The european journal 2017 vol 14 no 1 by Singidunum University

Vol. 14 No. 1

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Vol. 14 No. 1 Publisher: Singidunum University Edi t or i a l B oa r d

Professor Milovan Stanišić, Singidunum University mstanisic@singidunum.ac.rs Emeritus Slobodan Unković, Singidunum University sunkovic@singidunum.ac.rs Professor Francesco Frangialli, UNWTO frangialli@gmail.com Professor Gunther Friedl, Technische Universität München gunther.friedl@wi.tu-muenchen.de Professor Karl Ennsfellner, IMC University of Applied Sciences, Krems karl.ennsfellner@fh-krems.ac.at Professor Gyorgy Komaromi, International Business School, Budapest gyorgy@komaromi.net Professor Vasile Dinu, University of Economic Studies, Bucharest dinu_cbz@yahoo.com Professor Ada Mirela Tomescu, University of Oradea, Oradea ada.mirela.tomescu@gmail.com Professor Radojko Lukić, University of Belgrade rlukic@ekof.bg.ac.rs Professor Alexandar Angelus, Lincoln University angelus@lincolnuca.edu Professor Nemanja Stanišić, Singidunum University nstanisic@singidunum.ac.rs Professor Verka Jovanović, Singidunum University vjovanovic@singidunum.ac.rs Professor Milan Milosavljević, Singidunum University mmilosavljevic@singidunum.ac.rs Professor Olivera Nikolić, Singidunum University onikolic@singidunum.ac.rs Professor Goranka Knežević, Singidunum University gknezevic@singidunum.ac.rs Professor Mladen Veinović, Singidunum University mveinovic@singidunum.a.crs Professor Jovan Popesku, Singidunum University jpopesku@singidunum.ac.rs Professor Zoran Jeremić, Singidunum University zjeremic@singidunum.ac.rs Associate Professor Christine Juen, Austrian Agency for International, Mobility and Cooperation in Education, Science and Research, Wien christine.juen@oead.at Associate Professor Anders Steene, Södertörn University, Stockholm/Hudinge anders.steene@sh.se Associate Professor Ing. Miriam Jankalová, University of Žilina miriam.jankalova@fpedas.uniza.sk Associate Professor Bálint Molnár, Corvinus University of Budapest molnarba@inf.elte.hu Associate Professor Vesna Spasić, Singidunum University vspasic@singiduunm.ac.rs Associate Professor Michael Bukohwo Esiefarienrhe, University of Agriculture, Dept. of Maths/Statistics, Markurdi esiefabukohwo@gmail.com Associate Professor Goh Yen Nee, Graduate School of Business, Universiti Sains Malaysia yngoh@usm.my Research Associate Professor Aleksandar Lebl, Research and Development Institute for Telecommunications and Electronics, Belgrade lebl@iritel.com Assistant Professor Patrick Ulrich, University of Bamberg patrick.ulrich@uni-bamberg.de Assistant Professor Konstadinos Kutsikos, University of the Aegean, Chios kutsikos@aegean.gr Assistant Professor Theodoros Stavrinoudis, University of the Aegean, Chios tsta@aegean.gr Assistant Professor Marcin Staniewski, University of Finance and Management, Warsaw staniewski@vizja.pl Assistant Professor Gresi Sanje, İstanbul Bilgi Üniversitesi, Istanbul gresi.sanje@bilgi.edu.tr Assistant Professor Michał Biernacki, Wrocław University of Economics, Poland michal.biernacki@ue.wroc.pl Assistant Professor Piotr Luty, Wrocław University of Economics, Poland piotr.luty@ue.wroc.pl E d it o r ia l O f f ice

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CONTENTS

1 - 12

13 - 23

24 - 31 32 - 47 48 - 62 63 - 69

Serbia’s competitive position in the regional tourism destination market Milivoj Teodorović, Jovan Popesku

Analysis of the determinants of corporate cash holdings: Examples from companies in Serbia Željko Račić, Nemanja Stanišić

International regulatory changes in financial systems as a factor of stability Dimitar Anevski, Elena Temelkovska-Anevska

Insurance industry in selected transition countries Aleksandra Stojaković

The analysis of Serbian customers satisfaction with e-services quality dimensions of lodging e-intermediaries Nikola Mihajlović

Instructions for authors III

EJAE 2017, 14(1): 1-12 ISSN 2406-2588 UDK: 338.48(497.11) 338.487:339.13 DOI: 10.5937/ejae14-13088 Original paper/Originalni naučni rad

SERBIA’S COMPETITIVE POSITION IN THE REGIONAL TOURISM DESTINATION MARKET Milivoj Teodorović 1, Jovan Popesku 2 Singidunum University, 32 Danijelova Street, Belgrade, Serbia 1

Singidunum University, 32 Danijelova Street, Belgrade, Serbia

Abstract: The paper analyzes a competitive position of Serbia as a destination in the regional tourism market. The regional market includes Serbia’s neighboring countries enhanced by Austria, Slovenia and Greece to provide a better view of the competitive landscape of the Southeast European region, herein termed the “Extended Balkans”. The gap analysis was applied to the selected number of global secondary indices to highlight the differential effects that impact Serbia’s position in different domains and categories, which in turn, has a profound effect on Serbia’s ability to attract, delight and retain visitors. The emphasis of this theoretical paper is placed on the concept and methodology rather than on the selection of indices. The paper caters to both practitioners and academics by contributing to the literature on destination competitiveness through the lens of the positioning theory.

