that economic success depends on competitiveness gained ground in the late 1970s. A nation which lags behind in terms of productivity or technology is deemed likely to experience crisis in the same manner as a company that cannot manage to match its competitors’ costs or products. Each nation thus has an interest in creating suitable conditions to attract foreign direct investment (FDI) which would transfer expensive modern technology, create jobs, cut unemployment, and ultimately improve public welfare. Moreover, it is important to create conditions to curb business costs by offering companies and entrepreneurs favorable credit, maintaining currency stability, and low inflation, thus helping make national companies and products competitive domestically and internationally. It could thus be said that, as national competitiveness depends on corporate and sectoral competitiveness, company and sectoral competitiveness, in turn, depends on national competitiveness. The basis of competitiveness is human resources with their skills, abilities, qualities, educational attainment, etc.. It is people’s manner of working and their executive, organizational, and managerial skills that largely determine the degree of efficiency a company brings to its business. The successful integration of companies into the national and international competitive environment and their market strength determine the competitiveness of the sector in which they operate. Technical and technological conditions and political and economic environment in a country and internationally are significant in this respect. Sectoral competitiveness may be assessed by reference to the level of sophistication production that production has attained. National competitiveness depends both on what a state produces and in what amount, and on its international economic and political position and the degree of its infrastructural development (Zaharieva, 2007). The aforementioned facts may prompt the following conclusions: (1) Competitiveness is always a comparative category that shows an economy’s ability to raise the overall national productivity and quality and to compete with other economies regionally and globally; (2) National competitiveness is a broad and general concept that includes corporate, sectoral, and regional competitiveness. It intertwines a multitude of aspects such as, inter alia, economic growth, productivity, incomes, technological development, commerce, investment, and human capital, i.e., all those factors on which national prosperity and development depend; (3) In today’s globalizing and integrating world, national competitiveness is as strongly dependent on company competitiveness as company competitiveness is on national competitiveness. In this sense, national competitiveness may be said to depend on: 

The country’s trade performance which depends on companies’ ability to export and sell goods in

international markets at prices providing high incomes; 

Nations’ ability to create suitable conditions for attracting foreign investment not only in sectors in which

those nations specialize and have comparative advantages, but also in sectors with high added value, alongside stimulating existing sectors; 

Companies’ ability to boost productivity by introducing new technology and governments’ ability to create

suitable conditions for this process; 

Companies’ and governments’ ability to adapt their policies and strategies to the changing market, economic,

and political realities (Zaharieva, 2007). (4) National competitiveness aims to attain sustainable development combining high economic growth and high living standards while protecting the environment;

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(5) Micro-level competitiveness is synonymous with a firm’s long-run profit performance and its ability to offer attractive pay to the employees and high earnings to its owners (Kubiak, 2006). There are different definitions of competitiveness at the sectoral level. Momaya (1998) considers that it is often regarded as the result of the strategies and actions of companies within a given sector. Moreover, companies and policy makers often downplay the significance of the so-called non-business infrastructure, including educational and training institutions, research bodies and unions. Thus, Momaya sees meso-level competitiveness shaped by interactions between the non-business infrastructure and business firms. Other definitions include:  The collective ability of firms in that sector to compete internationally (D’Cruz & Rugman, 1992);  The extent to which a business sector offers potential for growth and attractive return on investment (IMEDE, 1991). While the latter definition appears satisfactory from the perspective of an investor, it fails to take into account the interests of a significant proportion of sectoral stakeholders. Identifying key components of the former definitions, Momaya amplifies them to derive a balanced definition of sectoral competitiveness. It represents the extent to which a given business sector:  Satisfies consumer needs with suitable combinations of the following product characteristics: price, quality, and innovation;  Satisfies employees’ needs, for instance in terms of involvement, benefit programs, training, and safe workplace;  Offers attractive return on investment;  Has profitable growth potential (Momaya, 1998). The authors of these definitions consider that a sector’s competitiveness may be inferred by analyzing the performance of that sector’s leading companies. They consider competitive that economic sector which comprises internationally competitive companies. Competitiveness measures may be calculated at an industry level if firm-level data are not available. Most of the measures of competitiveness that can be calculated at a firm level can be calculated at an industry level as well. For example, profitability may be measured at an industry level. An industry that consistently earns average or above average rates of return in open competition with foreign suppliers can be regarded as competitive (McFetridge, 1995). A significant difference between determining competitiveness at a micro and meso level is that, while companies may be assessed through comparison with local competitors, sectors have to be assessed by comparisons with analogous industries in other countries or regions with which trade exists or could exist. One of the practical contexts in which competitiveness is discussed is the relative attractiveness of various countries as locations for developing a given sector. An alternative way to assess sectoral competitiveness includes comparisons with other industries in the same economy. While in a closed economy it is meaningful to examine the competition for human resources and capital between industries, growing globalization makes it more rational to consider the competition within the same industry between nations. Therefore, at the sectoral level competitiveness is usually linked with international trade performance. Markusen (1992) suggests the following trade-based definition of industry competitiveness: In a free-trade environment: (1) An industry loses competitiveness if it has a declining share in total domestic exports or a rising share in total domestic imports deflated by the share of that good in total domestic

INTERNATIONAL COMPETITIVENESS OF EXPORT-ORIENTED INDUSTRIES IN BULGARIA

production or consumption; and (2) An industry loses competitiveness if it has a declining share in total world exports or a rising share in total world imports of that good deflated (divided by) the country’s share in world trade. Yaacob (2007) gave a similar definition according to which meso-level competitiveness is the comparative advantage of an industry or a country, and also the ability of an industry to gain and maintain domestic and export market share. Various indicators for total or net exports (revealed comparative advantage indices—RCAI) are commonly used to assess sectoral performance in foreign trade and determine whether country’s industries possess comparative advantages. Despite its clarity, the use of foreign trade performance as a competitiveness indicator raises other issues. For this reason, some authors like Markusen (1992) prefer to study an industry’s competitiveness by comparing its productivity with that of the same industry in major trading nations. That author considers a sector competitive if it has a total factor productivity equal to or higher than that of its foreign competitors or if its average cost per unit of production is equal to or lower than that of its foreign competitors (Markusen, 1992). Representing the relationship between output and input, productivity is an indicator of production efficiency. Since quantifying it is rather difficult, many studies focus only on a single factor of production, usually labor. Labor productivity is the ratio between total output value and the number of workers. Comparing a country’s sectoral labor productivity with that of trade partners requires sector-level purchasing power parity data. For this reason, the growth rates of productivity are all too often compared rather than its levels (European Commission, 2009a). Unit Labor Cost (ULC) is a frequently used indicator of an industry’s competitiveness. It represents the ratio between wage rate indices and production indices (the value of final output). It is noteworthy that it is precisely relative labor costs per unit of output which are the relevant indicator for measuring price competitiveness, rather than solely differences in pay levels, since gains from international trade stem from comparative, rather than absolute advantages. If a real wage increase in a sector is accompanied by a commensurate productivity rise, the ULCI index remains unchanged. Real wage uptick implies that the opportunity cost of labor used in the industry has grown; i.e., other industries are bidding up the price of labor (or more generally that of production factors). In such a case, ULCI rises might reflect a shift of comparative advantage to other industries within an economy. The definition of competitiveness at a sectoral level and its quantitative evaluation used by the European Commission, combine definitions and indicators based on foreign trade performance with those based on productivity and labor costs. The European Commission (2008) sees competitiveness at a sectoral level as the performance of a given industry within a country or region relative to the same industry in other countries or regions. A sector could be characterized as competitive on the basis of its capacity to grow, to innovate, and to produce more and higher-quality goods and services, and to keep or gain market shares in international and domestic markets (European Commission, 2008). In the EU Industrial Structure: Performance and Competitiveness report competitiveness, seen as a multidimensional concept, is defined by reference to two types of indicators. The first measures directly relevant aspects of competitiveness such as labor productivity and unit labor costs. The second type addresses international competitiveness by

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observation of sectors’ performance on international markets. This involves analyzing the dynamics of Revealed Comparative Advantage (RCA) and Relative Trade Balance (RTB) indices and EU sectors’ world market shares (European Commission, 2009b). These indicators (production index, labor productivity, labor cost per unit of output, RCA, and RTB) are presented as sectoral competitiveness indicators in the statistical annexes to several European Commission European Competitiveness Reports (European Commission, 2006; 2007; 2008). The Ministry of Economy and Energy’s 2007 Analysis of Bulgarian Industrial Companies’ Competitiveness (in Bulgarian) does not give a definition of competitiveness (Ministry of Economy and Energy of the Republic of Bulgaria, 2007). Competitiveness indicators included in it are based on productivity (here the authors include indicators like labor productivity, labor cost productivity, the ratio of personnel costs to output, and labor costs per employee) and profitability calculated using the share of gross operating surplus in gross added value and profit rates in the sectors under observation. To enable sound recommendations for boosting competitiveness, however, sectoral analyses include overall characteristics and sectors’ place in manufacturing, growth dynamics and scale, share in total employment, investment, technological levels and innovation, domestic market, foreign markets, EU regulations, standards, strategic and programming documents, role and activity of trade associations, strengths and weaknesses, and summaries of sectoral problems, in addition to the abovementioned indicators. Analyzing the competitiveness of Central and Eastern Europe (CEE) on a sectoral level the authors of the Vienna Institute for International Economic Studies (WIIW) used the following indicators: labor productivity; labor cost per unit of output; investment growth; attractiveness for FDI; production dynamics; export growth and European market share growth; RCA and pattern of export specialization according to classification of industries based on factor intensity; and output quality indicators, based on comparison of export unit values (Havlik & Landesmann, 2001). Depending on statistical data availability, the indicators set out above could be used in an analysis of the overall competitiveness of Bulgarian industrial sectors. This is not to underestimate the complexity of competitiveness and the fact that it remains an ever relative concept that expresses a sector’s ability to boost productivity and quality and to compete with analogous sectors in regional and global markets.

Results of the Assessment of the Competitiveness of Selected Bulgarian Industries The industries addressed in the research are among Bulgaria’s most promising sectors. Each of them has a significant share in total national exports, with their combined share in Bulgarian exports in recent years hovering at 70 percent. Recent years’ sectoral analyses rank metallurgy, machine building, chemicals, clothing and textiles, furniture, wine production, tobacco, and food processing industry among Bulgaria’s most competitive industries. Metallurgy In recent years, manufacture of metals and metal goods has occupied a growing share in Bulgarian output and added value. The industry has very dynamic production and sales volumes. The high share in the country’s industrial output and in total goods export and the surplus generated in metals and metal products trade are important factors in improving Bulgaria’s macroeconomic indicators. Metallurgy is thus seen as a key strategic sector in Bulgaria’s economy.

INTERNATIONAL COMPETITIVENESS OF EXPORT-ORIENTED INDUSTRIES IN BULGARIA

At the same time, diverse negative factors are facing the Bulgarian metals industry posing a number of challenges. Attaining the following aims ought to be a priority for all companies in the industry:  Acquiring new knowledge;  Introducing modern techniques and technologies to reduce energy intensity and to comply with the European environmental standards;  Increasing investment in modern machines and facilities;  Boosting the proportion of high-quality end products which would lead to sustainable increases in companies’ competitiveness;  Implementation of innovative solutions for manufacturing of new higher-value-added products and boosting workforce qualifications;  Improving labor conditions. Machine Building Alongside being an industry which creates a relatively high added value, machine building has an intensive spillover effect across other sectors. This, together with accumulated tradition and production facilities, makes it particularly promising for Bulgaria’s manufacturing and export specialization. Machine building is also an industry that relies largely on export markets for selling its production. Long traditions, good price/quality ratios, and good workforce availability among other factors contribute to the sector’s competitiveness. In spite of these distinct advantages, Bulgarian machine building also faces a number of challenges and difficulties on the road to improvement and enhanced competitiveness: low labor productivity; competitiveness, established in lower market segments, based on low costs in machines of only fair added value; a shortage of financial resources for investment in fixed assets and technological innovation; and insignificant inflows of FDI among others. Bulgarian companies in the sector need to improve their management and turn to strategic long term development that involves a transition from comparative advantages reliant on low labor costs to specific advantages stemming from diversified goods and services with high quality and greater added value. Competitiveness could be boosted by:  Active company policies for modernization of manufacturing technology;  Firms’ strategies should be directed to introducing and spreading innovation, regardless of how it is acquired—through transfer or own creation by closer interaction with research institutes and universities and higher R&D expenditures;  Improvement of the marketing approach applied. Companies should see that their products match to a greater extent the requirements set by the market;  Development of entering new markets, while taking into account the efficiency of the logistic chain;  Establishing modern human resources management systems; investment in human capital formation;  Achieving synergy due to the establishment of long-term partnerships through creation of entrepreneurial networks, subcontractor chains, joint ventures with Western companies, clusters, etc.;  Absorption of the grants allocated for co-financing of projects under the Competitiveness Operational Program and the Human Resources Development Operational Program as well as other programs funded by the EU and the state.

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Ultimately, to improve their competitiveness and to gain stable market positions in the global market, the efforts of the Bulgarian machinery companies should be focused on increasing the resources productivity and climbing up the ladder of added value through technological innovation, creation of innovative capacity, and formation of highly-skilled human capital. Chemical Industry Chemical industry is among the modern fast-developing sectors of the national economy. It is among the main carriers of the scientific and technological progress and it appears to be a significant factor for production intensification. This sector holds the potential to be the main engine of the economic growth as new technologies are continuously implemented and new products are developed. The chemical industry is also characterized by high export orientation, while large part of the companies occupy stable positions and are traditional players not only in the Bulgarian market, but also in international markets. The main competitive advantages of the industry are the good combination of quality and price, the flexible operations management, and high growth rates of added value. At the same time, there are barriers to the development of the sector’s competitiveness, such as the considerable resource and energy intensities of the production, the prevailing share of raw materials and intermediate products in the export list, the added value still being low and the issues related to the quality management system. In this regard, the recommendations for enhancement of the competitiveness of the companies operating in the chemical industry are in the following directions:  Increase in production of goods with higher added value (intermediate and consumer products) that should have a prevailing share in the national export list;  Implementation of new technologies to enhance the efficiency and reduce energy intensity;  Maintaining and stepping up positions in the domestic market in spite of the increased competition and stabilization of sales on external markets; organization of manufacture designated to replace import;  Increasing positions in the markets within the EU and beyond as well as occupying some new niches thanks to good price/quality ratio;  Elaboration of joint programs between scientific organizations and companies from the industry designated to train sufficiently large number of highly skilled specialists;  Stressing also on the non-price factors for competitiveness, inter alia, regulatory requirements and standards;  Priority orientation towards biotechnological manufactures, production of perfumery and cosmetics, and of other light chemical industry products;  Undertaking measures to assist the application process for EU programs through information campaigns and alleviating the red tape procedures so as to facilitate the participation in the EU operational programs and to benefit from the state mechanisms to boost export. Clothing and Textile Manufacture The recent years’ developments as well as the present analysis have shown that currently the textile sector in Bulgaria has good competitive advantages in international markets. What limits the steady progress is the manufacture based on low added value and low production costs. There are a number of cases, where, for the lack of a strategic vision for the enterprises’ development, a peculiar downward movement along the spiral of the low added value is observed without any attempt to use

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the accumulated know-how and capacity, e.g., to develop own product for local and regional markets, to promote a brand and product diversification. Probably the current period is one of the key stages, under the conditions of post-crisis restructuring and unstable economic recovery, when the entrepreneurs mainly in the sewing sector in Bulgaria should undertake strategic steps to create higher added value or, on the contrary, to ensure in the short term new Cut, Make, Trim (CMT) orders and, respectively—to compete mainly on the basis of lower production costs, with other countries in the region or, at first sight unexpectedly and doubtlessly without any perspective, in Southeast Asia. In this context, the following recommendations for an increase in the sector’s competitiveness can be highlighted:  Need for strategic planning, which shall be a landmark for the enterprises’ development in a medium-term perspective;  Reorientation from CMT production to manufacture of products of higher added value;  Building on the experience gained and the existing market positions of the Bulgarian manufacturers to develop and promote own brands;  Proactive marketing to promote the Bulgarian companies’ textile products in prospective niches in the domestic market and in the Balkan region’s markets; diversification of the export markets by shifting to EU countries, other than our current partners (Germany, Italy, and Greece);  Strategic partnerships with local and foreign contractors, including cooperation with or without equity participation;  Development of a network of potential sub-suppliers and subcontractors in neighboring countries that have prospects for future EU membership;  Strengthening the role of industry associations;  Development of a capacity for design of models and own design, e.g. Computer Aided Design (CAD), Computer Aided Manufacturing (CAM) systems, including modernization of production funded by the EU Structural Funds;  Maximum utilization of the most of the opportunities for manufacture of specialized production such as medical and military uniforms, etc.. Furniture Manufacture Furniture manufacture is another export-oriented sector of the Bulgarian economy with proven traditions and qualities. In spite of its strengths, over the recent years the industry has faced certain obstacles that hinder additionally its development and slow its competitiveness growth. This entails low revenues, which is a reason for lower reinvested earnings and consequently hinders the replacement of machines and other fixed assets in the manufacture. Thus, the enterprises’ productivity is additionally reduced. The insufficient profit is also a reason for Bulgarian companies to sell products with low added value—the margin is much lower as compared to that of a production, in which the end product design is widely used. When it comes to the export of Bulgarian furniture, the label “Made in Bulgaria” is not associated with high-quality production, neither with on-time delivery, which exerts a negative impact on the export of this type of manufacture. The main competitive advantage of furniture manufacture in Bulgaria is the low remuneration level. However, even under these conditions, our country cannot compete with economies like China and India, which also rely on similar advantages.

INTERNATIONAL COMPETITIVENESS OF EXPORT-ORIENTED INDUSTRIES IN BULGARIA

In the course of the analysis of the industry, the following recommendations can be outlined:  Orientation towards products with higher added value which shall provide higher return for the enterprises and opportunities for more investment, respectively;  Use of professional designers’ services so that the Bulgarian furniture manufacturers shall differ from their foreign competitors, rather than imitate an already existing design;  Strengthening the role of existing partner organizations (clusters) and establishing new ones so as to facilitate entering and strengthening positions in new markets, cooperating in joint advertising, marketing, and scientific research activities, and improvement of the access to crediting;  Targeting wealthier market segments while retaining a good price/quality ratio;  Updating educational curricula according to market requirements; training marketing and management specialists, which are of crucial significance for the successful entrance and establishment on foreign markets;  Incentives provided by the government to boost competition between companies through innovation of end products, manufacturing processes and services;  Increasing state incentives for the introduction and implementation of international quality standards. Wine Production Bulgaria has developed traditions and culture in vine growing and winemaking for centuries. Over the recent years a trend has been observed towards establishment of modern wine cellars which meet global standards as well as towards production of exclusive wines which compete successfully with proven world brands. In spite of the sector’s progress so far, some additional actions and efforts are necessary to increase the competitiveness of this traditional for Bulgaria sector. With regard to this, the wine producers and the National Vine and Wine Chamber should unite their efforts in order to strengthen the competitive advantages of Bulgarian wine—starting from the centuries-old tradition and considering the new vineyards, the change of the grape varieties, and creation of boutique wine series that shall turn into the image of the Bulgarian wine production. More and more producers and technologists with modern views realize that a fastidious European consumer can be attracted only by high-quality wines, even if not in large volumes. Therefore most of the new wine cellars aim at making high-quality wines and some of them really do. In the near future, if grown in appropriate areas, while the yield is controlled with care and the product is well marketed, local brands as Mavrud, Rubin, and Melnik can create a modern image of Bulgarian wine and make it competitive. The specific recommendations for the sector’s competitiveness enhancement are related to the following:  Investment in the renewal of vine massifs, in technological development and innovation, and in human capital;  Development of an efficient control system that shall cover the whole production process (from the vineyards to the bottle on the counter). The lawmaking bodies, industry associations, the producers and consumers’ organizations should be involved in this process;  A targeted policy to boost export (e.g., advertising, promoting, and positioning Bulgarian wine in the markets of third countries with a focus on its origin);  Production of high-quality wines from the higher price segment (e.g., boutique wine series) designated for the solvent consumers in Western Europe;  Strengthening positions on new markets as Brazil and entering potential markets—mainly countries in

INTERNATIONAL COMPETITIVENESS OF EXPORT-ORIENTED INDUSTRIES IN BULGARIA

North and South America and Asia;  Measures undertaken by the State and various institutions to support the absorption of the finances provided by the EU funds, mainly aimed at coping with red tape and corruption practices in the project application and approval process; shortage of funds for project co-financing and lack of sufficient information. Tobacco Industry The production and export of Bulgarian tobacco and tobacco products are a sector with established traditions, long history, and high level of competitiveness. Given the fact that the central position in the companies’ structure of today’s Bulgarian tobacco and tobacco products market is occupied by Bulgartabak—Holding AD, which also monopolizes the export in the industry, the conclusions, and recommendations as regards the tobacco industry in the country have been drawn on the basis of an analysis of this company. Bulgartabak—Holding AD has kept its competitive advantages thanks to the high-tech equipment, strong and established own brands on the domestic and external markets, developed distribution network as well as to the long traditions in the sector. In spite of the fierce competition with multinational companies, Bulgartabak—Holding AD is a leader on the domestic cigarette market. In the future the company’s market share may remain stable as excise duties have already been increased, and the multinational companies’ marketing strategies are no longer so aggressive. In the new post-privatization conditions, export appears to be crucial to the holding’s growth. As a result of the analysis, the following recommendations for enhancement of the sector’s competitiveness have been pointed out:  Flexible policies as regards the products’ adaptation according to the preferences of the consumers both in the domestic and external markets;  Training of specialists in the field of marketing;  Marketing strategies for retaining the market presence of Bulgarian brands in the domestic and external markets to the greatest extent possible;  Strengthening the existing positions in external markets and diversifying export destinations;  Need to find new business partners and establishing own channels for selling abroad; elimination of the sector’s dependence on intermediate companies in the international business operations;  Effective measures to be undertaken by the state to cope with illegal trade and the continuous increase in smuggling;  Development of innovative and modified products (product portfolio, design, color, flavor, taste, and packing). Food Industry The food industry is a highly-developed sector with rich traditions and has a significant role in Bulgaria’s economy and export. On the basis of the research and the results thereof, the following basic conclusions and recommendations for the improvement of the state’s economic policy as regards the export-oriented companies which aim at enhancing the quality of the business environment and the Bulgarian companies’ export competitiveness have been formulated:  Implementation of aggressive marketing policy, which includes creating a positive image of the Bulgarian goods on the domestic market as well as drafting and implementing strategies to promote branded Bulgarian

INTERNATIONAL COMPETITIVENESS OF EXPORT-ORIENTED INDUSTRIES IN BULGARIA

food products;  Establishing a common vision of the Bulgarian food industry based on quality and an attractive image;  Establishing structures of clusters and improving the existing inefficient ones in the industry;  Building cooperation and partnerships to exchange information about the markets and the challenges facing the food industry;  Creating and promoting new organic food products in the market;  Investment in new technologies and modern equipment to enhance the effectiveness and efficiency of production;  The opportunities for access to EU financing remain underestimated and underutilized by the Bulgarian food industry companies;  Seeking opportunities and undertaking measures to increase the share of export-oriented products with high added value in the total output of the food processing industry.