INTRODUCTION In today’s tourism destination marketplace, countries are increasingly striving to attract more visitors, fulfill their expectations and prompt them to talk about their impressions and, ultimately, repeat their positive experience. Therefore, countries are looking for ways, tools, practices, and marketing strategies to track and guide their activities in order to achieve the desired performance levels. Tourism is the world’s third * E-mail: milivoj.teodorovic.14@singimail.rs

Key words: gap analysis, destination positioning, destination competitiveness, importance-performance map.

largest industry, after fuels and chemicals, accounting for 10% of the world’s GDP, 7% of the world’s total exports, employing one in eleven people worldwide and growing at an annual rate of 4-5% (UNWTO, 2016). Despite the fact that tourism is susceptible to the world’s crisis scenarios, it is an industry that bounces back quickly.At the global scale, tourism is an opportunity and a source of wealth for the humanity in the years to come. However, the complex and multifaceted nature of the tourism industry, due to large number 1

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Teodorović M., Popesku J.  Serbia’s competitive position in the regional tourism destination market

of stakeholders and diversity of challenges and experiences, makes the industry both promising and a risky venture for participants on either the demand or the supply side. Many countries consider tourism to be almost the entire source of their economic output (Maldives, Seychelles, etc.). It is a significant income generator in developed countries, and a challenge for developing countries (Montenegro, Croatia, Slovenia, Hungary, etc.). Moreover, for most developing countries, it still remains an elusive goal, an unexplored venture and an opportunity on hold. Europe continues to lead the tourism market with 620 million arrivals in 2016, followed by Asia & the Pacific with 303, the Americas with 201, Africa with 58 and the Middle East with 54 million arrivals. In 2016, Northern Europe, Central and Eastern Europe, and Southern Mediterranean showed an increase in arrivals by 6%, 4% and 1% respectively (UNWTO, 2017). Serbia inevitably finds itself in the middle of the tourism market that is substantially growing, but the question remains as to whether it is maximizing its opportunities in comparison to the region and, consequently, global trends. The paper elaborates on how Serbia measures up against other countries in the region, and the region itself, and what strategic options it has at its disposal. The problem with many countries is the lack of index measurement system in place that will track a country’s position against the competition (Dupeyras & MacCallum, 2013). The Travel and Tourism Competitiveness Index (TTIC) places Serbia at 95th position out of 141 countries. The same report ranks Serbia 35th in Europe, only ahead of Albania and Moldova. The TTIC index, although an useful and good starting point, presents only a small part of the big picture, since it uses the same set and type of dimensions and indicators for each country. In this paper, we argue that each country should adopt its optimal and unique set of indices and indicators, as a measurement set, one that will address tangible and intangible specifics of a country, and use them 2

for positioning of the country as a destination. The argument supports the notion that every country is comprised of a unique set of features and attributes that constitute its identity. In addition, those attributes constitute an authentic perception that creates an image offered to visitors. It is the reputation or image of a country that visitors take with them back home, as a perception of the experience they obtained while consuming the country’s resources. Consequently, people talk about their experiences and consider them when planning their next trip. Therefore, the problem appears to be in the selection and interpretation of measuring instruments that will more closely match the specifics and intrinsic attributes of the region. Consequently, in addition to the TTCI indicator, we propose several additional global empirical indicators to take part in measuring, evaluating and tracking of Serbia’s performance as a tourism destination. The proposed set of indicators is by no means exhaustive, but rather a good starting point, which will be fine-tuned and improved over time. The emphasis is actually on the gap analysis for tracking and interpreting the difference between optimal points in order to better formulate point-of-parity and point-of-difference evaluations and strategies.

LITERATURE REVIEW The effective positioning of a country as a destination is more critical today having in mind that tourism markets are becoming increasingly competitive. Popesku (2011) argues that the competition among tourism destinations reflects the competitive nature of all other human activities, thus suggesting that the competitive capability of a tourism destination points to the levels of the socio-economic development and the quality of life in a tourism destination. Similarly, a more comprehensive argument can be found in the sustainable nature of destination

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Teodorović M., Popesku J.  Serbia’s competitive position in the regional tourism destination market

competitiveness manifested in the social, economic and human aspects (Popesku, 2011). The reason for being competitive is not only the fact that tourism markets are becoming substitutable as they are mushrooming at the high rate, and offering new locations and experiences (Pike, 2005). Some estimates suggest that over 70% of the tourists visit up to 10 countries, mostly those within short or mediumhaul distances. Only 30% are left as a potential segment willing to explore more countries and travel farther away (Morgan et al., 2002). However, there has been a lack of consensus when it comes to defining the concept behind the destination brand as an ultimate positioning construct by both practitioners and scholars (Park et al., 2006). From both supply and demand side, the destination brand is considered a (1) set of brand elements, (2) set of associations of expected experiences as a result of visitors’ consumption of destinations’ assets, (3) bridge between cognitive, affective and conative elements between the brand and visitors, and (4) means to reduce risk and the search cost (Blain et al., 2005).

performance and the position intended by the brand identity (Morgan et al., 2002). Furthermore, the importance of the gap analysis is to facilitate (1) increase in investments by DMOs, (2) increase in competition, (3) adjustment of positioning of the brand image and (4) increase in accountability by DMOs to stakeholders. In general, many marketing research initiatives have pointed to the lack of instruments to measure marketing performance effectiveness of the destination objectives (Pike, 2009). In 2004, the journal Place Branding and Public Diplomacy was launched by Anholt (2004) to address the vacuum between academic, research, scholar and public communities related to place branding as opposed to tourism destination branding. The place branding is a wider concept that besides tourism includes exports, trade, human development, public policy, cultural, historical and sport dimensions, hence all the elements of a nation.

Therefore, destination branding and positioning brings benefits to both sides of the spectrum, leading ultimately to higher arrivals and receipts and more importantly to visitors’ loyalty (Aaker 1991, 1996). Besides increasing profits to local businesses stakeholders and tourism routers, destination marketing organizations (DMOs) can enhance loyalty and ultimately compete with other destinations on the basis of difference and parity (Kotler & Keller, 2012). On the other hand, travelers use brand identity to lower search cost, match their perceived notions with expected experiences, reduce risk and enhance the overall value of the service via co-creation.

Pike (2009), in his review of 74 publications, has pointed to nine different research gaps related to the brand destination. Among those mentioned, he pointed that the gaps in literature exist for measuring destination brand performance over time suggesting that Aaker’s (1991, 1996) and Keller’s (1993, 2002) concept of customer-based brand equity (CBBE), which Konecnik & Gartner (2007) used to measure brand performance, is gaining attention. On the other hand, Aaker (1996) points that the objective should be for visitors to remember the destination for the right reasons. Furthermore, he discusses if the destination comes to mind when thinking about travelling, since travelers tend to narrow down the number of choices to four. Keller (2013) suggests that destinations to be considered must project strong, favorable and unique associations.

The area that has recently gained a lot of interest among academics and scholars is tracking destination brand positioning performance over time. This is an activity that tracks gaps between the actual destination brand

Many scholars and academics agree that the most empirical and theoretical research effort was geared towards brand equity of products (Konecnik & Gartner, 2007), while many agree that the service side of the destination 3

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Teodorović M., Popesku J.  Serbia’s competitive position in the regional tourism destination market

markets was left in the vacuum by the research community (Boo et al. 2009). Many scholars give advantage to the destination brand image, whereas less work is done on the destination’s brand value. Recent literature review efforts exhibit pressure from different communities to increase genuineness and meaningful quality by borrowing terminology, such as “Destination Brand Equity” from already established customer and corporate branding theory (Kladou et al., 2015). Since tourists value destinations based on how they are perceived by visitors, a customer-based brand equity concept emerged as a frontrunner, as the underlining concept for the model of measuring and tracking the destination value. Therefore, the image, rather than any other brand equity dimension, attracted the greatest attention of the research community (Gartner & Ruzzier, 2011). Similarly, Lee et al. (2015) argue that for creating strategies, programs and plans, destination image enunciate convenient measuring dimension. According to Schroter & Schwekendiek (2015), national image is a resource that can be explored from the point of democracy, social stability, security, cultural attractiveness, power, economic development, protection of law and trade. Also, Ritchie and Crouch (2010) argue that cost-to-value ratio augmented by attractiveness and competitive position are responsible for creating positive, favorable and unique feelings in the consumers’ minds about the consumed products and services or those expected to be consumed. They further argue that the cost is a vital indicator for destinations to create an expectations effect. Similarly, Mihailovich (2006) suggests that destination brands must exhibit strong efforts in gaining lasting positive relationship and trust with visitors. Globalization is a phenomenon that puts the country or nation’s reputation into the front row of the global tourism destination arena (Buhmann & Ingenhoff, 2013; Go & Govers, 2011). Globalization is far from being fair, but has a significant impact on how countries com4