Conclusions and Recommendations The different sectors of the Bulgarian economy have seen an uneven development since 2000. In the period of high economic growth, the greatest increase in output and attracted investments occurred mainly in the construction and financial sectors, which caused a considerable structural imbalance. The unstable financial environment and the subdued investment activity as from the beginning of 2009 affected those very sectors. Later on the changes due to the economic recovery of the main trade partners of Bulgaria provided favorable opportunities for development of the export-oriented sectors. This effect can be retained through adequate measures for enhancing the sectors’ competitiveness. These measures should cover the legal regulations, tax system, investment in new equipment, infrastructure, human resources, and R&D. The relevant industry associations can play a key role as a mediator between the state and the individual companies. Taking into consideration the conclusions from the detailed study of the selected sectors, it can be summarized that for most of the export-oriented industries the following strengths are observed:  Long-standing tradition in manufacture and export;  More and more companies from the sectors under consideration rely on their good price/quality ratio to be their competitive advantage;  Good price/labor productivity ratio;  High extent of integration within the internal market which is evident from the fact that most of the exported production is oriented to EU markets;  The geographical proximity to the main markets of the Bulgarian production guarantees short-delivery periods;  Access to EU funding. Despite the abovementioned advantages of the export-oriented sectors in Bulgaria under consideration, certain issues and challenges facing the industries can be specified as follows:  Notwithstanding the apparent trend which has shaped over the recent years and the aim of Bulgarian goods to attain higher added value, its level remains unsatisfactory. The low profitability makes it impossible to invest in development and implementation of new technologies;  Out-of-date production facilities and low extent of technologization, slow implementation of new technologies;

INTERNATIONAL COMPETITIVENESS OF EXPORT-ORIENTED INDUSTRIES IN BULGARIA

High energy intensity of production;  Low labor productivity;  Excessive dependence on cheap workforce, however, the importance of this factor is anticipated to gradually decrease in the near future;  Gap between demand and supply of high-quality labor resources;  Lack of a common strategic vision among industrial associations;  The marketing components are insufficiently used;  Low level of expenses for R&D and unsatisfactory innovation activity;  Competitiveness established mainly in low market segments;  Underdeveloped infrastructure which hinders processes that require timely deliveries;  Poor development of cluster formations;  The strong link between the export-oriented sectors in the economy and the Euro zone is the cause for the decrease in external demand given the deteriorating economic situation in the leading trade partners of Bulgaria. All these challenges facing the export-oriented sectors call for outlining and undertaking clear and appropriate measures so as to enhance and strengthen their competitiveness. This is a pressing issue that requires fast response and special attention, having in mind the great significance of the sectors at issue for the Bulgarian economy’s growth. With a view to a higher level of competitiveness, the following recommendations could be given to the producers in these leading export sectors:  Increase productivity by adding value growth at a faster rate than that of production costs as well as compared with the countries regarded as competitors. To that end, the companies can establish state-of-the-art logistics systems for fast deliveries, restructure the production so as to offer goods with high added value, and enhance marketing of Bulgarian goods;  Upward movement along the supply chain (design) and downward movement in terms of marketing and trade are appropriate strategies for the success of the exporting companies. Despite the difficulties, Bulgaria can conduct trade successfully, especially in Eastern European markets;  Investments in implementation of new technologies and transfer of technologies through FDI;  Investments in R&D, strengthening cooperation with scientific institutions;  Establishing strategic partnerships both with local and foreign companies. An important element of cooperation between Bulgarian and foreign companies is that it should be carried out on the basis of intensive innovation. This suggests efficient use and implementation of knowledge, skills, and experience already gained by the foreign companies in production of new technologies, products, and services;  Establishing clusters to increase added value, reduce costs, and enhance the competitiveness of companies in the sectors at issue. This, in turn, will make Bulgarian companies competitive on external markets where demand is larger—a task which is beyond the power of a single company;  The necessary export diversification is to be achieved through extending the scope of the markets serviced and the product lines offered. This would allow the companies to respond adequately to the changes in international markets and to optimize the results of their foreign trade operations by efficient use of the international environment. To that end, it is necessary to examine not only the current export directions, but also non-traditional markets and their potential, to identify the goods in which the sectors have export advantages or export potential; 

INTERNATIONAL COMPETITIVENESS OF EXPORT-ORIENTED INDUSTRIES IN BULGARIA

Creating conditions for training managers, designers, and other specialists, who shall acquire managerial and professional competence necessary for management of the sector’s supply chain. With regard to this, Bulgarian companies should pay more attention to on-the-job training and should endeavor to up-skill their employees continuously;  It is necessary to draft an export strategy directed, inter alia, to meet quality management requirements. Exporting companies in these sectors should guarantee that their products comply with the mandatory technical specifications set by the markets abroad and with the internationally recognized standards related to health protection, consumers’ safety, and environmental protection. With a view to the demanding European market, where a prevailing fraction of the Bulgarian goods’ export is oriented to, certification and implementation of the required quality standards should not be downplayed, on the contrary, they should be focused on;  Management of the competitive advantages through the following: Formulation of a clear vision and strategy for establishment and maintenance of sustainable competitive advantages, which implies that the owners and company management should have a clear and precise understanding of the essence and the factor dependence of these competitive advantages; strategic analysis with a stress on resources. In the context of the strategic analysis, it is also important to perform a comparative study and analysis of the competitors’ capabilities (benchmarking). It is the comprehensive information about the competitive advantages of companies from other countries offering the same, similar, or substitute products that will improve Bulgarian companies’ awareness and help them make the right strategic decisions. The next group of activities related to the competitive advantages management implies planning concrete managerial and executive activities as well as relevant resources and organizational support. As is the case with strategies in general, in this particular case feedback, flexibility, and effective change management are again of importance. Although the responsibility for the competitiveness lies mainly with the companies in the sectors, addressees of recommendations are another two groups of stakeholders—central and local authorities and institutions for cooperation (industry associations, educational, and training institutions). The contribution of the state in the process of establishing stronger competitive positions of the Bulgarian export-oriented industries may cover the following areas:  Laying stress on the educational system and its improvement is an important step towards increasing the level of competitiveness of the industries under consideration. The state, in particular higher educational institutions, should prepare their curricula in compliance with the real needs of businesses. A concrete step in this direction shall be the strengthening of the dialogue between them;  Support for innovation and development activities, technological upgrading, establishing contact with engineering organizations, implementation of new technical and technological solutions as well as state-of-the-art business models. This would assist companies in continuously enhancing their capacity, identifying, choosing, and adapting successfully adequate technological solutions in their activities. In this context, opportunities will be sought to encourage applied research and its commercialization as well as the use of EU good practices;  The main task of the State should be providing support to Bulgarian exporters through the following: preparing and providing the necessary business information, marketing research of foreign markets, technical support for establishing contacts, participation in fairs, business forums, advertisement of Bulgarian goods abroad and, as a whole, presentations of the Bulgarian economy in other countries to strengthen the presence of the Bulgarian producers and to improve the image of the country; 

INTERNATIONAL COMPETITIVENESS OF EXPORT-ORIENTED INDUSTRIES IN BULGARIA

Measures aimed at establishing attractive conditions for FDI, including the following: fiscal incentives—corporate tax relief, temporary tax exemption, reliefs for funds used for investment and reinvestment, an accelerated depreciation regime, reliefs in case of R&D-related activities, etc.; financial incentives—state subsidies to cover a fraction of the start-up costs, credit reliefs or guarantees, providing favorable state insurance conditions; other incentives—public expenditure for establishing investment infrastructure, creating areas of special economic status, etc.;  Introducing effective labor legislation and a flexible labor market;  Supporting promising export-oriented sectors through a comprehensive national strategy for export boosting. The export strategy should position the country in international markets, while identifying on a regular basis, the competitive Bulgarian products and product groups. Its main role is to focus and unite the efforts of the state agencies and institutions whose job is to promote Bulgarian export as the Bulgarian Smalland Medium-size Enterprises Promotion Agency, Bulgarian Export Insurance Agency, Bulgarian Development Bank, InvestBulgaria Agency, and the country’s trade missions abroad. In the context of the current strained economic situation, when the changes in the macroeconomic environment are chaotic and unpredictable and the achieved results are not attractive enough for investors, producers, and exporters, a policy of particular incentives for production and export has to be introduced. It is true that, due to the tight domestic market, it is precisely the export-oriented sectors that generate growth in the Bulgarian economy, but this is only when they are competitive on international market. The negative consequences of the economic crisis influence the competitiveness of the promising industries and the entire economy, respectively. This urges the state to attach particular attention to this issue and to direct considerable efforts and funds to find its solution. State support for the priority economic sectors will trigger a revival in the rest of the industries and, consequently, in the national output as a whole. The state support is to provide the conditions for new export-oriented manufactures that shall prove and strengthen the image of Bulgaria as regards the groups of goods with high added value. This implies implementation of policy of production integration with EU countries and the other developed countries in the field of new technologies. The policy of broadening the access of Bulgarian goods to world markets should be combined with policies aiming at attracting foreign investment to national export-oriented manufactures. The aim is to make their presence on these markets as well as the competition with the foreign products on the domestic market successful. By drafting sectoral export strategies, conditions shall be created for combining the stakeholders’ efforts for enhancement of enterprises’ export competitiveness and for the implementation of effective policy to boost export. The institutions for cooperation also play a significant role for the enhancement of the export-oriented industries’ competitiveness. (1) The sectoral organizations can assist in solving the pending issue of the highly-skilled workforce shortage facing most of these sectors in the following way:  Drafting programs for up-skilling and on-the-job training and more active implementation of the lifelong learning concept in the practice of the economic agents;  Playing more active role in updating the curricula of the specialized schools and higher education institutions that need better compliance with the requirements and needs of the companies of cadres with certain professional skills;  Drafting and execution of various initiatives to enhance the sectors’ attractiveness for professional 

INTERNATIONAL COMPETITIVENESS OF EXPORT-ORIENTED INDUSTRIES IN BULGARIA

development among young people;  In order to overcome the information imperfections on the labor market, the industry associations need to establish information systems for demand and supply of specialists in the relevant sectors. (2) The main issue facing the Bulgarian companies is the low labor productivity, which is due to the use of out-of-date production capacities and technologies. The industry associations contribution in this respect implies the following:  Providing competent consulting services to enterprises for developing projects of good quality to apply under EU operational programs with the purpose of better use of the opportunities for technological modernization of the small and medium enterprises (SMEs) and implementation of innovative processes and products;  Assisting in acquiring licenses for foreign technologies, transfer of know-how and knowledge;  The industry associations need to serve as an intermediary between the universities, scientific institutes, and businesses for the purpose of enhancing the enterprises’ innovation activities. (3) Industry associations have an indispensable role in assisting member companies in entering international markets. In particular, this can be realized through: collecting, summarizing, and providing information on the opportunities and the ways for entering particular foreign markets, the existing regulatory regime, and the general economic situation; helping companies participate in significant events, where they can establish contact with potential partners—fairs, conferences, exhibitions, competitions, etc. (4) In today’s global economy the competitiveness of industries does not depend only on the combined competitiveness of all companies. It is now to a greater extent dependent on the companies’ capabilities to cooperate with potential partners from related industries, on the complexity of company services (consultations, R&D, financial services, etc.), on the efficiency of public administration, and on political decisions, which support the establishment of favorable business environment for economic development. In this regard, the role of industry associations is to assist in overcoming the distrust among their members, to help them realize business cooperation, and participate in clusters; (5) The main efforts of the industry associations should be aimed at assisting businesses in adoption, implementation, certification, and control of the multitude of European rules, standards, and directives. In conclusion, it is important to note that under market economy conditions economic agents are the ones who create national welfare and ensure competitive sustainable development. Therefore, despite the unique role of the assisting organizations and the state support, including the state export strategy, without the effective operation of the business units, the enhancement of the international competitiveness is impossible.

References D’Cruz, J., & Rugman, А. (1992). New compacts for canadian competitiveness (p. 14). Toronto: Kodak Canada. European Commission. (2001). European competitiveness report 2001. Commission Staff Working Paper, Brussels. European Commission. (2006). European competitiveness report 2006. Commission Staff Working Paper, Luxembourg. European Commission. (2007). European competitiveness report 2007. Commission Staff Working Paper,Luxembourg. European Commission. (2008). European competitiveness report 2008 (p. 106). Luxembourg. European Commission. (2009a). EU industrial structure 2009: Performance and competitiveness (p. 94). Luxembourg: Publications Office of the European Union. European Commission. (2009b). EU industrial structure: Performance and competitiveness (p. 180). Luxembourg: Publications Office of the European Union. Havlik, P., & Landesmann, M. (2001). Competitiveness of industry in CEE candidate countries. Vienna: WIIW.

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IMEDE. (1991). World economic forum (p. 8). The World Competitiveness Report 1991. Kubiak, A. (2006). On essence and measurement of changes in competitiveness of the accession countries: Critical review of literature. Studies and Analysis, 321, 1-30. Markusen, J. (1992). Productivity, competitiveness, trade performance, and real income. Ottawa: Economic Council of Canada for Minister of Supply and Services Canada. McFetridge, D. (1995). Competitiveness: Concepts and measures. Occasional Paper 5, Industry Canada, Toronto. Ministry of Economy and Energy of the Republic of Bulgaria. (2007). Analysis of the Competitiveness of Bulgarian Industrial Companies (Министерство на икономиката и енергетиката на Република България, Анализ на конкурентоспособността на българските промишлени предприятия). Retrieved from http://old.mi.government.bg/bids.html?id=134456 Momaya, K. (1998). Evaluating international competitiveness at the industry level. The Journal for Decision Makers, 23(2), 39-46. UNCTAD. (2004). Trade and development report (p. 135). New York: UNCTAD. World Economic Forum. (2010). The global competitiveness report 2010-2011 (p. 4). Geneva, Switzerland: World Economic Forum. Yaacob, H. (2007). The study of export competitiveness of Malaysian electrical and electronic product. Shah Alam: UiTM Press. Zaharieva, G. (2007). Measuring national competitiveness. Svishtov, Bulgaria: D. A. Tsenov Academy of Economics.

Chinese Business Review, ISSN 1537-1506 January 2014, Vol. 13, No. 1, 19-27

DAVID PUBLISHING

Mixed Market Competition in a Quality Differentiated Duopoly Model—An Approach to Banking Sector* Ram Kumar Phuyal Tribhuvan University, Kathmandu, Nepal 

This paper attempts to develop a theoretical framework to investigate the competitive implications of quality choices of financial institutions whereby they charge prices to consumers based on their willingness to pay for the service qualities in the mixed market scenario under vertical product differentiation model. Initially, it analyzes benchmark equilibrium solutions of monopoly and duopoly to establish the degree of quality differentiation between two private banks in an uncover market configuration. Further, it estimates the quality differentiation between private and public banks, and examines the interaction between two market structures keeping public bank as both leader and follower, and then measures the social welfare from different prospectives. The explicit operation of two stages Nash equilibrium game forecasted that public banks’ monopoly seems to be still better than a private banking, and it is socially optimal. The outcome demonstrates a significant importance of vertical quality differentiation for policy implication in banking industry and provides an insight on the reasons of particular co-existence of public and private banking services in the specified location. In this context, it is concluded that the presence of public banks in banking industries is a crucial condition for obtaining the higher range of social welfare. Keywords: banking industry, Bertrand price competition, mixed duopoly, vertical quality differentiation

Introduction It seems that many of the research works on market structure of banking industries have been concerned on models of vertical product differentiation for the last three decades. Some recent literatures have contributed that if the nature of technology and tastes in banking industries take a concrete form, then they must necessarily be “concentrated”, and must remain so, no matter how large the economy becomes. Such models permit a kind of unified treatment of certain conditions and situations in which financial institutions incur costs with a view to enhancing customers’ willingness to pay for their respective services/products. In the findings of some leading research papers such as Gabszewicz and Thisse (1979), it showed that price competition could yield equilibrium market outcomes where some customers prefer to refrain from *

The earlier version of this paper was presented at the International Conference of Economic and Finance (April-2012), and ORSN-International Conference (February-2012). Author is grateful to anonymous referees for their genuine comments on both conferences. Author is also thankful to Professor Dr. Sang-Ho Lee, Department of Economics, Chonnam National University, South Korea for his valuable suggestions. All remaining errors are of author’s. Ram Kumar Phuyal, Ph.D., Associate Professor of Economics in Centre for Economic Development and Administration (CEDA), Tribhuvan University (TU). Correspondence concerning this article should be addressed to Ram Kumar Phuyal, CEDA, TU, Kirtipur, Kathmandu, Nepal. E-mail: phuyal_ram5@yahoo.com; ramkumar.phuyal@ceda.org.np.

MIXED MARKET COMPETITION IN A QUALITY DIFFERENTIATED DUOPOLY MODEL

buying or outcomes where all consumers buy one of the two products. Moorthy (1988) assumes the existence of a quadratic cost function for quality and considers the problem of quality choice in an uncover duopoly. Shaked and Sutton (1982) have been further investigated the intuition that firms are led to choose products of different qualities; Kindleberger (1983) focused on that international banking and international trade have been partners since the beginning of world trade and world finance. To capture the “special nature of banking competition”, available theoretical and empirical evidences of price and quality in a framework that finds its roots within the different theories explaining the existence of financial institutions. Tirole (1988) assumes that firms maximize product differentiation over the available range of qualities in cover market. Bresnahan and Reiss (1991) adopt an empirical framework for measuring the effects of entry in concentrated markets and show how the number of producers in an oligopolistic market varies with changes in demand and market competition, whereas, Choi and Shin (1992) show that the lower quality firm will choose a quality level which is a fixed proportion of the higher quality firm’s choice. Degryse (1996) studied the conditions under which banks offer remote access existing interaction between location and taste for remote access to enhance this effect. Matsumura (1998) investigates a quantity-setting duopoly involving a private firm and a privatized firm jointly owned by the public and private sectors. The private firm maximizes profits, while the privatized firm takes both profits and social welfare into consideration. Cohen and Mazzeo (2004) empirically estimate the effect of competition on ex-post quality in software markets by exploiting variation in number of vendors that share a common flaw or common vulnerabilities by distinguishing between two effects: the direct competition effect when vendors in the same market share vulnerability and the indirect effect which operates through non-rivals that operate in different markets but nevertheless share the same vulnerability. The results support the notion that increased competition, directly and indirectly, leads to faster patching times and improved consumer welfare. Kim, Kristiansen, and Vale (2005), for example, study whether banks can pursue strategies in order to vertically differentiate their products and services. If customers are willing to pay for banks enjoying a higher reputation, then banks may invest in variables to increase their reputation. The empirical question addressed is whether borrowers are actually willing to pay for “quality” characteristics. In addition to the above results, for a wide range of service quality parameters of banks, some properties of banks profit and social welfare are demonstrated. In particular, this paper aims to examine how the mixed duopoly competition in banking industry works within a frame of vertical product differentiation model. In this regards, Tirole’s (1988) paper has been extended with incorporating the comment followed by Choi and Shin (1992) for obtaining explicit solution of the performance of the consumers’ indexes in uncover duopoly considering the banking industry as an example in which one or both banks can perfectly identify valuations of heterogeneous consumers. High quality providing bank may reduce its quality, while the low quality may raise its quality to be more competitive. To this end, a two-stage game is considered where low quality financial institute first chooses the quality level and then competes in prices. The paper is organized as follows: Section two sets the basic duopoly model. Section three deals with the benchmark equilibrium analysis, whereas section four describes mixed competition strategies and the final section draws the concluding remarks.

The Duopoly Model Let us consider that there are two financial institutions in a banking industry, bank-one is a low quality

MIXED MARKET COMPETITION IN A QUALITY DIFFERENTIATED DUOPOLY MODEL

institute and bank-two is a high quality institute, which produces two non-substitute services. A costless uncovered duopoly is supposed for a market choosing qualities first and then prices. Each bank is allowed to choose only one service either high or low quality and is sold in an impersonal market at the same price of a given quality. A market equilibrium is described by a set of prices, one for each quality, and the observed product line is vertically differentiated in the index [ q , q ] , where q  q  0 . Let us consider a population of consumers who may purchase either a single or zero units of vertically differentiated product/services from any one of the financial firms. His/her preference is identified by  and enjoys indirect utility function as described below:

U  qi  pi

(1)

Utilizing a service of quality qi provided at a price Pi, the continuum of potential customer described by non-negative, one-dimensional taste parameter  is assumed to be distributed uniformly along an interval

[ ,  ] where     0 and i = 1, 2. All customers, at a given price, prefer higher quality, but they differ on the willingness to pay for it. Customer’s utility will be zero if he/she refrains from taking services as follows:

qi  pi = 0

(2)

Similarly, a customer will be willing to take the service of firm i, only if:

pi  qi

(3)

Without any loss of generality, the support of the distribution to the unit length is normalized, so that

    1 with the assumed uniform distribution of parameters. Here after, the remaining preference parameter

 will be interpreted as an index of the customers’ taste for the intensity of their willingness to

pay for the service quality.

Benchmark Equilibrium Analysis Monopoly Solution Suppose that a monopolist private bank produces a vertically differentiated service that is observable to all and is indexed by q  [ q , q ] where q  q  0 . Then, the demand function with price p is

  p p D M ( p; q)    1   and the profit function is  M  p   1   . Maximizing the profit q q  

  1  q  . Then, we have   2 

gives p  

  1     2  

q . Since the profit function is

increasing in quality, the monopolist chooses the highest level of quality, and thus its profit in the uncovered market will be 

  1     2  

q .

MIXED MARKET COMPETITION IN A QUALITY DIFFERENTIATED DUOPOLY MODEL

Private Duopoly Solution Consider the duopoly case where q1 and q2 are two distinct service qualities offered by two private banks such as bank-one and bank-two, and sold to a population of customers differing in their “taste for quality” at prices P1 and P2 respectively. Where qualities 0  q1  q2 customers are always agreeing on the ranking of two services provided by the banks but differs in their taste parameters. When a customer is indifference in choosing between the services of two banks the performance is expressed as follows:

 p

 p 

1    2   q 2  q1 

(4)

The demand functions of low and high quality banks are characterized as follows:

 p 2  p1 p1     q 2  q1 q1 

Low quality bank: D1 ( pi ; qi )  



High-quality bank: D2 ( pi ; qi )    1 



(5)

p 2  p1   q 2  q1 

(6)

Let us suppose that the quality levels of the services/products are selected in an interval

0  q  q1  q 2  q , and equilibrium in the price sub-game is obtained as: The profit functions of the banks are: Low quality bank:

High-quality bank:

p  p

p 

1  1 ( pi ; qi )  p1  2  1 q q q1   1  2



(7)

p p 

1  2 ( pi ; qi )  p 2   1  2  q q  2 1  

(8)

Taking q2 and q1 as given the best reply functions obtained from the first order conditions, and are as follows:

p1 

q1 p 2q2

, and p



1 { p 1  1   2

( q 2

 q 1 )}

(9)

Formally, we obtain the following equilibrium outcomes. Solving P1 and P2 in terms of q1 and q2 in equation (9),

p1 

( 1   )( q 2  q 1 ) q1 , p (4 q 2  q1)



2 q 2 ( 1   )( q 2  q 1 ) (4 q 2  q1)

(10)

Anticipating the price competition, the demand functions of both banks in terms of q1 and q2 and is as follows:

D2 ( q ) 

2(1   ) (4q 2  q1 )

(11)

MIXED MARKET COMPETITION IN A QUALITY DIFFERENTIATED DUOPOLY MODEL

D1 (q) 

(1   )q1 (4q 2  q1 )

(12)

Similarly, the profit functions are obtained as:

 1 (q) 

(1   ) 2 q1 q 2 (q 2  q1 ) , (4q 2  q1 ) 2

(13)

 2 (q) 

4(1   ) 2 q 22 (q 2  q1 ) (4q 2  q1 ) 2

(14)

The first order condition for the maximization of

 1 in equation (13) yields,

 1 (q) (1   ) 2 q1 q 2 (q 2  q1 )   0 Or (4q 2  q1 )(q 2  2q1 )  2(q 2  q1 )q1  0 q1 (4q 2  q1 ) 2 Or q1 

4 q 2 . It implies as q1 : q 2  4 : 7 . 7

Profit function of high quality bank proves that  2 is proportional to q 2 so that bank-two sets an optimum quality level q 2  q in the first stage of the game. In response to the bank-two, bank-one selects a low quality and equilibrium prices as follows: Setting q1 

4 q into equation (10) you get, 7 (  1 ) q p1  , and p 14 i.e.,

p1 : p



(  1 ) q 4

 2 : 7

(15)

Upon substitution of P1 and P2 into equations (13) and (14), thus, the actual profit functions of two banks are obtained as follows:

(1   ) 2 q1 q 2 (q 2  q1 ) (1   ) 2  q 48 (4q 2  q1 ) 2

(16)

4(1   ) 2 q 22 (q 2  q1 ) 7(1   ) 2  q High-quality bank:  2 (q)  48 (4q 2  q1 ) 2

(17)

Low quality bank:

 1 (q ) 

(1   ) 2 7(1   ) 2 q: q  1: 7 Then,  1 ( q 1 ) :  2 ( q 2 ) = 48 48 i.e.,

 1 ( q1 ) :  2 ( q 2 ) = 1 : 7

(18)

MIXED MARKET COMPETITION IN A QUALITY DIFFERENTIATED DUOPOLY MODEL

Welfare Analysis The welfare generated is examined by two private banks by combining measures of consumer surplus along with banks’ profits and it is denoted by W D .

W D  CS D   1   2 5(1 ) / 12 (1   )   53 (1   )  7 1 4 2 (1   ) 2 q (19) q d  (1   ) q    q  q d  (1   ) 2 q     q  144 4 48 7 14 48  5(1 ) / 12  (1 ) / 8   ( 1)

Proposition 1: In a duopolistic competition of two private banks, the service quality ratio between them is found to be 4 : 7 and profits become 1 : 7.

Mixed Market Competition The competition between public and private banking services examines the role and effects of the presence of public banks on supplying the quality services to the customers in a specified market .For this purpose, the basic model of section two has been extended into the mixed market setting in which now the possibility is considered that one of the two financial institutions (banks) in stage one selects quality to maximize welfare in order to see the effects on equilibrium outcomes and social welfare scales. It is assumed that there are public and private financial institutes in a certain market of the banking industry. Let us consider that firm-G is a public bank which maximizes social welfare, whereas private bank-S maximizes its own profits. A costless duopoly is supposed here for a market choosing service qualities first and then prices. Let us assume that q S and q G are two distinct qualities of firm-S and firm-G, and sold to a population of customers differing in their “taste for quality” at prices p S and p G respectively where the

observed product line is vertically differentiated in the quality index [ q , q ] , where q  q  0 . It is considered now that banks play a two-stages game, where in the first stage both of them compete on quality and in the second stage they compete on prices. Since two banks have different objective functions, there is a need to distinguish the conditions when the public bank is the leader or follower as mentioned below. Public Bank as a Leader When a customer is indifference in choosing between the services of low quality or high quality banks, the performance is expressed as  * .

p 2G  p1S Then, you have   G q 2  q1S *

(20)

The demand functions of private and public banks are characterized as follows:

 p 2G  p1S p1S   S G S  q q q1  1  2

Low quality private bank: D1   S



High quality public bank: D2    G



p 2G  p1S   q 2G  q1S 

(21)

(22)

The equilibrium in the price sub-game is obtained and profits functions of both banks are found as

MIXED MARKET COMPETITION IN A QUALITY DIFFERENTIATED DUOPOLY MODEL

follows:

 p 2G  p1S p1S   S Profit function of the private bank:   p  G S q1   q 2  q1 S 1

S 1



G G Profit function of the public bank:  2  p 2  



p 2G  p1S   q 2G  q1S 

(23)

(24)

The social welfare function: W  CS   1   2 S

*





 q   p d   [q S 1

S 1



G 2

  p 2G ]d   1S   2G

(25)

*

Where, CS stands for consumer surplus generated by banks,  2G public bank’s profit and  1S private bank’s profit. Then, the Lemma 1 as stated below has been obtained: Lemma 1: In a given situation, it is obtained from the sub-game Nash equilibrium that there is no Nash equilibrium with quality differentiation when public and private banks compete each other. It will end up in a homogeneous goods Bertrand competition. In the second stage, from the profit maximisation results, the best reply function shows that private bank gets all the demand. This will bring the situation of a private monopoly as stated in previous benchmark monopoly solution. But in reality, it has been seen that a private monopoly cannot operate in the industry because it reduces quality to zero and raises price as much as it can. This solution cannot be welfare maximising. Hence, there will be a homogeneous goods Bertrand competition. Price competition is increased to its higher degree and price equals marginal cost, which is a welfare maximising result. Public Bank as a Follower In this section, it is supposed that the public bank has the worst service quality. Then, a customer remains indifferent in choosing between worst qualities or high quality services of provider banks. The performance of this situation is expressed by  * and expressed as follows： Then, you have

* 

p 2S  p1G q 2S  q1G

(26)

The demand functions of private and public banks are characterized as follows:

 p 2S  p1G p1G   G S G q1   q 2  q1

Low quality public bank: D1   G



High quality private bank: D2    S



p 2S  p1G   q 2S  q1G 

(27)

(28)

The equilibrium in the price sub-game is obtained and profit functions of both banks are found as follows: Profit function of the public bank:



G 1

 p 2S  p1G p1G  p  S  G G q1   q 2  q1 G 1

(29)

MIXED MARKET COMPETITION IN A QUALITY DIFFERENTIATED DUOPOLY MODEL

Profit function of the private bank:



 2S  p 2S   

p 2S  p1G p1G    q 2S  q1G q1G 

(30)

The social welfare: W  CS   2S   1G *



 q

G 1



  p1G d   [q 2S   p 2S ]d   2S   1G 

(31)

The foregone analysis of this section follows the benchmark model. Lemma 2 has been obtained that is: Lemma 2: the situation when the mixed market competition is not covered, the public bank out of the market leads the industry to a private monopoly situation. In the second stage, welfare maximisation by the public bank originates a best reply function that is upwards sloping in the other bank's price, as expected and profit maximisation by the private bank results into its best reply function. The final solution for equilibrium in the second stage leads to a pair of prices for which the low quality provider bank gets a demand equal to zero. Thus, only the private bank remains active. On maximising profit on prices, the public banks try to push up service quality. But its price, when constrained by the other bank’s best reply, will be so high that no customer will choose the low quality service, and any of them will prefer to acquire either the best quality service or none at all. Then, it seems that, for this kind of services that are not matters of survival, public authorities would rather let the private bank provide the service, even in monopoly conditions, than do it themselves. Proposition 2: If the banking industry is monopolised by a private banks, there is no profit maximising solution on the price as the bank will push up prices as much as it can. It will choose a quality value of at most zero and welfare will also be zero.

Concluding Remarks The foregoing analysis of this paper has yielded the following main results as such: In the case of duopoly, it shows that there is a very high profits gap between the two private banks as compared to its quality level of the services exposed in the market. In the mixed market setting, when a public bank comes up with high quality services (leader), there is no Nash equilibrium with quality differentiation. It will end up in a homogeneous goods Bertrand competition. Similarly, when public bank comes up with low quality services (follower), competition between a public and a private bank drives the public bank out of the market leading the industry to a private monopoly situation. At this point, the banking industry will be monopolised by a private bank where there is no profit maximising solution on the price as the bank will push up prices as much as it can and welfare will be zero. From the entire findings, it can be concluded that public monopoly is still better than a private one, from a welfare point of view, but in ordinary situation, it has been predicted that competition between private and public banks is ruled out. However, competition between two private banks is possible in a specified location. It is believed that this work has offered a unique conceptual innovation and has some pedagogical values in exploring research and development (R&D) activities in the areas of quality differentiated banking industries. Thus, the main policy implications are associated with the role of public banks in the extended framework of the basic conceptual model. It is also necessary that at least one public bank should remain active in the banking sector. It is recommended for future research to incorporate the model from the political point of view

MIXED MARKET COMPETITION IN A QUALITY DIFFERENTIATED DUOPOLY MODEL

where two major outcomes could be possible: a public bank should remain in the industry and the other is privatisation which must always be followed by regulation and de-regulation that is not a plausible issue.

References Bresnahan, T. F., & Reiss, P. C. (1991). Entry and competition in concentrated markets. Journal of Political Economy, 99, 977-1009. Choi, J. C., & Shin, H. S. (1992). A comment on a model of vertical product differentiation. Journal of Industrial Economics, 60, 229-231. Cohen, A., & Mazzeo, J. M. (2004). Competition, product differentiation and quality provision: An empirical equilibrium analysis of bank branching decisions. Washington, D.C.: Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board. Degryse, H. (1996). On the interaction between vertical and horizontal product differentiation: An application to banking. Journal of Industrial Economics, 44(2), 169-186. Gabszewicz, J., & Thisse, J. F. (1979). Price competition, quality and income disparities. Journal of Economic Theory, 20, 340-359. Kim, M., Kristiansen, E. G., & Vale, B. (2005). Endogenous product differentiation in credit markets: What do borrowers pay for?. Journal of Banking and Finance, 29, 681-699. Kindleberger, C. P. (1983). International banks as leaders or followers of international business: A historical perspective. Journal of Banking and Finance, 7, 583-595. Matsumura, T. (1998). Partial privatization in mixed duopoly. Journal of Public Economics, 70, 473-483. Matutes, C., & Padilla, A. J. (1994). Shared ATM networks and banking competition. European Economic Review, 38, 1113-1138. Moorthy, K. (1988). Product and price competition in a duopoly. Marketing Science, 7(2), 141-168. Shaked, A., & Sutton, J. (1982). Relaxing price competition through product differentiation. Review of Economic Studies, XLIX, 3-13. Tirole, J. (1988). Theory of industrial organization. Cambridge, M.A.: MIT Press.

Chinese Business Review, ISSN 1537-1506 January 2014, Vol. 13, No. 1, 28-33

DAVID PUBLISHING

Effect of Macro Factor Volatility on the Returns of Financial Sector in Southeast Asian Stock Markets Siriwun Wongsrida, Prasert Chaitip Chiang Mai University, Chiang Mai, Thailand

The emphasis of this study is on the practice of the Pooled Mean Group (PMG) estimators to investigate the magnitude of macroeconomic performances: Real Gross Domestic Product (RGDP), Foreign Exchange Rate (EX), and Deposit Interest Rate (DINT) affecting on the rate of financial sector returns in Southeast Asian Stock Markets including Stock Exchange Of Thailand (SET) index (Thailand), the Kuala Lumpur Composite Index (KLSE) index (Malaysia), Financial Times Share Index (FTSI) (Singapore), Philippine Stock Exchange (PSE), and the Jakarta Composite Index (JKSE) (Indonesia). The Panel Autoregressive Distributed Lag (Panel ARDL) is applied to model the relations. The study applies the Levin, Lin, and Chu (LLC) test (2002) and Im, Pesaran, and Shin (IPS) test (2003) to investigates a set of time series data to examine whether the determinants and the rate of financial sector returns contain a unit root, the next step is investigated the cointegration and causality relationship of the determinants of financial sector influencing on long-run rate of returns of financial sector in Southeast Asian Stock Markets. Keywords: rate of returns, financial sector, Southeast Asian Stock Markets, panel unit root, Panel Autoregressive Distributed Lag (Panel ARDL)

Outcome Predictions in Legal Decision Makingď&#x20AC; Five Southeast Asian Stock Markets are recovering from the global financial crisis due to a powerful stimulus to the various ASEAN government taking steps to restore confidence in the demand of the market and stabilize the financial markets. As a result, ASEAN grew 1.5 percent in 2009 and expected to grow at 4.9 to 5.6 percent in 2010, moving forward, the challenge for ASEAN is to sustain the economic recovery by using monetary policy. Appropriate macroeconomic policy reforms and strengthening agencies have been in place since the financial crisis in Asia, 1997-1998 (Retrieved from www.asean.org), because the capital markets of the countries in the region are relatively small. The collaboration aims to promote the growth of Southeast Asian Stock Markets by streamlining ASEAN Exchanges access, introducing cross-border harmonization. The ASEAN Exchanges collaboration will bring greater economic opportunities to more people as well as bring greater capital liquidity to collaboration Southeast Asian members. ASEAN Exchanges is an important footstep in the collaboration of Southeast Asian capital markets to create opportunities. The investment will be transferred among five Southeast Asian Stock Markets (RM) Siriwun Wongsrida, M.A., Faculty of Economics, Chiang Mai University. Prasert Chaitip, Ph.D., Associate Professor, Faculty of Economics, Chiang Mai University. Correspondence concerning this article should be addressed to Prasert Chaitip, Faculty of Economics, Chiang Mai University, Chiang Mai, Thailand. E-mail: wongsrida.anna.8@gmail.com; nnfunction@gmail.com.

EFFECT OF MACRO FACTOR VOLATILITY ON THE RETURNS OF FINANCIAL SECTOR

covering SET index (Thailand), KLSE index (Malaysia), FTSI index (Singapore), PSE and JKSE index (Indonesia), driven in the financial sector. Due to the establishment of Asean Economic Community (AEC) by 2020, capital flows aimed at further promotion of investment in Southeast Asian member economies. This study attempts to investigate the order of integration panel unit root tests and the Panel ARDL relationship between the rate of financial sector returns in Southeast Asian Stock Markets (RM), and magnitude of selected macro-economic performance including Gross Domestic Product (GDP), EX and DINT from 2003 to 2012 using. The statistical results can also be useful tools as information to facilitate dialogue of decision-making processes developed in Southeast Asian Stock Markets.

Theory and Hypothesis The Efficient Markets The efficient markets theory proposed by Fama (1970) is a proposition that the prices of stocks, bonds, and other securities fully reflect all available information at any point in time. This is the result of profit-maximizing investors painstakingly searching for information and using what they know, including what they think will happen in the future, when trading securities. Active trading moves prices until the risk-adjusted expected returns are equal for all securities. Further changes are due to events not known beforehand, which are quickly built into prices. In an efficient market, investment capital is allocated to its most productive use. Market efficiency also implies that investors cannot “beat the market” or find securities that are mispriced such that their portfolios consistently perform better than the market. To observe Southeast Asian Stock Markets, the first subject is to understand the determinants of the rate of returns of financial sector in Southeast Asian Stock Markets (RM) covering the annual statistical reports of RGDP, EX, and DINT. However, ASEAN Exchanges’ national-level panel data are used to analyze the influencing factors on Southeast Asian Stock Markets (RM). Literatures based on the macro data used the ARDL model to be tested. Because the ARDL model completely depended on the statistical relationship, any change in sample interval will cause the instability of the results. Suggests that Market Effectively: Diagrammatic Design for Investment in Southeast Asian Stock Markets The market efficiency can reflect the information of investors. Investors receive information on the changes to affect the stock price which would have to turn down as well (see Figure 1).

Information

Investors

Quickly

Demand/Supply

Stock prices

Changes quickly

Figure 1. Diagrammatic design for investment in Southeast Asian Stock Markets.

Research Framework This study will establish the theoretical framework by the Diagrammatic Panel ARDL Approaches shown in Figure 2. The practice of the Pooled Mean Group (PMG) estimators was conducted to investigate the magnitude of macroeconomic performances: Real Gross Domestic Product (RGDP), Foreign Exchange Rate (EX), and

EFFECT OF MACRO FACTOR VOLATILITY ON THE RETURNS OF FINANCIAL SECTOR

Deposit Interest Rate (DINT) affecting on the rate of financial sector returns in Southeast Asian Stock Markets. The determinants of the rate of returns of financial sector influencing onthe rates of returns of financial sector in Southeast Asian Stock Markets

Panel Unit Root: LLC Test and IPS Test Stationary I(0) and some as I(1) or Non-Stationary

Panel ARDL approach: Time-series found to be I(1) and some as I(0)

Panel ARDL approach: Short-run and long-run equilibrium

Panel ARDL results

Pooled Mean Group (PMG) estimate

Mean Group (MG) estimate

Figure 2. Diagrammatic panel ARDL approach and hypotheses.

Research Subject This paper aims to experiment impulse mechanism of interaction between the rate of the returns of financial sector (RM) and macroeconomic fundamentals using Southeast Asian Stock Markets’ panel data of five main countries stretching from 2003 to 2012. Panel ARDL data were utilized to test whether the recognized statistical relationships’ exist among different Southeast Asian member economies on the rate of financial sector returns in Southeast Asian Stock Markets. To estimate the effects of each explanatory variable of the rate of financial sector returns including SET index (Thailand), KLSE index (Malaysia), FTSI index (Singapore), PSE and JKSE index (Indonesia), and economic panel ARDL models were adopted. Panel Unit Root This study applies panel unit root tests instead of traditional unit root tests to increase testing power from additional information provided by the pooled cross-section time series. Prior to PMG estimators’ analysis, panel root tests are required to determine the order of integration of the variables (Mahyideen, Ismai, & Hook, 2012). In this study, implement two panel unit root tests and different yet popular tests: LLC (2002) test with common unit root process and IPS (2003) test with individual unit root processes were tested. The LLC test is a based on homogeneity of the autoregressive parameter (Das, Chowdhury, & Muhammad, 2012), and involves fitting an Augmented Dickey Fuller (ADF) regression for each panel to estimate the coefficient α from the proxies. The test is based on the following regression. y it  y it 1 

i

  y it

it  j

 X it'  j    it

(1)

j 1

While the IPS test is based on heterogeneity of the autoregressive parameters (Das et al., 2012), the test is also modified by using ADF test. Equation (1) is fitted to each panel cross section.

EFFECT OF MACRO FACTOR VOLATILITY ON THE RETURNS OF FINANCIAL SECTOR

The results from Table 1 show the panel unit root test of variables used in the study. The results from the LLC test at stationary level or I(0) explain that a set of panel data between the rate of financial sector returns in Southeast Asian Stock Markets (RM) and Macro Factor Volatility evidence that EX and DINT variables are non-stationary at level or I(0). All variables are stationary at the first difference or I(1) significant at 0.01 level. The results of the unit root test using the IPS test show that all variables are non-stationary at level or I(0). When taking all variables into consideration, RM, RGDP, EX, and DINT, they all are stationary at the first difference or I(1). RGDP and EX at significant level of 0.01, and RM and DINT at significant level of 0.1. Table 1 Results Panel Unit Root Level or I(0) Variables lnRM lnGDP lnEX lnINT

LLC -2.77*** 1.15 -2.86*** 1.50

1st difference or I(1) LLC -4.48*** -25.36*** -12.84*** -4.27***

IPS 0.03 1.90 -1.19 1.62

IPS -1.64* -8.29*** -6.38*** -1.62*

Notes. ***, **, and * imply levels significance at 1%, 5%, and 10%, respectively.