municate, trade, influence opinions and attitudes about them (Vardar, 2013; Ashworth & Kavaratzis, 2010; Buhmann & Ingenhoff, 2013). Therefore, a very common argument among scholars is how to use country’s image as an instrument to facilitate a country’s development. Many academics agree that nations should adopt country brand positioning strategy (Brand Finance, 2015; Anholt, 2004). Furthermore, a county’s positioning strategy must match government interests, political strategies and the capability of organizations responsible for a country’s positioning (Marruti & Tench, 2015). Therefore, governments are increasingly interested in making their country brands more sophisticated in value and attractiveness. The governments are looking into fund development, promotions, management, performance levels to gain higher ground advantage over the competition when it comes to negotiations, political debates and discussions (Anholt, 2004). Moilanen and Rainisto (2009) argue that countries can benefit from the marketing positioning theory when it comes to promoting a country’s brand in the destination markets. However, despite the large number of country destination models, a number of scholars and practitioners agree that there is still no comprehensive model for positioning a country as a destination brand (Marruti & Tench, 2015). The number of models and related literature is constantly increasing, but one-model-fits-all is still a long way ahead. Buhmann and Ingenhoff (2013) argue that in order to develop a model that will comprehensively capture all aspects of the country’s positioning, it is necessary to include constructs such as aesthetic, scenic and attractiveness aspect. In addition, there are many researchers who believe that country’s brand positioning is a multifaceted and multilevel concept. There are numerous models for global positioning of a country based on its perceived image. Anholt’s GfK Roper National Brand Index, Future Brands’ Country Brand Index, CBSI’s

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Teodorović M., Popesku J.  Serbia’s competitive position in the regional tourism destination market

Country Brand Strength Index, Brand Finance’s National Brand Strength Index are some of the most interesting instruments supported by other set of indices such as GDP, Human Development Index, Travel and Tourism Competitiveness Index (TTCI) by the World Economic Forum (WEF) and variety of UN and World Bank statistics. According to Fabiutti & Tench (2015), the dimension analysis of indices revealed that tourism is identified as a major dimension followed by immigration, governance, investments, exports, culture and heritage, economy, trade and people. At the same time, science, technology, sports, quality of life, value system were less associated with the people’s perception of a country brand. Many scholars agree that perceptions and attitudes, though left out from the evaluation of the models, are an essential part of every country’s brand model (Fetscherin, 2010; Dupeyras & MacCallum, 2013). According to Dupeyras & MacCallum (2013), a mix of future, current and past oriented indicators should be considered to ensure more accurate measurement of the tourism destination competitiveness. This is also in line with the OECD Tourism Committee position. Difficulties in selecting indicators, combined with the view on decision making process related to the country’s brand positioning in the future, are cited as the main reasons for selecting a diverse set of indicators, leading the OECD to suggest the use of Travel & Tourism Competitiveness Index and Nation Brand Index (Dupeyras & MacCallum, 2013). Only a few countries have put in place country-to-country competitiveness measures to monitor their position in the global tourism markets (Marruti & Tench, 2015). Even though most countries use Travel & Tourism Competitiveness Index and Country Brand Index (Future Brand, 2015), the ideal number of indicators may vary from country to country (Marruti & Tench, 2015). Practitioners and schars have produced a significant

body of literature on the countries’ brand models from both business and research perspective. The business aspect is concerned with valuations of the performance, receipts, arrivals, rankings, improvements, image levels and public impression of the country (Buhmann & Ingenhoff, 2013; Marruti & Tench, 2015).According to Kotler and Keller (2012), a holistic approach must be used when determining which variables and corresponding indicators to use to correspond to internal, integrated, relational and performance dimensions of a country’s positioning model.

EXTENDED BALKANS REGION The region selected for the analysis is based on the neighborhood criteria, so called “Extended Balkans”, and comprises the countries that are immediate neighbors of Serbia and former Yugoslav republics, which are geographically located in the Balkan region. Austria is added to the list because of its proximity to the region, as well as for its leading role as a tourism destination, as shown in Fig. 1.

Figure 1. Extended Balkan Region by Receipts (Source: www.pinterest.com). 5

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Teodorović M., Popesku J.  Serbia’s competitive position in the regional tourism destination market

The region is a $1.1 trillion economy with a population of 82 million, which in 2015 attracted 89 million visitors and cashed in $67

billions in receipts. Serbia’s share was 1.1 million in foreign visitors and $1.3 billion in receipts or 1.16 % and 1.69% of the regional

No.

Country

Population (Mil.) NFA 2014

GDP ($Bil.) IMF 2016

Arrivals (000) NFA 2014

Receipts ($Mil.) NFA 2014

Albania

3.15

$12

3.000

1.705

Austria

8.43

$385

25.291

20.559

B&H*

3.84

$16

536

707

Bulgaria

7.33

$49

7.311

4.134

Croatia

4.32

$50

11.623

9.866

Greece

11.12

$195

22.033

17.793

Hungary

10.00

$118

12.139

5.844

Macedonia

2.1

$10

425

295

Montenegro

0.62

1.350

906

Romania

21.81

$182

1.912

1.813

Serbia**

7.20

$37

1.029

1.139

Slovenia

2.06

$44

2.411

2.719

81.98

$1.102

89.060

67.520

Total

*B&H Bosnia and Herzegovina; ** Serbia without Kosovo and Metohia;

Table 2. Extended Balkan Region.

figures, respectively. In 2014, the leader in the region was Austria with 25 million arrivals and $20 billion in receipts, followed by Greece and Croatia, which collected $18 billion and $10 billion in receipts, respectively. Globally, the extended Balkan region accounts for 7.5% and 6.5% of the global arrivals and receipts, respectively. On the other hand, the region attracts 15% and 17% of the total European arrivals and receipts, respectively. Consequently, the region on average outperforms both European arrivals and receipts per capita growth performance. In recent years, South Eastern region has been gaining popularity among visitors, who in pursuit of new 6

experiences and discoveries are looking into the region to satisfy their curiosity and fulfill their aspirations with a new, mystical, unknown world that is basically at their footsteps, just waiting to be discovered. However, the region is not uniform in its ability to attract visitors. As a matter of fact, there is a considerable difference between the top performing countries in the region, Austria and Greece, and the bottom ones, Macedonia and Bosnia and Herzegovina.

EJAE 2017  14 (1)  1-12

METHODOLOGY

Teodorović M., Popesku J.  Serbia’s competitive position in the regional tourism destination market

The database frame was developed based on the thirty-three global empirical indicators representing perceptions of different initiatives covering economical, social, environmental, human development, innovation, marketing and destination and tourism competitive aspects of the selected region. The indices of each country in the region are averaged and compared to those of Serbia. Analyzing how Serbia measures up with the average of each index demonstrates where Serbia stands in a particular category, as shown in Fig. 2. The differences or gap levels, for each index between Serbia and the region, are plotted in the importance-performance map (IPM)

analysis. The IPM, as an analytical tool, developed by Martilla and James (1977), has a wide use in analyzing positioning in the destination marketing literature (Chen & Wells, 1999; Pike 2000, 2002; Dwyer, 2015). To further analyze information presented in Fig 2. the IPM maps are utilized to highlight the hot spots and relevant points. The quadrants in the IMP map are filled out based on the performance level in the gap diagram shown in Fig. 2, thus reflecting suggestions and opinions by different researchers and scholars from the literature review. The gap analysis, as shown in Fig. 2, shows that there is a significant negative outlook of Serbia’s position based on the indices selected. It shows that Serbia falls significantly behind, on average

Serbia vs. Region’s Average

Figure 2. Serbia vs. Region: Gap Diagram Based on Thirty-Three Global Indices. 7

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Teodorović M., Popesku J.  Serbia’s competitive position in the regional tourism destination market

80%, in the areas of arrivals, receipts, national brand value, GDP and both in direct and total contributions of its tourism revenue to GDP. It is followed by negative levels of attractiveness, awareness, tourism expenditure and local purchasing power and low standard of living. On the other hand, Serbia shows competitiveness in price levels of groceries, res-

taurants, living and rent. However, all the benefits that Serbia offers as a destination do not seem to be enough to provide the attractive cost-benefit ratio for visitors. Furthermore, Serbia is about 15% below the region’s mean for ecological footprint, investment attractiveness, and country risk, strength of the national image, destination competitivness, corruption, innovation

Quadrant 1 – (High Importance – Low Performance)

Quadrant 2 – (High Importance – High Performance)

Foreign Arrivals (UNWTO, 2014) T&T Direct Contribution to GDP (Knoema, 2016) T&T Total Contribution to GDP (Knoema, 2016) Receipts (UNWTO, 2014) National Brand Value (Brand Finance, 2014) Gross Domestic Product (IMF, 2016) Economic Well-being (SSF, 2014) Attractiveness (Travel Image, 2015) Awareness (Travel Image, 2015) Ecological Footprint (SSF, 2014) Global Opportunity Index (GOI, 2015) Credit Rating (Economics, 2015) National Brand Strength (Brand Finance, 2014) Travel & Tourism Competitiveness Index (WEF, 2015) Corruption Perception Index (Transparency, 2015) Global Innovation Index (INSEAD, 2015) Human Development Index (Jahan, 2015) Index of Economic Freedom (Heritage, 2016) Social Progress Index (SPI, 2015) Human Well-being 2014 (SSF, 2014)

Environmental Well-being (SSF, 2014) Global Peace Index (IEP, 2016) Rent Index (Numbeo, 2016)

Quadrant 3 – (Low Importance – Low Performance)

Quadrant 4 – (Low Importance – High Performance)

International Tourism Expenditure (WB, 2015) Biocapacity Footprint (NFA, 2015) Grocery Index (Numbeo, 2016) Cost of Living + Rent Index (Numbeo, 2016) Local Purchasing Power Index (Numbeo, 2016) Restaurant Price Index 2015 (Numbeo, 2016) Cost of Living Index 2016 (Numbeo, 2016) Happiness Index (WHR, 2015)

Population (NFA, 2015) Consumer Price Index (2010 = 100; WB, 2015)

Table 1. Extended Balkan Region.

and human development. Furthermore, Serbia’s human well-being, economic freedom, social progress and happiness index are somewhat less negative, but still below the average for the region. On the positive side, Serbia scores higher on the population size, state of the 8

environment, global safety and inflation. Population and country size are one of the prerequisites for higher national brand value. The significance of the overall Serbia’s position is captured in the IPM table, as shown in Table 1.