To sum up, both LLC test and the IPS test indicated that a set of panel data between the rate of financial sector returns in Southeast Asian Stock Markets (RM) and Macro Factor Volatility evidence that EX and DINT variables are stationary at the first difference or I(1), though at different degree of stationary; the Pooled Mean Group Estimation allows us to use variables at different levels of stationary (Pesaran, Shin, & Smith, 1999). The MG and PMG Estimations PMG estimation of dynamic heterogeneous panels proposed by Pesaran et al. (1999) investigates the factors affecting a set of panel data between the rate of financial sector returns among five Southeast Asian Stock Markets (RM). PMG method is an intermediate estimator because estimation of dynamic heterogeneous panels involves both pooling and averaging (Pesaran et al., 1999). The method constrains the long-run coefficients to be equal over the cross-sections, but allows for the short-run coefficients and error variances to differ across cross-sections. The results indicate obtain pooled long-run coefficients and averaged short run error correction dynamics as an indication of mean reversion (Barrell & Davis, 2004). The PMG is based on an ARDL (p, q, …, q) model. Suppose that given data on time periods t  1, 2, ..., T and groups i  1, 2, ..., N and the dependent variable y is: p

y it 



it y i ,t  j 

j 1



' ij

x i ,t  j   i   it

(2)

j 0

where it xit (k  1) is the vector of explanatory variables for group i, i represents the fixed effects, the coefficients of the lagged dependent variables ij are scalars and  ij is k  1 coefficient vectors. T must be large enough so that the model can be estimated for each cross section. The re-parameterization form of equation (2) can be formulated as follows: p 1

y i  i y i , 1   ixit 

 j 1

q 1

*ij yi ,t ,  j 



*' ij

xi ,t ,  j   i   it

(3)

j 0

It is assumed that the disturbances  it , i  1, 2, ..., N , t  1, 2, ..., T in equation (3) are independently distributed across i and t , with zero means, variances  i2  0 and finite fourth moments. This assumption

EFFECT OF MACRO FACTOR VOLATILITY ON THE RETURNS OF FINANCIAL SECTOR

ensures that  i  0 , the roots of equation (3) must lie outside the unit circle. Thus, there exists a long-run relationship between yit and xit which is defined by yit  (  i / i ) xit  it (4)     /  The long-run homogeneous coefficient is equal to i i i , which is the same across groups. For our purpose, the key feature of the PMG is to make the long-run relationships while allowing for the heterogeneous dynamics and error variances (Barrell & Davis, 2004). Hausman tests of the difference between Mean Group (MG) estimator and PMG estimator of the long-run coefficients were settled and PMG estimator compared with the MG estimator. The main MG and PMG results produce dissimilar computed output results given in Table 2. The PMG provide consistent estimates with the theory. Pesaran et al. (1999) argued that MG estimator is always consistent. For comparison of the MG and the PMG both testing for a null hypothesis of a unit root against the alternative, a Hausman test was used to determine the consistency of an explicit estimator of common coefficients. The p-values associated with PMG estimators reject the null hypothesis of no long-run relationship. In PMG model, long-run rate of returns financial sector by macroeconomic factor volatility is determined. The finding of MG estimator suggests a positive and insignificant coefficient of lnRGDP. The study shows stationary in first difference or I(1) of macro-economic performance. Additionally, the essential characteristics of an experiment with Panel ARDL model estimation based on PMG and MG aimed to investigate the empirical relevance of observing long-run equilibrium properties. The empirical results confirm the presence of long-run equilibrium relationships between pairs of macroeconomic factors and rate of returns of financial sector in Southeast Asian Stock Markets. Table 2 Presents the Major MG and PMG Results Derived From Southeast Asian Stock Market Model Dependent variable: lnRM Explanatory variables Long run coefficients lnRGDPit lnEXit lnDINTit Short run coefficients lnRGDPit lnEXit lnDINTit

 lnRGDPit  lnEXit  lnDINTit

Error correction Constant

Mean Group (MG) Coef. St. Er.

t-ratio

-78.226 -0.665 -0.004

91.337 1.459 0.223

-0.856 -0.456 -0.019

14.404 0.429 0.09 10.729 0.357 0.065 0.31 5.878

-0.31 0.418 0.114 1.067 -1.352 -1.758 -3.033 0.094

-4.469 0.179 0.01 11.447 -0.483 -0.114* -0.94*** 0.554

Pooled Mean Group (PMG) Coef. St. Er. t-ratio

Hausman test h-test p-val.

3.288*** 0.225 -0.05*** 0.013 -0.074*** 0.016 Joint Hausman test: 3.551*** 0.425 -0.054*** 0.006 -0.08*** 0.01 7.364 5.717 -0.059 0.076 -0.017 0.02 *** -1.08 0.129 -1.312* 0.879

0.8 0.18 0.1 4.89

14.597 -3.773 -4.626

0.37 0.67 0.76 0.18

8.36 -8.36 -8.36 1.288 -0.781 -0.879 -8.36 -1.493

Notes. ***, **, and * imply levels significance at 1%, 5%, and 10%, respectively.

According to computed output results among five Southeast Asian Stock Markets, statistical techniques with Panel ARDL model estimation based on PMG confirmed that a change in percent of RGDP was statistically significant positive long-run equilibrium properties with a change in percent of long-run rate of

EFFECT OF MACRO FACTOR VOLATILITY ON THE RETURNS OF FINANCIAL SECTOR

returns financial sector. There is strong macro factor volatility evidence that EX and DINT variables were statistically significant negative long-run equilibrium properties with a change in percent of long-run rate of returns financial sector. The computed output results among five Southeast Asian Stock Markets established a short-term relationship based on Panel ARDL causality method to explore the direction of error correction term equals to -1.080 at significant level of 0.01.

Conclusions This study investigates the short-run and long-run relationships between rate of return on financial sector index among five ASEAN Exchanges, using the annual statistical reports of RGDP, EX, and DINT from 2003 to 2012. The results of the panel unit root test indicated that all variables are stationary at the first difference or I(1) at first different degree of stationary. Using PMG, there is strong unidirectional causality running from Macroeconomic factors for the five Southeast Asian Stock Markets samples. Lastly, in an attempt to analyse the short-run and long-run causality between Macroeconomic factor volatility and rate of financial sector returns, the results indicated the existence of directional short-run causality from Macroeconomic factors, thus emphasizing the view, embodied in the ruling that long-run rate of returns financial sector is determined by Macroeconomic factor volatility.The possibilities of short-run adjustment can be considered among five Southeast Asian Stock Markets based on Panel ARDL causality method to explore the direction of error correction term equals to -1.080 at significant level of 0.01.

References Barrell, R., & Davis, E. P. (2004). Consumption, financial and real wealth in the G-5. London: NIESR and Brunel. Das, A., Chowdhury, M., & Muhammad, A. (2012). Panel cointegration and pooled mean group estimation of energy-output dynamics in South Asia. Journal of Econometric and Behavioral Studies, 4(5), 277-286. Fama, E. F. (1965). Random walks in stock market prices. Financial Analysts Journal, 21(5), 55-59. Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. Journal of Finance, 25, 383-417. Levin, A., Lin, C., & Chu, C. J. (2002). Unit root in panel data: Asymptotic and finite sample properties. Journal of Econometric, 108, 1-24. Mahyideen, J. M., Ismai, N. W., & Hook, L. S. (2012). A pooled mean group estimation on ICT infrastrure and economic growth in ASEAN-5 countries. Journal of Econometric and Management, 6(2), 360-378. Ndambendia, H., & Njoupouognigni, M. (2010). Foreign aid, foreign direct investment and economic growth in Sub-Saharan Africa: Evidence from pooled mean group estimator (PMG). International Journal of Economics and Finance Research, 2(3), 39-45. Pesaran, M. H., Shin, Y., & Smith, R. P. (1999). Pooled mean group estimation of dynamic heterogeneous panels. Journal of the American Statistical Association, 94(446), 621-634.

Chinese Business Review, ISSN 1537-1506 January 2014, Vol. 13, No. 1, 34-41

DAVID PUBLISHING

Public and Private Investment in the Port Sector in Mexico, 2000-2010: A Study Through Data Envelopment Analysis Odette V. Delfín-Ortega, César L. Navarro-Chávez Universidad Michoacana de San Nicolás de Hidalgo, Morelia Michoacán, México

Knowing the level of efficiency of investment applied in ports of Mexico is relevant information for the design of port policies that contribute to its development and thus to greater freight movement. The objective of this paper is to analyze the technical efficiency obtained from International Mexican Ports, through the use of the technique of Data Envelopment Analysis (DEA). It uses data regarding public and private investment in ports applied during the period 2000-2010 and its influence on the number of Twenty-foot Equivalent Unit (TEU). Because it has been applied the DEA-CCR (the linear programming model) model input oriented, thus not only the efficiency is calculated in ports, but benchmarking is also obtained to determine the efficient ports that serve as reference to those who were found to be inefficient. The results obtained showed that Manzanillo and Progreso were the most efficient ports. On the other hand, the ports that were not efficient for any of the years reviewed were Mazatlan and Lazaro Cardenas. Generally, public investment has been increasing over the period, and public policies are not designed to allow the ports to have an international projection. Keywords: ports, investment, Data Envelopment Analysis (DEA), technical efficiency

Introduction The ports are a representative part in the development of a country, allowing a more efficient transport system. However, not all ports have optimal development to face the challenges in three main areas: industry, commerce, and tourism (SCT, 2008). Since a central theme is investment in port policies, this research aims to determine the levels of efficiency of public and private investment in the port sector in Mexico during the period 2000 to 2010. It is important because at the end of 2010, investment in ports was 49.801 million pesos, of which 25.981 million pesos correspond to public investment and 19.820 million pesos correspond to private investment (SCT, 2011) and in the same year 4,223,631 TEUs moved in Mexican ports (CGPMM, 2011). If compared these numbers with those obtained in 2,000 where it was moved 1,315,749 TEUs, it got a growth of 221%. This paper addresses the problem of measurement using a model called DEA. It is a nonparametric method for estimating production frontiers and efficiency assessment of a sample of production units (DMUs or Odette V. Delfín-Ortega, Ph.D., Institute of Economic and Business Research, Universidad Michoacana de San Nicolás de Hidalgo. César L. Navarro-Chávez, Ph.D., Institute of Economic and Business Research, Universidad Michoacana de San Nicolás de Hidalgo. Correspondence concerning this article should be addressed to Odette V. Delfín-Ortega, calle 8 de mayo no. 269 Lomas de Hidalgo Morelia Michoacán, 58000, México. E-mail: odettedelfin@hotmail.com.

PUBLIC AND PRIVATE INVESTMENT IN THE PORT SECTOR IN MEXICO

decision making units). The port production structure is determined by the inputs; in this case they are: public investment and private investment. To achieve the result (output) is to mobilize the largest number of containers at ports. The importance of this analysis is that, in most ports, activities in the past were operated entirely by the state and that in the last two decades they have been restructuring the pattern of private investment in order to balance the provision of public service, commercial development, and increased freight movement. For this reason, the hypothesis of this research is: Mexican ports have failed to be more efficient with private investment.

Literature Review Farrell (1957) was the first author to introduce a quantitative approach to efficiency, proposing a measurement in which each decision unit may be assessed in relation to other homogeneous units, so that efficiency becomes a relative concept and not an absolute one, where the value taken by the efficiency for each entity indicates the observed deviation regarding those considered as efficient. DEA model is a nonparametric technique that facilitates the construction of an enveloping surface or efficient frontier from the available data set under study, entities known as DMU (Decision Making Unit) (Charnes, Cooper, & Rhodes, 1978), in which each of these DMUs gets a weight or value of the inputs and outputs which maximize the efficiency value of the production. Thus inefficient units are outside of the border, allowing one to evaluate the relative efficiency on each of the units. The literature on technical efficiency has its origin in the early years of the decade of the 1950s. The first formal definition of technical efficiency comes from Koopmans (1951) who wrote that it “is one in which an increase in any of the outputs requires a reduction in at least one of the remaining or the increase of any of the inputs”, and the first measure of technical efficiency is given by Debreu (1951) and Shephard (1953), although with different orientation (output and input, respectively). Despite the theoretical relevance of these studies, none of them quantified efficiency. By efficiency, it means the comparison between observed and optimal inputs and outputs. The comparison can be through:  A comparison of the maximum attainable output for a given level of inputs, and that actually achieved (outputs orientation);  A comparison of the minimum level of inputs required for a given level of outputs, and the level actually achieved (orientation inputs). The work of Farrell is complemented by the works of Charnes et al. (1978) that were based on constant returns to scale (CRS), so that a change in the level of inputs leads to a proportional change in the level of output, which requires as many optimizations as DMU from the CCR as follows: Max ∑ (1) s. t

PUBLIC AND PRIVATE INVESTMENT IN THE PORT SECTOR IN MEXICO ,

Later, Banker, Charnes, and Cooper (1984) extended the original model to include VRS and the model (BCC): Min ∑ χ 0, 1,2, … , (2) ´

1, 2, … ,

Port Sector Efficiency Through DEA Martínez-Budría, Díaz-Armas, Navarro-Ibáñez, and Ravelo-Mesa (1999) analyzed the efficiency of 26 Spanish port services during the 1993-1997 period. They used the DEA-BCC model and divided the sample into three groups namely: high complexity ports, medium complexity ports, and small complexity ports. Results obtained show that “high complexity ports” had the best efficiency. On the other hand, Park and De (2004) realized an analysis of port efficiency using the DEA-CCR model and DEA-BCC model in Korean ports. The study finds that alternative DEA is a potentially powerful approach to the evaluation of the overall efficiency of seaports. Cullinane, Song, and Wang (2005) studied the technical efficiency of port container terminal, using the DEA model, CCR model, and DEA-BCC model too. The paper presents the pros and cons of port privatization and provides an empirical examination of the relationship between privatization and relative efficiency within the container port industry. González and Trujillo (2008) realized a study of technical efficiency in port infrastructure service in Spanish ports. They analyzed the port reforms that took place in the 1990s and its impact on the efficiency. The results show that the reforms produce significant improvements in technological change, but that technical efficiency has in fact changed little on average. Sala and Medal (2004) analyzed the efficiency of 28 Spanish ports using a non-radial DEA model: the Russell Measure. As a result of the analysis, they concluded that the Spanish Port System had generally a high average level of efficiency but it could grow around 20% to consider that all ports operate on the efficient frontier.

Methodological Development In this research, it has applied the DEA-CCR model, which identifies the Global Technical Efficiency (GTE) of the units DMUs analyzed. The model proposed is oriented inputs, where optimization of inputs is reduced as much as possible to be more efficient. It analyses the capacity of the port to minimize investment applied considering a given level of outputs, so that the results of the DEA informs investment units which mostly could be applied to be efficient. It begins by determining the sample which is subject to analysis of technical efficiency of major ports during 2000, 2005, and 2010. Selected DMUs are: Ensenada, Mazatlan, Manzanillo, Lazaro Cardenas, Salina Cruz, Puerto Morelos, Puerto Progreso, Veracruz, Tuxpan, Altamira, and Tampico. It took two selection

PUBLIC AND PRIVATE INVESTMENT IN THE PORT SECTOR IN MEXICO

criteria: They should be international ports and they have to have handled containerized cargo. For the selection of inputs and outputs, it was revised several studies on port efficiency. It must consider that the main objective of this research is to determine the levels of efficiency of public and private investment in the port sector in Mexico during the period 2000-2010. This is the reason why it is making a discrimination of variables, based on the objective to be achieved. Finally it models a production function where there are two inputs: public and private investment and one output number of annual TEUs, and to check the correlation between the variables, it makes a Pearson Matrix where it could determine whether the inputs can explain the outputs. For data that model the production function, several sources were used, including: the statistical yearbooks of ports in Mexico, in 2000, 2005, and 2010 in the section Container Movement Coordination of Ports and Merchant Marine, SCT, as well as each of the port development plans for selected periods.

Results of Efficiency Through the DEA Model With CCR It is observed in Table 1 that in 2000, four of the 11 ports had been efficient in implementing the port investment, which were Manzanillo, Veracruz, Progreso, and Puerto Morelos since they obtained a coefficient of one, and the port of Salina Cruz was the least efficient. In 2005 the efficient ports were Manzanillo, Salina Cruz, Altamira, and Progreso, in the same year the least efficient port was Lazaro Cardenas. Finally in 2010 there were more efficient ports: Ensenada, Manzanillo, Tampico, Tuxpan, and Progreso and the least efficient was the port of Veracruz. Importantly, the port of Manzanillo and Progreso was the most efficient in the three years analyzed. Table 1 Technical Efficiency of Public and Private Investment in Mexico Ports, 2000-2010 DMU Ensenada Mazatlรกn Manzanillo Lรกzaro Cรกrdenas Salina Cruz Altamira Tampico Tuxpan Veracruz Progreso Pto Morelos

2000 0.5661 0.2527 1 0.7885 0.2078 0.625 0.3504 0.2147 1 1 1

2005 0.7796 0.4422 1 0.1155 1 1 0.379 0.5263 0.6355 1 0.3972

2010 1 0.4251 1 0.192 0.4755 0.7356 1 1 0.0503 1 0.5026

Note. Source: Personal compilation based on DEA results.

In Table 2, it can be seen that the behavior of public and private investment in ports shows that in 2000 there were six ports efficient in the implementation of private investment: Mazatlan, Manzanillo, Lazaro Cardenas, Salina Cruz, Tuxpan, and Progreso; on the other hand, four ports were efficient in the implementation of public investment for the same year: Altamira, Tampico, Veracruz, and Puerto Morelos. In 2005, the number of ports that were efficient with private investment was reduced: Salina Cruz, Veracruz, and Progreso. In that same year, the ports that were efficient in implementing public investment increased to five: Ensenada, Altamira, Tampico, Tuxpan, and Puerto Morelos.

PUBLIC AND PRIVATE INVESTMENT IN THE PORT SECTOR IN MEXICO

Finally in 2010, again three ports were efficient in terms of private investment: Ensenada, Lazaro Cardenas, and Tampico. In the case of public investment, this time there were six efficient ports: Mazatlan, Salina Cruz, Altamira, Tuxpan, Veracruz, and Puerto Morelos. It is important to observe that the implementation of public investment has been increasing in the last decade, making double the number of efficient ports in 2010 compared to 2000 and specifically the ports of Altamira and Puerto Morelos have achieved optimal efficiency in the use of public investment during the three periods analyzed. Table 2 Importance of Public and Private Investment in Technical Efficiency of the Ports in Mexico, 2000-2010 2000 2005 Public investment Private investment Public investment Ensenada 0.85 0.15 1 Mazatlรกn 0 1 0.96 Manzanillo 0 1 0.96 Lรกzaro Card 0 1 0.48 Salina Cruz 0 1 0 Altamira 1 0 1 Tampico 1 0 1 Tuxpan 0 1 1 Veracruz 1 0 0 Progreso 0 1 0 Pto.Morelos, 1 0 1 Note. Source: Personal compilation based on DEA results. DMU

Private investment 0 0.04 0.04 0.52 1 0 0 0 1 1 0

2010 Public investment 0 1 0.88 0 1 1 0 1 1 0.61 1

Private investment 1 0 0.12 1 0 0 1 0 0 0.39 0

Benchmarking Analysis With the Benchmarking analyses, it can identify which DMU can be considered as a reference for inefficient DMUs, having similar characteristics. Table 3 shows how in 2000, Puerto Morelos was the port that was taken as reference many times. In 2005, the ports that were taken more frequently as reference were Salina Cruz and Altamira and in the year 2010 the port that was taken as further reference regarding the other was Manzanillo. Table 3 Benchmarking Analysis of the Port Sector in Mexico, 2000-2010 DMU 2000 1. Ensenada 3 (0.03) 10 (0.19) 11 (0.79) 2. Mazatlรกn 10 (0.20) 11 (0.80) 3. Manzanillo 3 4. Lรกzaro Cรกrdenas 11 (1.00) 5. Salina Cruz 11 (1.00) 6. Altamira 3 (0.42) 11 (0.58) 7. Tampico 3 (0.10) 11 (0.90) 8. Tuxpan 11 (1.00) 9. Veracruz 0 10. Progreso 2 11. Puerto Morelos 7 Note. Source: Personal compilation based on DEA results.

2005 6 (0.19) 10 (0.21) 10 (0.24) 6 (1.74) 10 (4.27) 6 (0.18) 10 (1.04) 10 (0.01) 6 6 (0.01) 10 (0.10) 10 (0.00) 6 (0.82) 10 (4.93) 9 6 (0.01) 10 (0.08)

2010 7 1 (0.01) 3 (0.02) 8 1 (0.53) 3 (0.47) 3 (0.00) 1 (0.10) 3 (0.31) 1 (0.01) 1 (0.00) 3 (0.00) 1 (0.00) 3 (0.00) 1 (0.25) 3 (0.01) 3 (0.00)

Analysis Slacks In the analysis of the variables slacks, let us see where it may be necessary to reduce some additional

PUBLIC AND PRIVATE INVESTMENT IN THE PORT SECTOR IN MEXICO

factor or increased output. As seen in Table 4 in 2010, the port of Mazatlan required 65.89 million pesos decreases in private investment to be more efficient and increases the number of TEUs moved annually by 0.01 units. On the other hand, Lazaro Cardenas needs to decrease public investment by 0.11 million dollars and increase the number of TEUs handled by 0.01 units annually in order to be more efficient. The ports of Salina Cruz, Altamira, Veracruz, and Puerto Morelos should reduce private investment by the amounts of 1,866 million, 39.72 million, 29.96 million, and 331.69 million pesos respectively to become more efficient. Table 4 Slacks Variables Analysis, 2010 DMUs Ensenada Mazatlรกn Manzanillo Lรกzaro Cรกrdenas Salina Cruz Altamira Tampico Tuxpan Veracruz Progreso Puerto Morelos

Input {S} Ipub{I}

{S} Ipriv {I}

0 0.11 0 0

Output {S} Teus {O}

65.89

0.01

0 1,866 39.72

0.01 0 0

29.96

331.69

Note. Source: Personal compilation based on DEA results.

Discussion of Results This work is a pioneer effort in the analysis of port efficiency with the implementation of public and private investment in Mexico, as in reviewing the literature using DEA methodology. However, in this study it was observed that in the years 2000 and 2005, 64% of the ports were inefficient and by 2010 the percentage of inefficient ports was 55%. This situation shows even though the public and private investment is applied according to the growth strategies embodied in port development plans, how they have failed to produce the port development expected. Ports that were efficient throughout the period under review are: Manzanillo and Progreso. Moreover the results show, the application of private investment, failed to produce more efficient ports, the number of efficient ports was declining over the period analyzed, starting in 2000 with six ports and in 2010 there were only three ports that showed efficient implementation of private investment. In the case of public investment, the behavior was the opposite of private investment as it began in 2000 with four efficient ports and in 2010 there were six ports which were shown to be efficient with the application of this resource. Puerto Morelos and Altamira are highlighted for ports that during the study period were more efficient with the implementation of public investment. In the specific case of the port of Lazaro Cardenas, it failed to be effective in any of the periods analyzed and observed as in 2010 it should have been efficient with only 19.2% of the inputs used, and the results of the slacks variables show that it had an excess of 0.11 million in investment applied. In the same direction

PUBLIC AND PRIVATE INVESTMENT IN THE PORT SECTOR IN MEXICO

benchmarking analysis indicated as reference ports Mazatlan and Manzanillo, which had similar characteristics in the use of their resources and in whether they were efficient.