EJAE 2017  14 (1)  1-12

THE OUTLOOK

Teodorović M., Popesku J.  Serbia’s competitive position in the regional tourism destination market

The first quadrant of the IMP map identifies the performance in the most significant areas that constitute the back bone of the positioning elements of Serbia as a destination. The map shows that Serbia is falling behind in the majority of indicators that are deemed important in the analysis. In particular, the most severe gaps, 80% below the region’s average, are in the level of foreign receipts and arrivals, contribution to GDP, and the national brand value. This indicates that Serbia has not sufficiently integrated tourism into its national and global strategic development programs. On the other hand, the gap of 40% in economic wellbeing, attractiveness, awareness, sustainability and investments indicates that Serbia is lacking efficient and effective integrated marketing communication programs combined with a favorable business climate that will attract foreign investments, both green-field and brown-field. This leads to the lack of attention to the environment, unattractive investment climate, undeveloped infrastructure and the overall low standard of living. Serbia as a destination is slow to effectively advertise its attractiveness and, consequently, scores very low on awareness, i.e. 25% below the region’s average. Its most known locations are Belgrade, Novi Sad, and the winter/summer resorts Kopaonik and Zlatibor, but the rest of the country’s cultural, archeological, historical, scenic and hereditary treasure is relatively unknown to the global community. Furthermore, Serbia has not clearly defined its points-of-parity and points-of-difference positioning strategy and is not explicit on its frame of reference in the region (Kotler & Keller, 2012). In terms of corruption index, Serbia is 12% below the region’s average and its national brand strength is on average below 16%. The negative gaps continue in single digits for

innovation, freedom of doing business and human development. The second quadrant shows areas that are important and in which Serbia performs well and measures up better than the region. Serbia’s impact on the environment is at the region’s average or slightly better. That can be explained by undeveloped economy rather than environmental friendly practices. On the other hand, Serbia is a relatively safe place to visit, with the low risk of unexpected catastrophic events. Furthermore, low cost of accommodation is an attractive offer, but again, it is mostly the result of the weak demand and undeveloped supply. The third quadrant outlines the areas of relatively low importance, not significant for Serbia’s position even if Serbia does not perform well in those areas. It is worth mentioning that the price levels are about 25% below the region’s average. The argument can be made that low prices attract visitors, but only if there are perceived benefits or reasons reasons (Aaker, 1996). In other words, low price levels alone are not enough to attract visitors if there is no underlying value structure that creates the perception of getting value for money. On the other hand, Serbia’s bio-capacity and satisfaction levels, even though below the region’s average, are not considered to play a significant and relevant role in Serbia’s positioning as a destination. The fourth quadrant identifies areas in which Serbia excels, but without significant impact on Serbia’s position. Inflation levels, although not severe, have little impact on the values of foreign currency and in some cases, can have positive effects on the attractiveness of Serbia as a destination. On the other hand, the size of the population is not considered significant in this study, at least not in the Balkan region.

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Teodorović M., Popesku J.  Serbia’s competitive position in the regional tourism destination market

CONCLUSION

The center of gravity of the region, as presented in Fig. 1, shows the above average performance at the outskirts of the region and the gap in the middle of the region with two countries, Macedonia and Bosnia and Herzegovina, falling significantly behind. On the other hand, Slovenia, with 2014 foreign receipts just under $3 billion, is expected to do much better, mostly because of its scenic, infrastructure, hereditary and cultural resources, as well as because of its proximity to Central and Western Europe. Furthermore, the analysis shows that Serbia falls below the region’s average according to twenty-nine out of thirty-three global indicators. The only pockets of the above average performance are in prices of accommodation, impact on the environment and global safety. The most significant finding of the paper is that Serbia does not have in place the tracking mechanism for monitoring its competitiveness, reputation, awareness and attractiveness of the position in the global tourism destination marketplace. In particular, it is evident that Serbia lacks a comprehensive strategy for improving its position in the region and globally. In addition to the high level strategy initiative, the herein conducted research reveals the areas where Serbia needs to improve its current position and standings. Those include awareness, attractiveness, contribution to GDP, value and strength of the country’s brand, reputation, sustainable practices, corruption, legal and business climate, innovation, ease of doing business, human development and competitiveness. The holistic approach suggests that the overall improvements of Serbia’s position will come as a synergy of advances in numerous different areas, which will contribute to the final and ultimate positioning of Serbia in the regional and global destination market.