Conclusions The economic growth rate in Mexico, as well as the growth of public and private investments in ports has been insufficient to meet the needs of transport and communications of the population and to achieve internationally competitive standards. The importance of efficient ports is crucial, because it reduces transport costs and increases the commercial dynamism, as just over a third of the total charge of the country and most of the volume of exports including oil and derivatives are transported through the ports. The model of DEA is a linear programming technique that facilitates the construction of an envelope surface or efficient frontier from the available data set under study entities called DMUs and allows us to analyze the level of port efficiency. In this research, the model used is DEA-CCR which is input oriented. Inputs are considered as public investment and private investment, and output is represented by the number of containers. The results of the technical efficiency DEA-CCR during 2000 to 2010, were shown as the ports that were distinguished by having higher levels of efficiency in 2000 were Manzanillo, Veracruz, Progreso, and Puerto Morelos, in 2005 the most representative ports are: Manzanillo, Salina Cruz, Altamira and Progreso, and in 2010 they were Ensenada, Manzanillo, Tampico, Tuxpan, and Progreso. Highlighting Manzanillo and Progreso throughout the period, they were efficient. On the other hand, the ports that were not efficient for any of the years reviewed were Mazatlan and Lazaro Cardenas. The DEA methodology allows benchmarking analysis and it identifies the ports that were taken as reference in the period 2000-2010, which are: Puerto Morelos, Salina Cruz, Altamira, and Manzanillo. The main problems for passing ports to achieve the levels of efficiency in investment primarily have to do with the implementation of private investment, as it decreased during the period 2000-2010 and the results obtained show ports that have failed to be more efficient with the contribution of private investment. The ports of Mazatlan and Lazaro Cardenas, although they have invested in the growth of container terminals, are less efficient and also they have not increased the number of TEUs handled annually to have attained the projected potential, by rethinking what is missing in their port development plans and strategies to make them more competitive. This type of study allows us to see the changes that occurred after the introduction of private investment, however for future research, it should be analyzed in detail, each item of the implementation of the investment and what was their impact on the port, not only in the international ports, but also in the rest of the ports. Finally, although public investment has been increasing over the period, public policies are not designed to allow the ports to have an international projection, since shipping is evolving rapidly and the responsiveness and attention from the Mexican seaports are not growing at the same pace.

References Banker, R., Charnes, A., & Cooper, W. (1984). Some models for estimating technical and scale inefficiencies in data envelopment analysis. Management Science, 30(9), 1078-1092. Charnes, A., Cooper, W., & Rhodes, E. (1978). Measurement the efficiency of decision making units. European Journal of Operational Research, 2, 429-444. Coordinaci贸n General de Puertos y Marina Mercante (CGPMM). (2011). Container movement: Statistical yearbook of the ports in Mexico, 2011. Retrieved from http://www.sct.gob.mx/fileadmin/CGPMM/U_DGP/estadisticas/2011/Anuarios/index.htm

PUBLIC AND PRIVATE INVESTMENT IN THE PORT SECTOR IN MEXICO

Cullinane, K., Song, D., & Wang, T. (2005). The relationship between privatization and DEA estimates of efficiency in the container port industry. Journal of Economics & Bussiness, 57, 433-462. Debreu, G. (1951). The coefficient of resource utilization. Econometrica, 19(3), 273-292. Farrell, M. (1957). The measurement of productive efficiency. Journal of the Royal Statistical Society, 120(3), 253-267. González, M., & Trujillo, L. (2008). Reforms and infrastructure efficiency in Spain’s container ports. Transportation Research, 42, 243-257. Koopmans, T. (1951). Efficient allocation of resources. Econometrica, 19(4), 455-465. Martínez-Budría, E., Díaz-Armas, R., Navarro-Ibáñez, M., & Ravelo-Mesa, T. (1999). A study of the efficiency of Spanish port authorities using data envelopment analysis. International Journal of Transport Economics, XXVI (2), 237-253. Park, R., & De, P. (2004). An alternative approach to efficiency measurement of seaports. Maritime Economics & Logistics, 6(1), 53-69. Sala, R., & Medal, A. (2004). Study of the technical and economic efficiency of container terminals (pp. 1-11). Department of Mathematical Economics and Business Department of Business Finance. University of Valencia. Shephard, R. (1953). Cost and production functions. Princeton: Princeton University Press. Transport and Communications Sector (SCT). (2008). National port development program, current status of the national port system. Retrieved from http://cgpmm.sct.gob.mx/fileadmin/PNDP2008/htm/pndp.htm Transport and Communications Sector (SCT). (2011). Statistics communications and transport sector: Planning general leadership. Retrieved from http://www.sct.gob.mx/informacion-general/planeacion/estadistica-del-sector/indicadores-mensuales-sct/2011/

Chinese Business Review, ISSN 1537-1506 January 2014, Vol. 13, No. 1, 42-52

DAVID PUBLISHING

Semantic Differential as an Assessment Tool of (Dis) Advantages of QMS in the Light of Accredited Certification in Poland* Katarzyna Hys, Liliana Hawrysz Opole University of Technology, Opole, Poland 

This article is a continuation of the issue in the field of assessment of (dis)advantages resulting from the implementation of the quality management systems (QMS) in a structure of the organization. The publication uses the results of studies conducted in the range of assessment’s information completeness provided by the certification bodies (CBs) in the context of advantages and disadvantages of the QMS implementation in accordance with PN-EN ISO 9001. In addition, an attempt to define a tool for the QMS assessment of (dis)advantages in the organization has been made. The basis for empirical analysis of the issue was the information provided by an accredited management systems CBs recommended by the Polish Centre for Accreditation (PCA). There are 33 units in Poland, which were granted by PCA with the accreditation within the range of ISO 9001:2008. In the first stage of the research work, a substantive analysis of websites content among mentioned CBs has been carried out. In addition, the paper proposes use of semantic differential method (SD) to evaluate (dis)advantages of the QMS. SD adaptation for the assessment of the QMS (dis)advantages is the authorial concept. The authors hope for polemic in this area. In the face of obtained results, an authorial SD construction has been proposed, which is useful and may help in the formulation and conveying of the relevant (reliable) information to potential clients in the range of (dis)advantages resulting from the QMS implementation to the organization. As a consequence, the recommendations have been set, which are kind of guidelines that could significantly influence the realignment of the information state conveyed on the internet by the CBs. Keywords: quality management system (QMS), accredited units, (dis)advantages form the QMS implementation, semantic differential (SD)

Introduction Quality management system (QMS), especially ISO 9000 : 2008, in European conditions permanently took root in minds of the decision-makers as a tool supporting the management of an organization (The ISO Survey). The consequence of this state is widespread use of the standard or its components in an organizational practice. Admittedly, the emphasis here is on the process of management identification, implementation, and improvement, *

Acknowledgments: This paper was supported from Research Project by National Science Centre, No. 2011/01/B/HS4/04796. Katarzyna Hys, Ph.D., Production Engineering and Logistics Department, Opole University of Technology. Liliana Hawrysz, Ph.D., Economics and Management Department, Opole University of Technology. Correspondence concerning this article should be addressed to Katarzyna Hys, 76 Prószkowska St., 45-758 Opole, Poland. E-mail: k.hys@po.opole.pl.

SEMANTIC DIFFERENTIAL AS AN ASSESSMENT TOOL

especially operational, in the aspect of concentration on quality in each level of the organization’s functioning. However, it also serves the processes creation of an organization’s reality through this quality. In practice, this means that they contribute to the changes. What is important is the mentality of employees which in the long term affects positively the efficiency and effectiveness of actions taken by the organization. However, basic conditions concerning: purposefulness of implementation, feasibility, measurability, consistency and consequence of taken actions, commitment, flexible responsiveness, and openness to the evolution of action in the context of improvement processes must be fulfilled. Then, the validity of QMS implementation can be analyzed and (dis)advantages of this implementation can be determined.

Methodology Literature analysis of the issue of (dis)advantages resulting from the QMS implementation in the organizational structures allowed for an initial observation. Although the authors of the publication on the ISO 9000:2008 standard write broadly on the assets of the system, the aspect of potential weaknesses or threats is described quite laconically or completely ignored (Kowalczyk, Jabłoński, & Wawak, 2013). Therefore a basic question suggests itself: Is the ISO standards implementation risk free? Are all of the implementations completed with full success in the opinion of the decision-makers in the companies? Making an in-depth analysis of the issue, one could probably multiply questions of a similar tint. However, anybody who thinks reasonably, especially the decision-maker, would response rather skeptically to similar sets of optimistic scenarios. Although they are possible and by all means real, there are also the opposite scenarios, more pessimistic, which seem to take into account realities of the organization functioning in the market. In connection with the above, an analysis of web content information of CBs accredited by PCA in Poland has been carried out, in terms of complexity of content provided to potential clients in the range of potential (dis)advantages resulting from the QMS implementation in the structure of an organization. Currently, the website includes a list of 33 CBs that are accredited by PCA in the PN-EN ISO 9001. As a result of the basic analysis of the information contained in service offers of the above-mentioned units, it was found that out of 33 units, only 13 took up in their descriptions the issue of (dis)advantages resulting from the possession of the certificate of the system conformity with ISO 9000 : 2008 standard. Moreover, it has been determined that the offer of these institutions, addressed to clients, included only indicated benefits of systems certification. However, there is no internalization and demonstration of potential risks and disadvantages which are the results of improper preparation or process of certification in enterprises. Experience in many aspects of life indicates that the awareness and knowledge of potential mistakes and risks that may arise during its implementation can activate the state of particular vigilance of employees responsible for the implementation process in the organization and may allow to avoid making the classic mistakes. Therefore it is important for entrepreneurs to have the possibility to obtain comprehensive and reliable information before beginning the implementation process of the system in their structure. This situation could be benefit entrepreneurs, who taking the effort (economic and non-economic) of preparation of the organization for the necessary changes could take protective measures of those elements of the process, which require special security at the planning stage of the implementation process.

Hypothesis On the basis of this situation, main and auxiliary hypotheses have been defined for the problem

SEMANTIC DIFFERENTIAL AS AN ASSESSMENT TOOL

(Brzeziński, 2005) which is: Is the information provided on websites by CBs, accredited by PCA, concerning (dis)advantages from the implementation of the ISO 9001 system complete? Hypotheses have been described as follows: Main Hypothesis: Information provided on the websites by CBs accredited by the PCA, concerning (dis)advantages of ISO 9001 implementation allows entrepreneurs to prepare properly for the QMS implementation in terms of organization. Auxiliary hypotheses: H1: Data transmitted by the CBs on the websites contain information about the benefits (opportunities and possibilities) of the QMS implementation in the structures of the organization. H2: Data transmitted by the CBs on the websites contain information about disadvantages (risks and errors) of the QMS implementation in the structures of the organization. For hypothesis defined in this way, a verification process has been carried out through the analysis of the information content published on the websites of the CBs.

Research Method—Empirical Analysis of the Issues Verification of hypotheses from a practical point of view is based on an analysis of issues based on two types of variables (Giddens, 2004): dependent and independent. For the described situation, the independent variable is the information provided by the CBs on their websites, while the dependent variable is the completeness of the information in the context of (dis)advantages of ISO system implementation in the structure of organization. On the basis of analysis of CBs’ web content in the context of information on (dis)advantages, only 128 features indicating benefits of implementing ISO 9001 were accumulated. Among listed attributes, one can mention those, which existence is single or repetitive (Hys & Hawrysz, 2012). All collected attributes, with regard to the merit, can be divided into specific thematic groups. And so, distinguished were the issues showing primarily the effects of management, in particular financial and organizational. Furthermore, the results were indicated depending on the subject of analysis, i.e., in relation to competitors, employees, and clients. Demonstrated results have a high level of attractiveness in manager’s assessment. Thus, in the case of any reasonable entrepreneur, the aspect of ISO system implementation should be indisputable, or at least considered. During analysis of data, an attention should be paid to the assignment of characteristics to the individual thematic groups. The division was made on the basis of semantic tone and character of a particular feature, nevertheless the authors are aware that due to the way of data collection, the system may provide a basis for further scientific polemics. However, it is worth noting that the assumed thematic sets are a logical layout of interrelated features, forming a sequence of cause and effect. However, a certain trend can be noticed—this system can be described in classical terms of management (Stoner, Freeman, & Gilbert, 2001). Where the basis of action is planning activities, then their organization at the strategic, tactical, and operational level motivates interested parties (mainly employees and clients) and controls or monitors the effectiveness of taken actions.

Hypotheses Verification The analysis of the content of information published on the website by the CBs in the field of information about (dis)advantages of the QMS implementation according to ISO 9001 has allowed verifying the hypotheses.

SEMANTIC DIFFERENTIAL AS AN ASSESSMENT TOOL

Hypothesis number one: Data provided by the CBs on websites contain information about the benefits (opportunities and possibilities) of the QMS implementation in the structure of organization. As a result of analysis of the information published on the websites of these units 128, properties have been set. All the characteristics indicate only the benefits of implementation, the ISO 9001 system in corporate structure, including market opportunities and possibilities of organization’s internal development. Mentioned benefits relate primarily to the effects of management, including financial and organizational, as also to competitors, employees, and clients. Therefore it can be concluded that the first hypothesis was verified positively. In consequence of above, the situation concerning verification of the second hypothesis, i.e. data provided by the CBs on websites contain information about disadvantages (threats and errors) of the QMS implementation in the structure of organization, means that this hypothesis was verified negatively. In fact there is no information about the potential risks resulting from improper approaches or the realization of process of system implementation (erroneous preparatory actions, preliminary, executive or pro-implementation actions). Not forwarded is also information concerning consequences resulted from improper implementation of the quality management system. Improperly carried-out implementation process is a serious risk to potential entrepreneurs. In fact it may expose them to unnecessary costs or losses of a financial and non-financial character (including moral). Moreover, it exposes workers to frustration and demotivates to make efforts related to the QMS. In consequence of the above, it can be concluded that the information reported by CBs is incomplete. They are a kind of an allurement for potential entrepreneur, targeting and focusing his attention solely on the benefits of system implementation—which has no confirmation in real conditions. Commonly used record of (only) benefit from the QMS implementation is so attractive, which is unbelievable. The effects of taken actions and incomplete descriptions the entrepreneur usually interested in consider to be unreliable, which in turn is not beneficial for the CBs, concluding: It might be indicated that the information on the QMS implementation in the organization structures can be described with a help of categories, that can be collected in the following associative sequence: assumptions-dilemmas-interpretations, which in practice means expectations-(dis)advantages-interpretations of an entrepreneur in the field of the QMS implementation. Consequently, it can therefore be assumed that taken issue as well as concepts set limits of reflection characteristic for that issue.

Structure of Model In the context of the above, where a total dissonance has been shown between the range of information provided by CBs and expected by the decision makers for identification and preparation for the QMS implementation in the environment of organization, a tool supporting comprehensive preparation of information in this regard will be offered. The reference here is to the use of SD (Osgood, Suci, & Tannenbaum, 1957). It is a way of exploring the deep structure of words, consisting of subjective assessment of impressions on assessed object in the adopted scale using the defined questionnaire. In the assessment questionnaire, respondents in a way review subjectively their attitude, i.e., the attitude (Obuchowski, 1972; Mika, 1981; Nowak, 1973; Mądrzycki, 1977; Prężyna, 1967; Gołaszewska, 1964; Hys, 2013a; 2013b; Hawrysz & Hys, 2013) in relation to the assessed object. The attitude (Hilgard, 1967), as a category, is a positive or negative respond to some objects, concepts, or situations as well as the willingness to react in a predetermined manner to these (or related to them) objects, concepts, and situations. It is worth noting that attitudes are formed by the interaction of the individual and its

SEMANTIC DIFFERENTIAL AS AN ASSESSMENT TOOL

environment. It is important to be aware of distinguishing components of attitudes. According to psychologists (Prężyna, 1975; Newcomb, Turner, & Converse, 1970; Bielecki, 1986), attitudes are created on the basis of:  Acquired knowledge and experiences, which is so called cognitive aspect (attitude is defined here as a system of evaluative perceptions);  Emotions that are manifested in the likings and preferences of the respondents. It is so called motivational aspect, which means a certain state of readiness for the appearance of the activity motive;  Behaviors or behavioristic element which affect the actions taken throughout the process of purchase realization and mean similarity of occurrence of a particular behavior in a given situation (Prężyna, 1967). The immanent evaluation feature is that it is always carried out with the same number of the opposing terms placed on the two poles of scale. In practice, it means that, for the evaluated object, antagonistic pairs of statements are defined (pairs of antonyms, usually adjectives), for which the grading scale has been determined. A kind of continuum is formed to which a certain number corresponds and generally used is the scale of which the central assessment takes a neutral form. It is worth noting that the intervals among particular assessments values are of an equal length. The task of the respondent is to select one category on each assessment scale. Assessment of attitudes is made in the range: extremely positive attitude—an attitude decidedly negative. Thanks to that, the assessment level can be measured using various scales, especially ordinal scale. In real conditions, a measurement using the SD lies in the fact that a set of several ordinal scales, mostly seven degree or nine point, is placed in the questionnaire. These scales are independent of each other. The respondent giving the answers must mark out only one category on each scale. Analysis of the literature on the practical application of SD in empirical research has shown that one usually takes a specific layout template in the assessment questionnaire. This means that in a given column, at the discretion, only positive characteristics are defined, and in the opposite column only negative characteristics. It is widely used, however according to Babbie (2003), in order to avoid loads in the patterns of responses, custom records should be applied, enabling an intellectual effort during the assessment process. As far as the analysis of collected data aspects, accepted method of inference is determined by the conditions of the study, accepted hypothesis, and their verification methods, which mean that the analysis can be carried out in various ways. But most often so called profile analysis is used, consisting in drawing a graphic profile for comparable characteristics. Profile is formed by joining with a line numerical values obtained during the measurement for each of the characteristics from evaluation scales. During the analysis, it is supposed that ordinal scales ranges are equal. Then specific values are assigned to scale ranges, the so-called weights. Usually these are numbers from one to seven or from -3 to +3. Obtained results can be analyzed using basic statistical characteristic such as the arithmetic mean, weighted average, and standard deviation from these averages or the medians. Given characteristics are calculated for all pairs of measured evaluative characteristics. Collection and reduction of data consist in therefore counting all filled in scales in the questionnaire, classifying them and presenting the results in a statistical series. Obtained averages are usually joined with lines on combined scales formed from assigned weights. Then a profile graph arises—specific for a particular phenomenon.

Analysis by Means of SD Using obtained results of the analysis concerning the verification of adopted hypotheses, an attempt to construct a questionnaire used to define the model evaluation of the QMS (dis)advantages has been made. The following stages of building a semantic scale have been identified:

SEMANTIC DIFFERENTIAL AS AN ASSESSMENT TOOL

 Transformation of characteristics obtained in the study and analysis of the substantive content of websites of CBs in Poland accredited by PCA. Selection of test objects fulfilling the role of stimuli affects the respondent (the name of characteristics, which form an arranged list of (dis)advantages resulting from the QMS implementation).  Determination of opposite pairs of terms (usually adjectives) describing tested object and corresponding the dimensions of the semantic space (the basis here is the assessment level given to each tested characteristics).  Development of responses patterns—the scale expressed as a set of bipolar scales estimated, sustainable, seven point, at the end of which there are categories of responses. It is worth noting that the following assumption has been made: Each evaluated object is evaluated independently. While constructing an assessment questionnaire, taxonomy of characteristics obtained during the verification of the substantive content of web sites of CBs accredited by PCA has been used. All collected attributes, with regard to the merit, can be divided into specific thematic groups.

The Effects of Modeling While defining a model of assessment of (dis)advantages resulting from the QMS implementation, it has been determined that: SD scale consists of six thematic groups, i.e., concerning: the effects of the enterprise management (see Table 2), organizing activities in the enterprise (see Table 3), financial aspects (see Table 4), competition (see Table 5), employees (see Table 6), and clients (see Table 7). SD model takes therefore the following form. Forty-two pairs of antonyms have been defined in the range of six defined thematic groups. Each pair of the opposing statements is assessed in bipolar seven point scale. The meaning of used weights is as follows: (3) definitely yes (extremely positive); (2) yes; (1) rather yes; (0) I do not have any opinion (neutral); (-1) rather no; (-2) no; (-3) definitely no (extremely negative). All one needs to do is to select the level of subjective assessment according to the key used on the scale and to join obtained grades. As a result, a semantic profile arises for the tested characteristics (see Table 1). Table 1 An Example of an Assessment’s Questionnaire by Means of SD Characteristics negative/positive grades

Grades meaning of importance in accordance with accepted values -3

-2

Positive overtone characteristic Characteristic’s antonym Negative overtone characteristic

-1

Characteristics negative/positive grades

3 Characteristic’s antonym

•

Positive overtone characteristic

•

Characteristic’s antonym

•

Characteristic’s antonym

•

Negative overtone characteristic

…

•

…

Note. Source: Own study.

Technical note: The questionnaire can additionally be marked with colors to enhance the effect of reception. For example, from the deep red (meaning the extreme negative grade) through green (indicating a neutral value), and yellow (indicating extreme positive value). Between these clear colors, shades of colors can be used, which will adequately map different states of assessment intensity. In case of evaluated characteristics concerning the effects of the QMS implementation identified as “business management”, nine pairs of antonyms have been defined (see Table 2).

SEMANTIC DIFFERENTIAL AS AN ASSESSMENT TOOL

Table 2 An Assessment’s Questionnaire of the Effects of Business Management Characteristics Activities…

Grades: the QMS implementation effects for enterprise management group -3 -2 -1 0 1 2 3

Effective activities Not-improving management Reducing risk of the action Ineffective activities Enabling comparison of the effects Limiting efficiency Consistent with the requirements Improving effectiveness Inflexible response to market changes

Characteristics Activities… Ineffective Improving management Increasing the risk Effective Lack of possibility of the effects comparison Improving efficiency Inconsistent with the requirements Limiting effectiveness Flexible response to market changes

Note. Source: Own study.