REFERENCES

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Future Brand. (2015). Country Brand Index 2014-15. Future Brand. Retrieved December 2,2015, from Future Brand: http: //www.futurebrand.com/ uploads/CBI-14_15-LR.pdf Gartner, W. C., & Ruzzier, M. K. (2011). Tourism Destination Brand Equity Dimensions: Renewal versus Repeat Market. Journal of Travel Research, 50(5), 471-481. Go, F. M., & Govers, R. (2011). International place branding yearbook 2011: managing reputational risk. Individual chapter’s contributors. London: Palgrave Macmillan. GOI. (2015). Global Opportunity Index. Santa Monica: Milken Institute. Heritage. (2016). 2016 Index of Economic Freedom. Retrieved July 20, 2016, from Heritage: http://www. heritage.org/index/ IEP. (2016). Global Peace Index 2016. New York: Institute for Economics and Peace. IMF. (2016). Report for Selected Countries and Subjects. Retrieved July 20, 2016, from International Monetary Fund: https://www.imf.org INSEAD. (2015). The Global Innovation Index 2015. Geneva: Cornell University, INSEAD and World Intellectual Properties. Jahan, S. (2015).Human Development Report 2015. New York: UNDP. Keller, K. (1993). Conceptualizing, measuring, and managing customer‐based brand equity. Journal of Marketing, 57(1) , 1‐22. Keller, K. L. (2013). Strategic Brand Management. In K. L. Keller, Strategic Brand Management Building, Measuring and Managing Brand Equity. Essex: Pearson. Keller, K. L., & Lehmann, D. R. (2002). Measuring Brand Equity. Hanover, NH: Dartmouth College, Working Paper. Kladou, S., Giannopoulos, A. A., & Mavragani, E. (2015). Destination Brand Equity Research from 2001 to 2011. Tourism Analysis, 20, 189-200. Knoema. (2016). Travel & Tourism Total Contribution to GDP. Retrieved July 15, 2016, from Knoema: https://knoema.com/atlas/ topics/Tourism/Travel-and-Tourism-TotalContribution-to-GDP/Total-Contributionto-GDP-percent-share

Konecnik, M., & Gartner, W. C. (2007). Customerbased brand equity for a destination. Annals of Tourism Research, 400-421. Kotler, P., & Keller, K. L. (2012). Marketing Management. Upper Saddle River, NJ: Prentice Hall. Lee, H., Ju-Pak, K.-H., & i Hong, M. (2015). Comparative Perspectives on Brand Value of Place Slogans: Analysis of Different Cities, States, and Countries. American International Journal of Social Science,40(2), 59-70. Marruti, F., & Tench, R. (2015). Are we talking the Same Language? Challenging Complexity in Country Brand Models. Athens Journal of Business and Economics, 49-61. Martilla, J., & James, J. (1977). Importance-Performance Analysis. Journal of Marketing (pre-1986), 41(000001), 77-79. Mihailovich, P. (2006). Kinship Branding: A Concept of Holism and Evaluation for the Nation Brand. Place Branding, 2(3), 229-247. Moilanen, T., & Rainisto, S. (2009). How to brand nations, cities and destinations: a planning book for place branding. London: Palgrave Macmillan. Morgan, N., Pritchard, A., & Piggott, R. (2002). New Zealand, 100% Pure. The creation of a powerful niche destination brand. Journal of Brand Management, 9(4-5), 335-354. NFA. (2015). National Footprint Accounts. Oakland, CA: Global Footprint Network. Numbeo. (2016, April 2). Cost of living. Retrieved December 2, 2015, from Numbeo: http:// www.numbeo.com/cost-of-living/ Park, S., & Petrick, J. (2006). Destinations’ perspectives of branding. Annals of Tourism Research, 33(1), 262-265. Pike, S. (2009). Destination brand positions of a competitive set of near-home destinations. Tourism Management, 30(6), 857-866. Pike, S. (2002). Destination Image Analysis. A review of 142 papers from 1973-2000. Tourism Management, 23(5), 541-549. Pike, S. (2000). The use of importance-performance analysis to identify determinant short break destination attributes in New Zealand. Pacific Tourism Review, 6(2), 23-33. 11