Transition phase is very difficult, since all the efforts should be made to reflect the nature of characteristics defined in the original statement. In such a way, their final sound could clearly express the contents of the original. Assessed are following characteristics: the management effectiveness, the level of improvement, the impact on the risk, productivity, efficiency, effectiveness, flexibility, compliance with the law, and representing benchmark of its own results over time. For characteristics concerning organization of the activities in the enterprise, 15 pairs of antonyms have been defined (see Table 3). Assessed are following activities: (not)improving functioning of the organization, (dis)facilitating communication within the company, qualitatively (un)stable, (dis)transparently organized, (not)focused on improvement, (not)involved in the integration, (un)stable, (un)supervised, (non)complex resource management, a skill(less) problem solving, (dis)ordering documentation, (not)making decisions based on facts, (not)saving time, and (not)showing understanding of the impact of the environment on the organization. Table 3 An Assessment’s Questionnaire Concerning Organizing Activities Characteristics Activities… Hampering functioning Communicative Qualitatively unstable Transparently organized Indifferent to the improvement Open to integration Unstable Supervised Imprecise Complex managing the resource Skill less problem solving Ordering documentation Not making decisions based on facts Saving time Lack of understanding of the impact of the environment on the organization Note. Source: own study.

Grades: concerning organizing activities -3 -2 -1 0 1 2 3

Characteristics Activities… Improving functioning Uncommunicative Qualitatively stable Dis-transparently organized Improvement directed Indifferent to integration Stable Unsupervised Precise Partially managing the resource Skilful problem solving Disordering documentation Making decisions based on facts Wasting time Understanding of the impact of the environment on the organization

SEMANTIC DIFFERENTIAL AS AN ASSESSMENT TOOL

In case of financial aspects, following assessment elements have been distinguished (see Table 4), concerning analysis the level of costs, sales, profitability, and profits, which indirectly result from the adopted and implemented pro-quality standards. Table 4 An Assessment’s Questionnaire of the Financial Aspects Characteristics Activities…

Grades: effects of the QMS implementation concerning financial aspects -3

-2

-1

Rationalizing costs Depreciating sales Increasing profitability Depreciating profits Note. Source: Own study.

Characteristics Activities… Irrationalizing costs Increasing sales Depreciating profitability Increasing profit

As indicated by the respondents, another important thematic group is the competitors. Seven major groups of antonyms are mentioned here. Rated are activities that have an impact on: the increase/decrease of the company’s competitiveness in the market, creating image of the company, the level of tendering, adapting to international standards, the level of value and attractiveness, level of reliability, and pro-quality involvement of employees of the company (see Table 5). Table 5 Competition Assessment Questionnaire Grades: effects of the QMS implementation with regard to competition

Characteristics Activities…

-3 -2 -1

Characteristics Activities…

Increasing competitiveness in the market Deteriorating image of the company in the market Improving the ability of tendering Lack of adaptation to international standards Increase of the value and attractiveness of the company in the market Lowering reliability of the company Increasing pro-quality involvement of the company

Depreciating competitiveness in the market Improving image of the company in the market Deteriorating the ability of tendering Adaptive to international standards Atrophy of the value and attractiveness of the company in the market Increasing reliability of the company Lowering pro-quality involvement of the company

Note. Source: Own study.

The effects of the QMS implementation are of great importance in the light of staff activity (see Table 6). Table 6 An Assessment’s Questionnaire Concerning Employees Characteristics Activities…

Grades: effects of the QMS implementation with regard to employees -3

Increasing labour productivity Decreasing employees’ motivation Increasing level of self-satisfaction of the work Decreasing awareness of employees Note. Source: Own study.

-2

-1

Characteristics Activities…

3 Decrease of labour productivity Increasing employees’ motivation Decreasing level of self-satisfaction of the work Increasing awareness of employees

SEMANTIC DIFFERENTIAL AS AN ASSESSMENT TOOL

They affect the level of: labor productivity, employees’ motivation, employees’ level of self-satisfaction, and awareness in the range of the QMS effects and their impact on the internal and external environment of the organization. The last presented, but not less important is the aspect of assessment of the QMS implementation effects to the organization from the point of view of potential and existing clients (see Table 7). Among evaluated characteristics distinguished were: the level of clients’ satisfaction, compatibility with all the QMS standards, and the level of confidence in the quality and safety of offered products. Table 7 An Assessment’s Questionnaire Concerning Potential and Existing Clients Characteristics Activities…

Grades: effects of the QMS implementation concerning clients -3

-2

-1

Increasing satisfaction Biased evidence that the organization operates in accordance with the QMS Increasing confidence in the quality and safety of products

Characteristics Activities… Decreasing satisfaction Vide objective evidence that the organization operates in accordance with the QMS Decreasing confidence in the quality and safety of products

Note. Source: Own study.

After the analysis of partial questionnaires completed by the respondents (see Tables 2-7), a model of (dis)advantages for the assessment of the QMS implementation effects in the structures of the organization can be drawn (see Table 8). A profile created in this way will be a real and useful preparation tool for many entrepreneurs for the process of the QMS implementation in organization. They will be able, though the benchmark analysis, to prepare in an optimal way—reducing the risk and costs of mistakes. Completion of an assessment’s questionnaire consists in introducing subjectively by the respondent an assessment by marking the importance in accordance with the adopted scheme (on a scale of -3 to 3). However, it is worth noting that given assessments concern only the observations of the respondents in the range of effects of the QMS implementation to the organization observed by them. One can therefore consider to introduce dual questionnaire, the construction of which will be identical, except that evaluations are observations and expectations with respect to the effects of the implemented QMS. It is about the application of logic known from the works of Parasuraman, Zeithaml, and Berry (1985; 1988; 1994). In an exemplary questionnaire (see Table 8), the results for the expectations and perceptions of the respondents have been shown in the range of the QMS implementation effects in the structures of the organization. Table 8 Summary of the Results of Partial Questionnaires Assessment model (dis)advantages of the QMS implementation (Dis)advantages group: The effects of business management Size of organization (tick the appropriate): Micro, small, medium, large, international Type of business (tick the appropriate): Services, trade, manufacturing, other... what kind of? Company: Ltd., joint stock, general partnership, limited partnership, civil The legal form of organization (tick as appropriate): individual economic activity other... what kind of? Additional comments: Date of assessment: Name and surname of the person conducting the assessment:

SEMANTIC DIFFERENTIAL AS AN ASSESSMENT TOOL

(Table 8 continued) Evaluation characteristics

-3

Characteristics assessment -1 0 1

-2

•

• • • •

• …. n • Legend to scale: (3) definitely yes (extremely positive); (2) yes; (1) rather yes; (0) I do not have any opinion (neutral); (-1) rather no; (-2) no; (-3) definitely no (extremely negative) semantic profile of characteristics according to expectations of respondents _____ semantic profile of characteristics according to observations of respondents ------n: n-th characteristic Note. Source: Own study.

In such statement any possible difference in the assessments is visible. Besides, the contrast among the assessments of respondents might be captured easily.

Conclusions Carried-out analysis of the information provided by the CBs in the context of defined hypotheses shows that the records located in their websites concern (dis)advantaged resulting from implementation of QMS require supplementation. On the website of Polish CBs accredited by the PCA, there is no comprehensive information on the (dis)advantages of the quality management system implementation. Therefore there are no considerations on:  Causes ineffectively carried out by the implementation of the QMS;  The cost of time and capital investment in the preparatory, executive, and pro-implementation processes;  Labor costs associated with hiring additional staff with appropriate skills or the cost of employee involvement in additional responsibilities (e.g., costs of supervision);  Preparation costs such as staff training, expertise, investment, and organizational consultation;  Costs associated with the transformation of the company’s organizational structure;  Investment costs;  Potential risks (resulting, for example, from the routinely carried out by individuals activities, lack of commitment, lack of accountability for taken actions);  Disturbances or incorrectness that may occur during the process of the QMS implementation in the organization. In this situation, in order to enable the development of an objective and at the same time comprehensive set of characteristics describing the QMS implementation effects in the structure of the organization, this article proposes the use of an assessment’s questionnaire using the SD (Hys & Hawrysz, 2012). For characteristics forming a set selected as a result of carried-out analysis of the substantive content of websites accredited by the PCA and CBs in Poland, an assessment’s questionnaire has been proposed. The questionnaire contains a set of 42 antonyms for the characteristics identified in the study of websites of CBs. With regard to its clarity, the questionnaire has been divided into six parts. The division results from the thematic groups developed in the basic study. The final result of the work is a proposition of a questionnaire called an assessment model of (dis)advantages of the QMS implementation. Practical implementation of this tool may be helpful in defining

SEMANTIC DIFFERENTIAL AS AN ASSESSMENT TOOL

and communicating reliable information to potential clients in the range of (dis)advantages resulting from the QMS implementation to the organization. Carried-out analysis is merely a beginning to deeper research problems, which means that the SD will be used by the author for further research.

References Babbie, E. (2003). The practice of social research. Warsaw: PWN. Bielecki, J. (1986). Selected aspects of psychology. Warsaw: Publ. ATK. Brzeziński, J. (2005). Methodology of psychological research. Warsaw: PWN. Giddens, A. (2004). Sociology. Warsaw: PWN. Gołaszewska, M. (1964). Research on the attitudes functions. In Z. Żarnecka (Ed.), Philosophical sketches as a gift for Romano Ingarden. Cracow: PWN. Hawrysz, L., & Hys, K. (2013). Process-oriented management in public and private sector. China-USA Business Review, 12(9), 903-910. Hilgard, E. R. (1967). Introduction to psychology. Warsaw: PWN. Hys, K. (2013a). Semantic profile as a tool for assessment of competence public sector workers. Proceedings from MMK 2013. Hys, K. (2013b). Evaluation of public sector workers for assistance method of mystery shopping. Proceedings from the 2nd Virtual International Conference on Advanced Research in Scientific Areas (ARSA-2013). Slovakia. Hys, K., & Hawrysz, L. (2012). (Dis)advantages of quality management systems in the light of credited certification bodies in Poland. In E. Skrzypek (Ed.), Integration in management (pp. 197-209). Lublin: University of Maria Curie-Skłodowska. Kowalczyk, J., Jabłoński, A., & Wawak, S. (2013). Guide of the quality management system implementation conforming to ISO 9001. Retrieved from http://www.humanms.pl Mądrzycki, T. (1977). Psychological regularities of attitudes’ development. Warsaw: Educational and pedagogical Publ. Mika, S. (1981). Social psychology. Warsaw: PWN. Newcomb, T. M., Turner, R. H., & Converse, P. E. (1970). Social psychology. Warsaw: PWN. Nowak, S. (1973). Theories of behavior. Warsaw: PWN. Obuchowski, K. (1972). Psychology of human aspirations. Warsaw: PWN. Osgood, C. E., Suci, G., & Tannenbaum, P. (1957). The measurement of meaning. Urbana: University of Illinois Press. Parasuraman, A., Zeithaml, V. A., & Berry, L. L. (1985). A conceptual model of service quality and its implication. Journal of Marketing, 49(4), 41-50. Parasuraman, A., Zeithaml, V. A., & Berry, L. L. (1988). SERVQUAL: A multi-item scale for measuring consumer perceptions of the service quality. Journal of Retailing, 64(1), 12-40. Parasuraman, A., Zeithaml, V. A., & Berry, L. L. (1994). Reassessment of expectations as a comparison standard in measuring service quality: Implications for future research. Journal of Marketing, 58, 111-124. PN-EN ISO 9001:2009. (2009). Quality management systems—Requirements. Warsaw: PKN. PN-EN ISO/IEC 17000:2006. (2006). Conformity assessment—Vocabulary and general principles. Warsaw: PKN. PN-ISO 10014:2008. (2008). Quality management—Guidelines for realizing financial and economic benefits. Warsaw: PKN. Prężyna, W. (1967). The concept of attitude in psychology. Philosophical Annuals XV (Roczniki Filozoficzne), 15(4), 25-38. Prężyna, W. (1975). Self-image and the intensity of religious attitude. Philosophical Annuals XXIII (Roczniki Filozoficzne), 23(4), 5-25. Stoner, J. A. F., Freeman, R. E., & Gilbert, D. R. Jr. (2001). Management. Warsaw: PWE. Studying the impact of the ISO 9001 implementation on the competitiveness of the company in 2010. (2013). Retrieved from http://qbusiness.pl/uploads/Raporty/pbonlineiso.pdf

Chinese Business Review, ISSN 1537-1506 January 2014, Vol. 13, No. 1, 53-74

DAVID PUBLISHING

The Impact of Nationalisation on CSR Policy in Citadele Bank and CR Study of the Latvian Retail Banking Sector Aleksandrs Judins The Manchester Metropolitan University, Manchester, England SIA Esmeralda Immobilien, Riga, Latvia The present research paper is dedicated to the analysis of the impact of nationalisation on Corporate Social Responsibility (CSR) Policy in Citadele bank (formerly Parex) and Corporate Responsibility (CR) study of the Latvian banking sector. The goal is to analyse the notion of nationalisation, the history of Citadele bank, and to scrutinise CSR policy and its aspects. Research aim is to explore the impact of CSR activities implemented by Citadele on customers’ views after the nationalisation of the bank. The research methodology involves the analysis of the existing theoretical literature and a quantitative research method-survey conducted by an international research agency. The article also explores CSR activities of commercial banks in Latvia by applying the comparative method of research. Keywords: Corporate Social Responsibility (CSR), nationalisation, Banking industry, Parex, Citadele, Latvia, analysis, survey

Introduction Almost all financial institutions and enterprises are implementing Corporate Social Responsibility (CSR) policy; however, not many people are aware of such activities. The significance of the present research is that presently nationalisation in the banking sector is particularly relevant to the Baltic countries, which for a long time suffered problems related to the financing of government budgets, as they were not able to avoid the bankruptcy of several credit institutions. The research concentrates on the Latvian commercial bank Citadele (formerly Parex), which underwent the bankruptcy procedure that was followed by nationalisation in the period from 2008 to 2009. It is based on the author’s dissertation for the Award of MBA Degree from the Manchester Metropolitan University. Additionally, the author scrutinises CSR activities of commercial banks in Latvia. The problem of the research is the influence of nationalisation process on CSR activities implemented by Citadele bank. The common recognition of the research significance and the problem stated above provide the author with the opportunity of formulating three hypotheses. Firstly, it may be assumed that public is more aware of CSR activities and it has an effect on their views of the bank and subsequently their trust in the bank. This leads us to a second hypothesis, which allows for the presupposition that the nationalisation of Citadele bank brought into focus on the CSR activities of the bank, as customers who were affected by the economic crisis are looking Aleksandrs Judins, MBA, The Manchester Metropolitan University; Managing Director at SIA Esmeralda Immobilien. Correspondence concerning this article should be addressed to Aleksandrs Judins, Kokneses prosp. 4/1-3, LV-1014, Riga, Latvia. E-mail: a.judins@mail.ru.

THE IMPACT OF NATIONALISATION ON CSR POLICY IN CITADELE BANK

for a bank that offers more than simple banking services and one that demonstrates genuine concern for, and commitment to its responsibilities to society, not just to its shareholders. The third hypothesis states that with the bank understanding and acknowledging these concerns, they are promoting CSR programmes, sponsoring good causes, being seen to operate in a more ethical and philanthropic manner, and promoting themselves as a safe, reliable and honest financial institution with customers’ interest in heart. Additionally, the author of the paper presumes that presently all banks apply Corporate Responsibility (CR) activities regardless of the fact that CSR policy is not obligatory by law. The subject of the present research is CSR policy aspects, the notion of nationalisation, the history of Citadele Bank and CSR activities of commercial banks in Latvia. The object of the present research is Citadele Bank (formerly Parex Bank) that has been selected due to the author’s personal involvement, as he has been an employee of the bank for a four-year period, starting from 1997 to 1999 and from 2005 to 2007 and 10 commercial banks operating in Latvia. The goal of the research is to analyse the notion of nationalisation and the history of Citadele bank, and to scrutinise CSR policy and its aspects. The other aim is to explore the impact of CSR activities implemented by Citadele Bank on customers’views after the nationalisation of the bank. The third goal is to analyse CR activities of 10 commercial banks operating in Latvia. The method of the research is the quantitative research method used for implementation of survey—online poll (CAWI—computer assisted web interviews), conducted in cooperation with an international research agency (GFK). The research involves the analysis of the theoretical literature and the comparative method. Target group is Citadele Bank’ clients—Latvian residents who currently use banking services of Citadele bank and are reachable via the Internet. In total, 316 interviews were carried out with existing customers of Citadele bank, who were reachable via the Internet. The sample size is sufficient to analyse the results of this target group with 6.5% accuracy at a 95% probability, which is optimal for accurate measurement to use for purposes of a scientific research. It is essential that the information gathered in the survey represents viewpoints of economically active persons—Internet users, rather than views of all Citadele’s customers about the impact of CSR of Citadele on the image of nationalised bank. Clearly defining the target group and the accuracy of the results obtained, the survey is representative for the above-mentioned target group. The present research consists of the introduction, five chapters, conclusions, recommendations, four figures, two tables, and a list of references that contains 59 entries. CSR is an innovative term in Latvia. The results of the survey prove the present statement. In addition, in Latvia, only several studies are completed regarding the current topic. According to the study, only 12% out of 316 respondents were fully aware of Citadele’s CSR activities with 41% being unsure and 47% having no awareness. Despite the fact that similar researches have been conducted in various countries, the present paper is one of the first studies related to CSR in the banking sphere in Latvia. Moreover, the present research provides valuable recommendations to the bank and a ground for further study on CSR policy.

The History of Success, Crisis and Rebirth of Parex Bank Crystallisation of Parex Parex cooperative was established in 1988 by two entrepreneurs in search of new business ideas—Valery

THE IMPACT OF NATIONALISATION ON CSR POLICY IN CITADELE BANK

Kargin and Victor Krasovitsky who were engaged in the tourism business. With the collapse of the Union of Soviet Socialist Republics (USSR), new market niches started to appear. These niches were known before, nevertheless, in Soviet times they were considered as prohibited and persecuted. One of them was currency exchange. In the USSR period, many businesspersons who tried to make money in currency exchange were prosecuted and in the epoch of Khrushchev, some were even executed. However, times changed, and the environment for entrepreneurship began to transform. It should be pointed out that Kargin and Krasovitsky were taking a colossal and almost incommensurable risk at the beginning of their activities, as at that time, there was still Komitet gosudarstvennoy bezopasnosti (KGB) activity in the country and people did not know whether the previous political situation would return. From the history of the cooperative: “the name Parex was not created by us, it was there before us. Nobody questioned what it meant... Parex was a cooperative under the umbrella of the city committee as all other institutions were established by the city committee... Parex was sold for 5,000 soviet roubles and became ours” (Kargin, 2005). Thus, currency exchange activity gradually began to acquire legal turnover, and on the 3rd of April, 1991, the president of Latvian Bank Pavel Saks issued a signed license Nr.1 for currency exchange. On a simple piece of paper, this laconic text was written: “Buying and selling of currency is permitted in specially equipped premises on 8 Valdemara Street and in the head office of Parex in the Central Station... ”. The first currency operations were performed at the head office, which was located in the premises of Komsomol city committee, not in the Central Station. From a commercial point of view, the terminal with its constant jostling was more attractive, however, the chill of fear that hovered over us, made us cautious. Therefore, the first currency exchange point started to work in the city committee, and it was the correct decision: a large amount of money was exchanged there, and these people were not people from the street (Kargin, 2005). Subsequently, the activity has improved and with rapid success went uphill: “We were very mobile. We sent money by planes; people brought us bags, trunks, suitcases, even plastic bags... Cash and non-cash roubles flowed to Riga, to Parex from other cities of the Union, to buy currency. Tens of millions per month, hundreds per year!” (Kargin, 2005). Customers came to their Parex currency exchange point in Riga Central Station from as far afield as Siberia. Parex’s slogan at the time was: “We are closer than Switzerland” (Forbes Magazine, 2000; Kargin, 2005). The slogan started to be associated with Parex bank among Latvian and Russian citizens, and it represented the availability and the analogy of working by Swiss methods, including the security and confidentiality of client information. Currency exchange business quickly became successful. “In 1992, Parex had 76 currency exchange points, and we were the leaders on the currency exchange market not only in Latvia, but also in the territory of all former USSR countries”. “ ...we were, in fact, small, but growing bank” (Forbes Magazine, 2000; Kargin, 2005). Founding and Development of the Bank On 30th of April 1992, the Bank of Latvia issued license Nr.32; and on 14th of May, the Company Registry registered Parex bank. In June 1996, the bank was accepted into the International Chamber of Commerce (ICC), becoming the first Latvian company to join its ranks. In 1996, Parex opened their first cash machine that accepted Visa, Euro Card/Master Card. There were only 15 cash machines that accepted Euro Card/Master Card in Riga that year. A new cooperation started with

THE IMPACT OF NATIONALISATION ON CSR POLICY IN CITADELE BANK

American Express. In mid 1996, the bank was actively developing leasing and factoring services, which followed by establishing Parex Lizings Ltd. In that year, the leasing portfolio was worth approximately 28 million euro. Parex stirringly supported CSR initiatives—on a regular basis throughout its activity, the bank financially supported the Latvian Children’s Fund. Parex bank also supported arts, helped sponsor events, and devoted to international opera and Latvian ballet star Andris Liepa. In 1999, Parex received an international BA2 evaluation on long-term foreign currency deposits. The rating on long-term deposits received a BB+ mark. Starting in 2000, Moody’s Investor Service has confirmed Parex ratings. In the same year, Parex was awarded the best local bank and the best broker company by Euro Money magazine. According to the Institute of Economic Researches (LETA), 35.9% respondents acknowledged Parex Bank as the most reliable bank in Latvia: the bank took the second position, behind Latvijas Unibanka. At the same time, in the framework of the study, Parex took the leading position among the surveyed population with the highest income. In 2001, the authoritative publishing the Banker placed Parex Bank in the list of the one hundred largest banks in Eastern Europe, where the bank ranked 51st according to the volume of its net worth. Experts gave Parex 28th place, according to the rates of growing net worth, and 19th place for the indicator of growth of assets. In November 2001, the bank significantly improved its performance in terms of assets growth. Bank assets were 979.388 million euro. Judging on the volume of assets, Parex was the largest in Latvia. Already having a successfully operating branch in Lithuania, in the same year Parex Bank started to provide its services in the Estonia capital Tallinn. In early 2003, for the third consecutive year, Parex Bank has taken the initiative on CSR subject by gifting two minibuses and sports equipment to the Latvian Children’s Fund and Riga Haematology Centre within the framework of the “Heart to Heart” charity event. According to the Association of Latvian Commercial Banks, in the year 2005, the volume of Parex Bank assets had increased by 13.6% during eight months and had reached approximately 2.260 billion euro. The authoritative edition Euro Money recognised Parex Bank as the best Latvian bank of 2005. In early 2005, Parex Bank received an exclusive right to produce and issue American Express cards in Latvia. In February 2006, international rating agency Capital Intelligence affirmed the long-term foreign currency rating of Parex Bank at BBB-level and short-term foreign currency rating at A3 level. In addition, the bank received the rating of financial stability on BBB-level and the support rating of four. At the same time, Capital intelligence retained the possibility of increasing ratings of Parex Banka, assigning it a positive outlook. Once seven people worked, and today’s Parex employs three thousand people (Kargin, 2005). In February of the year 2007, Parex bank received the record size of a loan of 385 million euro. This was the largest syndicated loan ever granted to Baltic financial institutions. Mizuho Corporate Bank Ltd., and Sumitomo Mitsui Banking Corporation Europe Limited became mandated leading arrangers of the loan. In April 2007, Moody’s financial agency affirmed an investment rating of Parex Bank of BAA3 (until February 25, 2007, Parex was rated as speculative—BA1). Eric Brivmanis, Vice president of the bank on financial affairs, pointed out that Parex Bank became the only financial institution among the Baltic States, the rating of which reached the level of investment grade after last revision by Moody’s Investors Service agency. “The most honourable fact is that the rating is given to a bank, which does not have any external support: Parex is not supported by the State or ‘The big Swedish Mother’”.

THE IMPACT OF NATIONALISATION ON CSR POLICY IN CITADELE BANK

The systematic line of the development of Parex was to open foreign branches. Branches of Parex Bank were actively operating in more than 15 countries, including Sweden, Japan, Bulgaria, and many former USSR republics. The activities of the bank were especially successful in the neighbouring Baltic countries, where the bank held the leading position since the 1990s. The Origins of the Crisis After a year of work, the press started to publish articles on Parex bank liquidity problems. Parex then turned to the Bank of Latvia, asking to provide loans secured by assets. It was the end of October of the year 2008 when the outflow of funds started. According to a rough estimate, local clients, including state, municipal agencies, as well as foreign investors removed about 342 million euro from the bank in just a few days. On November the 8th, at an emergency cabinet meeting, it was decided to nationalise the bank de facto. The controlling stake of 51% was sold for 2.85 million euro and was moved to the state bank Latvijas Hipoteku un Zemes banka (LHZB). Other 34% of assets, which remained in the possession of ex shareholders Valery Kargin and Victor Krasovitsky (formerly they owned 42.42% of shares each), along with personal assets were pledged to LHZB. According to the opinion of former owners of the controlling stake, the day of the collapse was October 21, 2008. On the same day, the Swedish government announced the programme of state support of Swedish banks (including operating in the Baltics Skandinaviska Enskilda Banken (SEB) bank and Sweden bank, providing about 150 billion euro for such target). Latvian banks did not receive such support. Subsequently, the state began to actively allocate funds in the accounts of the bank, and by March of 2009, the volume of allocated funds totalled 1,191.395 million euro.

The Notion of Nationalisation in the Sphere of Banking Nationalisation in the Sphere of Banking “Nationalisation means transferring the ownership or control of one or more banks from the shareholders to the government and can vary from full or partial nationalisation and be either temporary or permanent” (Elliott, 2009). Why Banks Are Nationalised? The decision to nationalise a once private business or industry is taken by governments for a variety of reasons: to rescue a failing bank or to bring poorly managed organisations under state control, as the case in Soviet Russia, for social and political reasons. Since 2007, the world has experienced a period of severe financial stress, not seen since the time of the Great Depression. Many countries were significantly affected by these adverse shocks, causing systemic banking crises in a number of countries, despite extraordinary policy interventions (Laeven & Valencia, 2010). Governments around the world were faced with unpalatable policy decisions on how to limit the damage caused by the systemic banking crisis to their respective economies. In the case of several banking giants and as a measure of last resort, the decision was taken to nationalise and thus brought the assets, organisation, and running of the banks under state control while assuming debt. Bank Nationalisation: Latvian Experience In the case of Latvia’s Citadele bank (formerly Parex) that were scrutinised, nationalisation was a decision determined by the government’s intention to save Latvia’s financial system. Parex was the systemic,

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second-biggest Latvian bank, serving individuals as well as businesses and governmental authorities. The Latvian authorities stated that it was the crisis, accompanied by mistrust from the financial markets and difficulties in obtaining financial resources, that was the main reason for Parex receiving government support. On 8th November 2008, the Latvian government took control of Parex through an initial 51% share package, which was later increased to 85% control of the bank’s capital (Kolyako, 2008). The overall dissatisfaction of the Latvian population with Parex’s bailout was due to several reasons. Firstly, the financial problems encountered by Parex created panic among the bank’s clients who feared losing their deposited money (Kolyako, 2008). Secondly, the process of nationalisation was carried out in secrecy, and Latvians were informed of what was going on and why nationalisation had taken place only post factum (occurring after the fact) (Greenhalgh, 2010). Thirdly, and most importantly, Parex’s bailout was done at the expense of Latvia’s budget, including the pension fund of about 1.4 billion euro, which for the special purpose of the bank’s nationalisation was simply merged with the main state budget. These and many other ungainly facts of Parex’s bailout have contributed to the significant damaging of the bank’s image and resulted in almost irrecoverable customer dissatisfaction and disloyalty. Nevertheless, the Latvian authorities in charge of Parex’s restructuring into Parex as an asset management company that will handle non-performing loans, real estate and other bad assets, and Citadele with healthy assets as a retail bank for the sale of both, have somehow managed to save the bank’s reputation (BBN, 2010). Last year, Citadele (2012a) was positioned as a “a full-service financial group for both private individuals and companies offering the complete portfolio of banking, financial and private capital management services in its home market Latvia and through its international presence.” As its mission, Citadele (2012b) wishes “to inspire economic growth for people and enterprises, and to enhance good changes in Latvian and the whole Baltic region’s society”, by re-inventing banking “by making Citadele a simple, reliable, honest and socially responsible bank”. Applying professionalism, pro-activity and team work, Citadele (2012b) should become “the most valuable local financial group in the Baltics”, for shareholders, clients and employees.

The Notion of CSR Policy in the Sphere of Banking The Notion of CSR Policy Presently the vast majority of businesses, banks and other institutions are applying CSR policy in their practice. Beyond profit maximisation, businesses have responsibilities for society, as large corporations are able to control and affect the quality of life of their employees, shareholders, and customers. The above mentioned power entails social responsibility. Already in 1916, Clark (1916) stated that “If men are responsible for the known results of their actions, business responsibilities must include the known results of business dealings, whether these have been recognized by law or not”. The European Commission in 2001 notes that “Being socially responsible means not only fulfilling legal expectations, but also going beyond compliance and investing more into human capital, the environment and relations with stakeholders” (European Commission, 2001). The analysis of CSR is still in an embryonic stage and critical issues regarding frameworks, measurement, and empirical methods which have not yet been resolved (Academy of Management, 2003). Therefore, CSR still has various definitions. The World Business Council for Sustainable Development (WBCSD, 2001) defines CSR as “the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society”. This statement emphasises the power of impact that businesses may have on society. Sparkes (2003) highlights

THE IMPACT OF NATIONALISATION ON CSR POLICY IN CITADELE BANK

that in economic terms, CSR is a “constraint upon business activity which must be integrated into management decision making in order to maximise long term profits”. The present definition is supported by Decker (2004), who highlights in her paper that “this definition of CSR presents the view that pursuing a CSR agenda is not incompatible with profit maximisation and does have a place in a market economy and in achieving the commercial objectives of business activity” (Decker, 2004). This means that CSR policy can be seen, not only as a responsibility, but also as an instrument, which can accumulate profit to the company that is applying the policy. As emphasised by World Bank (Khan, Halabi, & Samy, 2009), CSR is the commitment of business organizations to contribute to sustainable economic development through working with employees, their families, the local community and society at large with the main purpose to improve the overall quality of life, in ways that are good both for business and society. Connolly’s (Ralston, 2010) definition of CSR illustrates why socially responsible policies implemented by financial organisations are truly important for society: CSR is the alignment of business operations with social values. CSR consists of integrating the interests of stakeholders that are affected by a company’s conduct into the company’s business policies and actions. CSR focuses on social, environmental, and financial success of a company—the so-called triple bottom line—with the goal being to positively impact society while achieving business success (Ralston, 2010, p. 398). Concluding from the statements above and the scrutinised literature on CSR, which can be divided into two categories (see Figure 1).

Figure 1. CSR categories.

CSR1 is oriented towards the social, environmental, and society concerns. CSR2 focuses on business, shareholders and profit. There are common areas of both forms of CSR; however, one will usually override the interests of the other. CSR1 can sometimes be detrimental to the running of a business, imposing new working methods and policies not aimed at maximising profit. CSR2 is seen as favouring the financial interests of business first and showing insincere support to other issues. All CSR policies are currently designed and implemented by the business along guidelines they themselves choose. They can choose to apply any CSR policy aspect, which suites their business. A problem arises, as CSR is not an obligatory policy, therefore, it is open to abuse. Only directors with specific and personal interests in social and environmental issues can hope to achieve true CSR within the framework of their business. Legislation or officially recognised certification through external organisations is perhaps the only viable way of establishing constants in CSR policy where business and consumer interests are equally represented. Some authors, who scrutinise CSR, state that “it needs to be thoroughly considered and treated as any other investment” (Castka, C. Bamper, D. Bamper, & Sharp, 2004). McWilliams and Siegel (2001) earlier highlighted that the core return on investment in CSR was finding the optimum level that balanced the need for maximising “profit for CSR” while satisfying the “demand for CSR” from multiple stakeholders. Castka et al. (2004) offered their resolution of that balance as Figure 2.

THE IMPACT OF NATIONALISATION ON CSR POLICY IN CITADELE BANK

Figure 2. Key CSR equilibrium (Castka et al. 2004, p. 222).

Here a parallel can be drawn—“Profit from CSR” is “CSR2” (oriented towards the social, environmental and society concerns) and “Demand for CSR” is “CSR1” (focuses on business, shareholders, and profit). The figure above is strongly supported, as it is significant to find the balance between CSR1 and CSR2 for CSR policy to work in general. Judging from the Figure 2, the balance should be equal (50 to 50). For further study, it is recommended to move on to the CSR further on implementation in the banking industry, as CSR application is specifically scrutinised in that sphere. Aspects of CSR There are four aspects of CSR, which include economic, legal, ethical, and philanthropic responsibilities (see Figure 3).

Figure 3. Exam four-layer pyramid of CSR (Carroll & Buchholtz, 2009, p. 45).

   

According to the Figure 3, a socially responsible bank should strive to: make a profit; obey the law; be ethical; be a good corporate citizen (Carroll & Buchholtz, 2009, p. 45).

THE IMPACT OF NATIONALISATION ON CSR POLICY IN CITADELE BANK

CSR in Latvia Despite the fact that CSR is not compulsory by Latvian legislation, it is practised by major Latvian banks. The research concentrates on the Latvian commercial bank—Citadele (formerly known as Parex), which underwent the bankruptcy procedure that was followed by nationalisation between 2008 and 2009. By the end of the twentieth century, Latvia was in transition to a market economy and civil society. The application of CSR policy in Latvia dated back to 1974, when successful textile firm Rigas Audums was providing their employees with better wages and working conditions. According to Maessen, Van Seters, & Van Rijckevorsdel (2007), their views were akin to modern concepts of stakeholder primacy in CSR. Thus, it could be concluded that some concepts of CSR policy may have been used even in earlier years. However, at that time there was no such definition as CSR. This also implies that CSR development in Latvia was parallel to other countries. Petersons (2009) stated that in the overall context of CSR, the costs and benefits were directly associated with internal business activities, generally in line with long established values. The side effects, or externalities in the language economists, were largely ignored. Currently banking supervision and the legislative framework is well advanced and it is one of the strictest in Central and Eastern Europe. The principal basis of Latvian credit institutions is determined by the “Law on Credit Institutions” adopted in 1995. In 2003 there were 22 commercial banks united under the Association of Latvian Commercial Banks (Zubkova, Kauzens, Tillers, & Prusis, 2003). According to Brige (2006), Latvia has set up a universal banking sector. All banks are mostly operating as commercial banks, offering a wide range of traditional banking services (including Parex and now Citadele) such as account maintenance and settlement, lending and financial leasing, asset management, etc. Citadele implements its social responsibility campaigns through the movement “You Are. You Can” launched in the spring of 2012 as a support programme for the participation of the Latvian team in the London Paralympic Games. Part of Citadele’s marketing investments, as well as all the donations made by its employees, clients and other supporters are used for the implementation of programmes of the Latvian Paralympic Committee, as well as other social responsibility programmes aimed at inspiration and involvement of disabled people in society, as well as their support through positive and encouraging information (Citadele 2013a). The majority of Citadele’s employees are active members of the movement “You Are. You Can”. Latvia is currently preparing for the introduction of the Euro. Citadele Bank has been preparing for the transition to Euro actively since 2012 in order to ensure that the introduction of the new official currency is simple and convenient for their customers (Citadele, 2013b). The bank offers ordering encashment service and preliminary Euro delivery service of Citadele bank and provides detailed information on introducing the Euro in Latvia, which may be helpful for residents and non-residents. CSR in the Banking Industry Banks, like other businesses, apply CSR policy to their practices. In the banking industry, CSR is known as Community Service Banking, which was introduced by the banks in 1973 with a view to assist the identified target group belonging to the weaker and downtrodden sections of the society both under its Banking and Non-banking activities. The banks were among the first to accept, as part of its corporate philosophy, that human and financial resources at their command should be mobilized in discharging the social role (Narwal, 2007). As it is mentioned before, during 40 years of application, CSR still does not have a unified, standard definition.

THE IMPACT OF NATIONALISATION ON CSR POLICY IN CITADELE BANK

In the present days, banking services are necessary for participating in modern economic life. Even to receive a salary or pension, a person needs a bank account. Nevertheless, banks are businesses that provide services, which can lead to financial exclusion. It refers to inability of individuals, households, socio-economic groups or communities to access necessary financial services in a manner suitable for their needs (Decker, 2004). In Latvia, on the 19 of November, 2009, a respected Latvian business newspaper Bizness & Baltija (Business and the Baltics) printed a three-page article “A Human Outside the Banking System (Человек за бортом банковской системы)” detailing a common practice among Latvian banks of withholding, limiting or cancelling access to their financial services for certain clients without offering the client any explanation. In the article, a bank customer tells how he was left without being able to use his bank account to pay his bills. According to the table on the level of financial exclusion in individual European 25 countries, created in 2003 and published European Microfinance Network website, Latvia has one of the highest levels of financial exclusion. This also proves the above mentioned example from the newspaper, as in EU 10, where there is 34% of financial exclusion among adults, Latvia has the highest rate of financially excluded people. The lowest rate is held by Slovenia. Countries from EU 10 are the most vulnerable to financial exclusion, especially Latvia, Lithuania and Estonia. CSR, when implicated, in its turn can help prevent social exclusion by making bank services more available to all layers of society and geological location, for example, by making the creating and maintenance of a basic bank account free of charge, by placing more ATMs and by making ATMs accessible to people with physical disabilities. In case of financial services, the needs of consumers are “security, access, liquidity, interest and social responsibility” (Reifner, 2007). Therefore, to prevent financial exclusion, the above mentioned needs shall be fulfilled.

CSR in the Latvian Banking Sector The following chapter is devoted to the analysis of the implementation of CSR policy in the Latvian banking sector. CR activities of the banks are analysed according to the information provided on their official websites. Several employees of these banks were interviewed by the author of the research. Gathered information is scrutinised by applying the comparative method of research and is provided in the conclusions section. CSR Policy at Swedbank According to the volume of assets among retail banks, Swedbank is the largest bank in Latvia. It is a full-service bank for both private individuals and companies in the home markets of Sweden and the Baltics (Estonia, Latvia, and Lithuania). In terms of CSR policy, the bank has its own code of ethics. “Key values and principles, on the basis of which the Swedbank Ethics Policy has been developed are: conformity with law, openness and transparency, directness and unambiguity, focus on customer’s interests, cooperation and mutual respect, professionalism, quality, responsibility, integrity, self-control and good financial institution practice” (Swedbank, 2013a). The bank does not have a specific section on their homepage devoted directly to CR; however, Swedbank has its own Code of Conduct “a concise summary of the fundamental principles that govern the operations of the Swedbank Group companies. Essentially, it is our promise to the customers, employees, business associates and the society” (Swedbank, 2013b) and sustainability policy. Swedbank stresses that “Sustainable

THE IMPACT OF NATIONALISATION ON CSR POLICY IN CITADELE BANK

development is achieved when people grow and fulfil their needs in harmony with the rest of the society and the planet. This implies respect for and protection of the environment, human rights, labour rights and business ethics” (Swedbank, 2013c). Swedbank has started various charity and social projects. In its corporate presentation, the bank highlights the desire to be a responsible citizen in society. “We have ambitious corporate guidelines in areas such as ethics, working environment, gender equality and diversity. These help us actively contribute to the sustainable development of our society at both local and international levels” (Swedbank, 2013d). Many services of the bank are available 24 hours a day. Swedbank’s largest projects related to social responsibility are presented below. In the framework of its philanthropic activities, on 11 December 2003, Swedbank opened a charity portal (Retrieved from www.ziedot.lv) (“ziedot” means to “donate”). The portal offers a unique opportunity for companies and private persons to donate funds via the Internet. Ziedot.lv is both a large-scale charity project and an online portal. For the first time in Latvian history, it encompasses charity projects, which, according to certain criteria, are selected by the Board of Experts of Ziedot.lv. These charity projects operate in various spheres—health, education, help for children, youth, elderly, animals, etc., Swedbank ensures a quick, easy and safe donation system. Ziedot.lv also cooperates with a family charity foundation “Boris and Ināra Teterev Foundation”. It was established in 2010 by the benefactors whose aim is to support distinguished and socially important charitable initiatives. “The Teterev family is particularly keen on supporting culture, education, as well as community development organizations in cities and rural areas of the country and also on animal care programs. They help groups of people with low income and families at risk. The foundation operates internationally and supports charity projects abroad” (Teterevfond, 2013a). The foundation particularly cooperates with Ziedot.lv in the charity communal meals project “Kopgalds—siltas maltites atbalsts” (Common table—hot meal support). On 21 November 2007, Swedbank launched “Mission Possible”, a social responsibility initiative in the area of education at the national level in Latvia. The project was implemented with support provided by non-profit organisations, public and private sectors. “The mission of the programme is to strengthen the value of quality education in Latvia by assisting talented university graduates to become inspiring teachers and future leaders. It is planned to roll out the programme at schools in the academic year of 2008/2009 when 15–20 participants of the programme will start their work in schools across Latvia” (Swedbank, 2013e). The project finished in 2013, donating a total amount of 92,664 EUR to the development in “Mission Possible” and investing 33,047 EUR in raising awareness of education issues. Due to Euro implementation in Latvia, Swedbank created a special section on its homepage that provided extensive information on the new currency. The present section covers such topics as “How to prepare for the most convenient switch to the euro”, “FAQ”, “Availability of banking services in the euro changeover night”, and even “Fun facts & comments” (Swedbank, 2013f). On its homepage, Swedbank has various links with useful information for clients—calculators, exchange rates, actual campaigns, analytical information, about Euro implementation in Latvia, etc.. The website is convenient to use and gives extensive information for clients. CSR Policy at Nordea Bank Nordea Bank ranked three among banks operating in Latvia in 2012 according to assets. It provides

THE IMPACT OF NATIONALISATION ON CSR POLICY IN CITADELE BANK

extensive CSR information, both on its website and in annual reporting. Nordea’s audited 51 pages “CSR Report 2012—A question of balance” which demonstrates Nordea’s serious commitment to CSR activities and its localised involvement in Latvia appears among the best in terms of variety and engagement of both the public and its staff. The Latvian branch decided in 2012 to implement the guiding principle of the group: “CSR is a part of Nordea’s DNA”. Christian Clausen, the President and Group CEO of Nordea is also the Chairman of the European Banking Federation, which is working to reshape global financial regulation to ensure that banks have profitability and sustainability to avoid new financial crises and become buffers to protect the public from asset price bubbles. The following part will provide Nordea’s Latvian specific CSR projects in 2012. In recognition of the high unemployment rates in Latvia, one of the main initiatives from Nordea was the establishment (in 2012) of the Nordea Business School which aimed to help Latvian entrepreneurs through 6-month courses. “The aim is to help up-and-coming entrepreneurs in a step-by-step process from idea to meetings with potential investors. The school provides participants with lectures, practical advice as well as individual coaching and mentoring sessions” (Nordea, 2013a). As part of Nordea’s community and ecology CSR strategy, 2012 saw them officially sponsor several popular events in the Riga calendar, including the Nordea Riga Marathon and “Big cleanup” (where citizens are taken to the streets on one day to pick up litter and tidy up their local streets and parks). Nordea also sponsored “Earth Hour” and “Donor Day”. Employees are involved from the very foundation of Nordea’s CSR strategy with 50% of staff actively participating in some form of CSR activity. A Bicycle scheme was introduced in 2012 where the bank provided bicycles for staff use. Thirty percent of staff participated in the scheme, helping to reduce their carbon footprint. Staff also participated in “volunteer days” conducting classes on financial management, which were paid for by the bank. CSR Policy at SEB Bank Recognised by Global Finance as Latvia’s Best Bank and the country’s best Consumer Internet Bank (Global Finance, 2013a), Swedish owned SEB Banka (formerly Latvijas Unibanka, then SEB Latvijas Unibanka) is among the top three sustainable companies in Latvia with over 3,466,728.99 EUR in total assets offering services for corporate customers, institutions, and private individuals. SEB Bank’s Latvian website defines its CSR through the slogan “SEB in society” with a section devoted to “Corporate Sustainability” (also linking to its 34-page annual Corporate Sustainability Report) and another for “Sponsorships and investments in society” where organisations are invited to apply for sponsorship grants towards sports and culture, children, education and financial literacy, entrepreneurship and ecological projects. SEB’s social CSR strategy is to involve itself in, and actively promote, many socially responsible projects such its long-term involvement with SOS Children’s Villages, which helps find and support foster parents of Latvia’s 2000 plus orphans and give the children a chance of a family childhood aided by regular public donations. SEB also grants scholarships each year in association with the University of Latvia Foundation, the Vitols Fund and the Art Academy of Latvia and is a major sponsor of cycling and tennis in the country. The bank also promotes several programmes that allow entrepreneurs to receive financial and advisory support. Although the term CSR is not mentioned on the website, SEB does appear to be committed to a wide range of socially responsible endeavours and give equal prominence to support its stakeholders and the

THE IMPACT OF NATIONALISATION ON CSR POLICY IN CITADELE BANK

business community, encompassing a broad CSR motive to its business. Stating their ambition as: “Our business shall be underpinned by strong ethics and good governance, long term relationships and highly committed people delivering the corporate strategy and managing the social and environmental impact of our business” (SEB, 2013a). The website is used to offer customers access to the information they need within only a couple of button presses. Features, such as a live map showing how many customers are currently queuing at each of its branches are particularly useful to those in a hurry and SEB places its contact information with prominence, displaying direct phone numbers to local branches and the ability to use Skype and email. Unfortunately, SEB’s CSR related pages reside under the “About” tab of the website which is not immediately clear to visitors. On 18th of November, the bank even opened “SEB Eiro Cafe” in cooperation with Baltic Restaurants Latvia, where people can receive useful information about euro introduction. Food prices were already presented in both lats and euro. During working days, clients are able to get consultations about euro implementation. This is a good example of where CSR policy activity is balanced—clients can purchase food and drink along with free information about the important change in their country. At the same time, such activity will also make money and possibly attract more clients to the bank (SEB, 2013b). Clear information regarding the Euro is lacking from the main page, although there is a large countdown timer at the top of the page indicating the forthcoming currency change. There is button under the heading “Accessibility of Services at the End of the Year” that takes the reader to a new section devoted to Latvia’s Euro zone membership. The Euro part of the site features an online currency calculator and detailed information regarding the new currency. It also attempts to answer many of the questions readers may have about the Euro. A section devoted to “services after the introduction of the Euro” is extensive, covering most of SEB’s banking services and the Euro related changes affecting them. Each section also offers advice to customers about “what you need to know” and “what you need to do”. CSR Policy at Baltikums Bank Baltikums Bank is an international private bank that provides a wide range of financial and advisory services, including tailored solutions for high net worth individuals, enterprises, and financial institutions. Established in 2001, the bank has its head office in Riga (Latvia), a subsidiary in Cyprus and Luxembourg, and representative offices in five other key business and financial centres throughout the CIS (Baltikums, 2013a). Baltikums Bank highlights that importance of preserving cultural and human values supports sporting events and other non-profit undertakings by donating funds. The bank does not have a specific section devoted to CSR policy; however, it has “Society” page, which describes Baltikums Bank’s activities in sponsorship and charities. On the website, there are three such engagements listed. In 2010, Baltikums contributed to the re-creation of the Orthodox temple of Our Lady of Kazan. In 2012, Baltikums provided financial assistance to the Imanta foster home and took part in a number of socially important events and charity campaigns (Baltikums for Children project). In the same year, the bank also sponsored the National Tennis Academy of Latvia by purchasing necessary equipment and organising events. Baltikums Bank’s website provides broad information about the bank, its services and activities. Nevertheless, since September 2013 the price list is not available online. To receive information on prices, a person needs to be a client of the bank and use Internet banking, or visit the bank. Details on euro introduction

THE IMPACT OF NATIONALISATION ON CSR POLICY IN CITADELE BANK

are also published. CSR Policy at Baltic International Bank Baltic International Bank was established in 1993 in Latvia. It is the first Latvian bank that offers a one-stop personalised financial service for affluent individuals and their families (BIB, 2013a). The bank stresses its striving to proactively participate in the community’s life and to support economic growth and culture development. BIB has a specific section devoted to social responsibility. The bank participated in a worldwide tree planting campaign established by the United Nations Environment Programme. The staffs were engaged in volunteer greenery planting activities in Riga. The bank gives its employees the opportunity to enrol their children in the summer work programme, where they can gain-real-world and hands-on experience while working for the bank. BIB supported a grand celebratory performance in honour of the 90th Anniversary of the Latvian National Opera House (LNO). In 2009, the bank sponsored a gala concert that was broadcast live on Latvian Television. In 2010, BIB sponsored the legendary Attention-Interest-Desire-Action (AIDA) opera in LNO. The bank implies CSR policy in the economic sphere as well by annually supporting a London-held international business forum dedicated to investment opportunities in Latvia. Baltic International Bank also supports hi-tech product developments by being one of the organisations aiming to support the Technology Promotion and Commercialisation Workshop that has been held in Latvia since 2009. BIB’s website also provides wide and open data to clients and potential customers about the bank, including information on euro introduction and a price list of available banking services. CSR Policy at DNB Bank Part of the largest financial group in Norway, De Nederlandsche Bank (DNB) is one of the top universal banks in Latvia in terms of assets, deposits, loans, and loan portfolio volumes and provides its customers, both legal entities and private individuals, with competitive financial solutions as well as high quality services within its extensive branch network. DNB itself was founded in Norway in 1822 and is the country’s oldest private bank. Although the main DNB website has a detailed section on CSR titled “Environment and Society”, the very basic DNB Latvian website is devoid of any specific CSR related content and concentrates almost entirely on the bank’s services. It is also difficult to find specific DNB supported projects within Latvia, although the bank did donate a car to the Ronald McDonald House Charities in Latvia in 2013. Euro transition does have its own page “Transition to euro”, a currency calculator on the main page and a section giving answers to common questions about the Euro transition. It is in this Euro section that it is found one solitary link to two DNB supported charities Jugla’s Animal Protection Project “Labas Majas” and Mobile Healthcare Centre (MVAC) Children’s Healthcare Project (DNB, 2013a). The main DNB website (DNB, 2013b) details its CSR policies towards stakeholders with the main focus on environmental issues such as “green banking” and its commitment to ethical practices, transparency and good working practices for its staff. DNB bases its CSR policy on national and international laws, regulations, accepted principles and guidelines, including those laid down in the Global Compact, Organization for Economic Cooperation and Development (OECD) guidelines for multi-national companies and the United

THE IMPACT OF NATIONALISATION ON CSR POLICY IN CITADELE BANK

Nations Environment Programme Finance Initiative (UNEP FI)’s principles and require its vendors adhere to the same principles and guidelines (DNB, 2013c). DNB financial support is predominantly to sports (62%), Culture (24%) and Humanitarian Work (12%). DNB also gives an annual “Innovation Award” although this is only in Norway. There are no similar programs for Latvia. DNB does report Carbon Accounting annually, including a specific report for DNB Latvia; however, this is not available through the Latvia website. CSR Policy at Rietumu Bank Rietumu Bank is one of the largest banks in the Baltics States, specialised in corporate banking and affluent individuals. The Bank is well represented in the global market, providing services to customers all over Europe, the Baltic States, Russia, Ukraine, Belarus, and other regions (Rietumu, 2013a). The bank does not have a section on their websites devoted to CSR policy; however, it has a “Charity Fund” page. “Rietumu Charity Fund was founded in April 2007 with the primary objective to support various projects in social, educational and cultural areas” (Rietumu, 2013b). Charity Fund’s website (Retrieved from www.rblf.lv) provides information about the allocation of donated funds and hundreds of CSR activities of Rietumu Bank during the years 2007-2010. Rietumu bank joined the American Chamber of Commerce in Latvia (AmCham Latvia) more than fifteen years ago and is one of the oldest members of the Chamber. In its interview with AmCham Latvia, the bank states that it “actively participated in various sponsorship programs, supporting USA Independence Day and anniversary celebrations, luncheons with ambassadors, prominent politicians and economists, as well as other respected guest speakers” (AmCham, 2013a). The bank has also signed the AmCham statement of Good Corporate Citizenship. Rietumu bank stresses that the statement “fully coincides with the Bank’s internal business ethics and CSR policy in terms of transparency, Human Resource (HR), philanthropy and environmental protection” (AmCham, 2013a). Information about euro implementation in Latvia is also located in a specific section of the website. Rietumu bank’s homepage itself is friendly to customers and potential clients, presenting broad and open information on customer services, information about the bank, currency exchange rates, price-list, documents and forms. The website is available in six languages. CSR Policy at ABLV Bank Presently, ABLV Bank is the largest independent private bank in Latvia, having representative offices of the Group in many CIS countries (ABLV, 2013a). It was established in 1993 under “Aizkraukles Banka” name. The bank is a member of the Association of Latvian Commercial Banks, which protects the interests of Latvian banks both in domestic and foreign markets, certifies banking specialists, and arranges professional seminars. Also, ABLV Bank takes active part in operations of other professional institutions, which aim to develop Latvia as regional financial centre (ABLV, 2013a). ABLV Bank has a section on their websites devoted to social responsibility. It contains information about the bank’s Charitable Foundation (ABLV, 2013b), which aims at encouraging businessmen to demonstrate their social responsibility. It is focused on supporting contemporary art, urban development, education, and civil society. In 2005, the bank also invested 1,422,871 euro in acquiring art works for the future Latvian Contemporary Art Museum. ABLV’s Charitable Foundation has various CSR projects. The foundation received over 70,000 euros from the above mentioned “Borisa un Ināras Teterevu fonds” family charity foundation for the charity project “Palidzesim 21.11” (ABLV, 2013c). The project was established in order to

THE IMPACT OF NATIONALISATION ON CSR POLICY IN CITADELE BANK

help those who suffered in Zolitude tragedy when a supermarket roof collapsed, taking away lives of 54 people. The main goal of “Palidzesim 21.11” (Let’s help 21.11) is to help those children who lost their parents in the tragedy. The bank’s homepage provides broad information about its services, fees, charges, documents, and currency rates. ABLV also has information about euro implementation in Latvia; however, there are no specific sections on their website, devoted to the event. CSR Policy at Danske Bank Founded in 1871, Danske Bank is Denmark’s largest bank and a major retail bank in northern Europe. In Latvia, Danske is a relatively small operation when compared to banks such as Swedbank; however, in May 2013, it received the bronze category evaluation in the Sustainability Index for the second year in succession, which proves that the implemented (CSR) practice bears responsibility towards the environment, society, employees, and clients. The Latvian website leads on corporate banking, but also offers banking to private persons. Although not as detailed as the main Danske website, the Latvian site does have a dedicated section titled “CSR” under the “About us” section. Danske’s CSR policies are generalised in three categories (see Figure 4). Danske’s CSR policies

Socially responsible investments (SRI)

Environmental initiatives

Education support

Figure 4. Danske’s CSR policies.

“Education support” has, since 2002, seen Danske Bank transfer over EUR 400.000 through a long-term agreement with the foundation “Vitols fund” on granting scholarships to gifted and hard-working, but needy young people who wish to study in Latvia’s Universities. Danske also implemented teleconferencing to cut-down on carbon emissions, saving over 1600 tons in 2011 alone. Socially Responsible Investments is a policy of the bank to ensure that customers’ investments are not placed in companies that violate international standards and Danske, through consulting firm Ethix Social Research Institute (SRI) Advisors, operates regular screening of investments and publishes an exclusion list (Danskebank 2013a) with the reasons for excluding investment. “The screening includes companies in the Morgan Stanley Capital International (MSCI) World and the MSCI Emerging Markets indices and the largest companies listed on the Nordic stock exchanges. The screening process is based on internationally recognised guidelines of the United Nation (UN) Human Rights Norms for Business (2003), including UN Global Compact (1999) and OECD Guidelines for Multinational Enterprises (1976). In addition, the screening includes a number of international conventions reflecting the development in the SRI field since 2003” (Danskebank, 2013b). Information about the Euro transition is concise but includes the most important aspects of the changeover and specific information for its customers, a prominent online currency convertor is available on the Euro page and a large banner advert “Get ready for the Euro” is on the front page making finding information a simple

THE IMPACT OF NATIONALISATION ON CSR POLICY IN CITADELE BANK one or two click process.

CSR Policy at Norvik Bank The bank was established in 1992 and is one of the oldest commercial banks in Latvia. It is owned by Latvian entrepreneurs. “Norvik Bank provides its banking services to a wide range of clients—from private individuals to international industrial companies” (Norvik Bank, 2013a). The bank stresses that its core value is “satisfied customers and high quality services”. The bank has 80 branches in Latvia due to developing its accessibility to customers. On their homepage, Norvik Bank has a specific section devoted to CSR, although the information is provided only in Latvian and Russian languages. The bank employs CSR policy in its performance and takes part in cultural, sports, and social life in Latvia. Norvik Bank made donations in 2007 to the children’s hospital, in 2009 to a treatment fund and in 2010 to the Latvian charity fund “Donor”. Throughout the years 2007-2012, the bank continuously sponsored various sports and cultural events in Latvia. During the above mentioned years, Norvik Bank also supported education events and activities. The website of the bank provides open and broad information about its services and activities, including various documents and forms, manuals, transaction terms, tariffs, etc.. The bank has a special section devoted to euro implementation in Latvia. Summary From Table 1, it can be seen that the most popular CSR activities of banks in Latvia are: charity projects and donation funds, supporting educational programmes and events, providing financial assistance for foster homes and children's hospitals. SRI activity is less popular among with the recreating of architectural arts and code of conduct. More detailed information is presented in the conclusions section. Table 1 CSR Activities of Banks in Latvia CSR activities of banks in Nordea SEB Baltikums BIB DNB Swedbank Latvia Bank Charity projects/Donating √ √ √ funds Code of conduct √ √ Contemporary art projects √ Educational programmes’ √ √ support Environmental projects √ √ √ Foster Homes/Children √ √ √ hospitals, financial assistance Preservation of cultural and √ √ human values Recreation of architectural √ projects Socially responsible investments (SRI) Sporting events organisation √ Sporting events support √ √ √ Sustainability policy √ √ √ Youth support, labour √ programmes

Rietumu Danske Norvik ABLV Citadele Bank Bank Bank √

√

√ √

√

√ √

√

√ √

√

√ √ √ √ √ √ √

√

THE IMPACT OF NATIONALISATION ON CSR POLICY IN CITADELE BANK

Survey on Citadele Bank Customers View About the Bank’s CSR Activities A survey was commissioned to question Citadele Bank account holders about their views and experiences regarding the Bank’s CSR activities. The questions were developed by the author of the paper in order to ascertain sample data for the purpose of proving the hypotheses of the present research. The survey itself was conducted on behalf of the author, by an international research agency (GFK), which is one of the world’s largest research companies, with around 13,000 employees. The survey was carried out in August and September of the year 2013, sampling 316 Citadele Bank clients, who were reachable via the Internet. The sample size is sufficient to analyse the results of this target group with 6.5% accuracy at a 95% probability, which is optimal for accurate measurement to use for purposes of a scientific research. It is essential that the information gathered in the survey represents the viewpoints of economically active persons—Internet users, rather than views of all Citadele’s customers about the impact of CSR of Citadele on the image of the nationalised bank. Clearly defining the target group and the accuracy of the results obtained, the survey is representative for the above-mentioned target group.

Conclusions Customer awareness of Citadele’s CSR activities has increased, although not significantly. It may be a general lack of public understanding of the actual term CSR that is the cause of this uncertainty among customers as respondents do indicate, throughout the survey, their awareness of activities and policies that are within the scope of CSR even if they are unaware of the terminology. Trust in the bank is a more difficult matter to assess. There does appear to be a level of cynicism directed towards CSR activities, as is evident by responses to question Q10, however, customers are, in general, more satisfied with how Citadele operates following nationalisation. Concerns for the safety of their money, although still evident, are lessened due to the bank now being partly under state control and somewhat guaranteed. The above mentioned fact proves our first hypothesis. It will come as little surprise that Citadele customers are acutely aware of failings in the banking industry as being generally responsible for the hardships they have endured and followed the financial crisis as Latvia has, more than most EU countries, experienced very harsh austerity measures. When asked about key issues that they see as important for the bank to focus on, there is a strong indication that legal and ethical issues outweigh trivial issues such as waiting times, Automatic Teller Machine (ATM) locations and queuing. It can be surmised that customers are now much more aware of, and take an interest in, how their banks are run and how they perform; and more importantly, that their banks are acting, first and foremost, in the best interests of their customers. Our second hypothesis is proven. With banks fully aware that their operations are now, more than ever, under closer observation from customers, tighter legal regulation and, in the case of Citadele, under state control, it is to be expected that, for a bank to rebuild its reputation, it must go further, be more open and be sincerely supportive of the society in which it operates. It is not surprising that customers may view CSR initiatives with a cynical eye and that many may be dismissive of such activities, but it is imperative that banks continue to further involve themselves in CSR initiatives and be seen to be doing so. Citadele bank is actively promoting itself through CSR involvement in good causes, such as support for the Paralympics movement and this should not be seen as grandstanding or conversely, altruistic, but as a good indication of the banks’ willingness to engage in socially responsible

THE IMPACT OF NATIONALISATION ON CSR POLICY IN CITADELE BANK

endeavours for the betterment of the community. It is only through continued, open and sincere involvement in the community through support for good causes, the improvement of its customer services and by demonstrating that the bank has learned important lessons from the hugely damaging financial crisis that it will have any chance of changing the perception of a weary public, whose trust in them was severely damaged. Our third hypothesis is proven, however it will take many more initiatives and time before the true motives behind Citadele’s CSR initiatives will be seen. After scrutinising the information provided on the homepages of the above mentioned banks, it can be concluded that 10 banks out of 10 apply CSR policy in their practice. The bigger the bank, the larger are its social responsibility activities. Swedbank, Nordea bank, SEB bank, and Rietumu bank, which are in the top 5 largest banks in Latvia according to their assets in the year 2012 (data Association of Latvian Commercial Banks 2013a), perform more CSR activities than other banks. However, DNB bank, which is the 5th largest bank, provides minimum information of its CSR activities in Latvia. Nevertheless, the bank concentrates more on implementing social responsibility policy in Norway, where the main office of DNB is situated. Only two banks out of 10 have a section on their websites that are devoted directly to CSR. These banks are Norvik bank (based in Latvia) and Danske bank (based in Denmark). All other banks have sections devoted to CSR activities; however, they are named as “Society”, “Charity”, etc.. This may be the reason why the majority of Latvian citizens are not familiar with the term “CSR”. The public is aware of charity funds, donations and sponsorship by the banks, however, according to our survey, they do not necessarily associate these socially responsible activities with the term “CSR”. It can be assumed that the reason banks do not name a section of their website specifically as CSR is likely because the policy is not a legal obligation. The majority of analysed banks have a special section devoted to euro introduction in Latvia. Regardless of a specific section, 10 out of 10 banks provide information about euro implementation. As it is seen from the process of the conducted research, the majority of commercial Latvian banks perform CSR activities by establishing their own charity funds. The goal of these funds is acceptance of requests for specific help, consideration of the request, realisation of the project, and the following control over the project. Usually the fund is run by three to five employees. For one of the workers, the fund management is full-time job, others work part-time. The largest banks, like Rietumu Bank perform several dozen charitable projects a year, with a detailed description available at a special homepage made for the fund. However, the majority of banks in Latvia with equity of local origins do not have a page, devoted directly to CSR. Since the 1970s, it has been typical of banks in Western Europe with foreign equities to apply “the code of conduct and sustainability policy” models. One such example is Nordea Bank Report on CSR of 2012, which reflects the model of CSR policy application in Latvia (see Table 2). The main difference from the classic CSR pyramid proposed by Caroll in 1991 is that its basis is economic and legal responsibility, whereas banks in Latvia mainly pay attention to the implementation of the top of the pyramid—ethical and philanthropic aspects. What is typical of the projects themselves is that they are orientated at recreating humanitarian initiatives, promotion of sports activities, child care, attention to issues of art, and architecture, i.e. all initiatives being developed are beneficial to society.

THE IMPACT OF NATIONALISATION ON CSR POLICY IN CITADELE BANK

Table 2 Current CSR Activities at Nordea Bank in Latvia Nature

To care and cherish the environment, thinking about Resource efficiency tomorrow

Business environment

To implement responsible Leadership in associations business activity, becoming a Partnership with state and municipal institutions flashing light for others

Society

Enterprise CSR dimensions

Values

To give, improve, develop, Charity and sponsorship becoming an integral point of Education of society public support Social work Clients To run business from the heart— Services, products sustainably and responsibly Employees Excellent clients’ People are Teamwork experience important

most

Recommendations Although stricter regulation and state oversight will mean Citadele bank is somewhat forced to adopt a more socially responsible program, it is encouraging that its initial CSR endeavours have made a positive impact on certain good causes in Latvia. It is also apparent from our survey that improvements have been made in key areas such as customer service and efficiency, but it is only through continued and closer interaction with its customer base and society that it will prove to be a different bank than the one it replaced. Our conducted survey does indicate the need for Citadele to increase awareness of its CSR activities among its own customers. It is apparent too that more prominent online information will be a beneficial method of informing customers about CSR as the majority are regular users of the banks’ internet services. Philanthropic and ecological issues, although commendable, are currently seen more much less important to our surveyed customers than improvements to traditional banking services that would directly affect customer experience; however, the age group of respondents should be taken into account, as issues such as ecology are typically more popular among young people. It may be the case that, so soon after nationalisation and with people still feeling the effects of the economic crisis, it is more important for customers that the bank, first and foremost, proves itself as a safe place for their money, a reliable business that is open and honest, ethical and law abiding, operating within the parameters of a public bank and is continuing to improve services for its customers before pursuing greater CSR initiatives, and that any large-scale CSR initiatives are undertaken in consultation with customers. Openness and providing more information to customers are a key to improve the banks reputation, and in turn, building greater trust in its operation and subsequent future CSR activities. After scrutinising theoretical literature, in addition it can be assumed that the implementation of CSR on an official scale can reduce shadow economy, as working in an institution that uses CSR activities would be more attractive to the potential employees. Moreover, obligatory CSR activities could increase employee’s work motivation, as they would be working for an organisation, which follows ethical, philanthropic, legal and economic aspects, i.e., benefiting the employees themselves.

THE IMPACT OF NATIONALISATION ON CSR POLICY IN CITADELE BANK

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THE IMPACT OF NATIONALISATION ON CSR POLICY IN CITADELE BANK

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