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Pike, S. (2005 ). Tourism destination branding complexity. Journal of Product & Brand Management, 14(4), 258-259. Popesku, J. (2011). Menadžment turističke destinacije. Beograd: Univerzitet Singidunum. In Serbian. Ritchie, J. B., & Crouch, G. I. (2010). A Model of Destination Competitiveness/Sustainability: Brazilian Perspectives. Revista de Administracao Publica, 44(5), 1049-1066 .doi:10.1590/S003476122010000500003 Schröter, T. Y., & Schwekendiek, D. (2015). Understanding South Korea’s Poor Nation Brand Image: A Content Analysis of Two Leading German Print News Media, 1948-2013. International Journal of Asia Pacific Studies, 11(1), 115-135. SPI. (2015). Social Progress Index 2015. Washington: Social Progress Imperative. SSF. (2014). Sustainable Society Index. Retrieved December 2, 2015, from Sustainable Society Foundation: http://www.ssfindex.com/about-ssf/ Transparency. (2015). Corruption Perception Index 2015. Retrieved December 2, 2015, from Transparency International: http://www.transparency. org/cpi2015

TravelImage. (2015). Travel Image 2015. Stockholm: Related. UNWTO. (2014). Annual Report 2014. Madrid:World Tourism Organization. UNWTO. (2016). UNWTO Tourism Highlights, 2016 Edition. Madrid: World Tourism Organization. UNWTO. (2017). UNWTO World Tourism Barometer. Madrid: World Tourism Organization Vardar, N. (2013). Recent trends in global advertising practice, beyond the fundamentals. Retrieved October 2, 2013, from http://hstalks.com. ezproxy.leedsmet .ac.uk/ WB. (2016). International Tourism Expenditures. Retrieved July 20, 2016, from World Bank: http://data.worldbank.org/indicator/ ST.INT.XPND.CD WEF, W. E. (2015). Travel and Tourism Competitiveness Report. Geneva: World Economic Forum. WHR. (2015). World Happiness Report 2015. New York: Sustainable Development Solutions Network.

KONKURENTSKA POZICIJA SRBIJE NA REGIONALNOM TURISTIČKOM TRŽIŠTU Rezime: Rad analizira konkurentsku poziciju Srbije kao turističke destinacije na regionalnom turističkom tržištu. Regionalno turističko tržište obuhvata zemlje susede Srbije uz dodatak Austrije, Slovenije i Grčke, kako bi se dobila celovitija slika regiona jugoistočne Evrope koji u radu nazivamo „Prošireni Balkan”. Izabrani skup globalnih indikatora je analiziran metodom jaza kako bi se pojasnio uticaj različitih efekata koji utiču na poziciju Srbije u pojedinim domenima i kategorijama, što zauzvrat ima značajan uticaj na mogućnosti Srbije da privuče, zadovolji i zadrži turiste. Težište ovog rada je više na konceptu i metodologiji, a manje na izboru indeksa. Rad je namenjen kako praktičarima, tako i akademskom sektoru, dajući doprinos literaturi koja se odnosi na konkurentnost turističkih destinacija posmatranih kroz prizmu teorije pozicioniranja.

Ključne reči: analiza jaza, pozicioniranje destinacija, konkurentnost destinacija, mapa važnost-učinak. Received: February 2, 2017 Correction: February 22, 2017 Accepted: March 7, 2017

EJAE 2017, 14(1): 13-23 ISSN 2406-2588 UDK: 658.153.1.1(497.11)”2008/2013” DOI: 10.5937/ejae14-13574 Original paper/Originalni naučni rad

ANALYSIS OF THE DETERMINANTS OF CORPORATE CASH HOLDINGS: EXAMPLES FROM COMPANIES IN SERBIA Željko Račić ¹*, Nemanja Stanišić ² Higher School of Professional Business Studies, 4 Vladimira Perića Valtera Street, Novi Sad, Serbia 2 Singidunum University, 32 Danijelova Street, Belgrade, Serbia 1

Abstract: In this study, we aimed to analyse the empirical determinants of cash holdings on the sample of non-financial companies operating in the Republic of Serbia. For that purpose, dynamic panel data models were estimated by utilising the generalised method of moments for the period from 2008 to 2013. The econometric analysis indicates that companies with higher cash flow hold more cash in their assets. Larger companies as well as companies with more liquid assets and higher turnover coefficients tend to reduce their cash levels. According to the results, companies operating in the Republic of Serbia tend to hold the optimal level of cash and prefer internal sources of financing, which is in line with the principles of trade-off theory and pecking order theory.

INTRODUCTION Despite the fact that cash is the least productive asset, companies have to maintain certain amounts of cash and cash equivalents. There are several relevant concepts explaining what motivates managers to maintain cash holdings at certain levels. The differences between these concepts originate in differences between various attitudes towards the benefits and costs of cash holding (Opler, Pinkowitz & Williamson, 1999). * E-mail: raciczeljko@gmail.com

Key words: liquidity, sources of financing, corporate cash holding, Republic of Serbia, dynamic panel models.

According to Keynes (1936), motives for holding cash may be transactional, precautionary, or speculative. Transactional motives originate from the point that companies cover their own transaction costs from their own funds. Speculative motives relate to the ability to finance profitable investment activities from cash reserves in order to avoid the cost of external funding. The motive for cash holding may also be precautionary. Companies often hold liquid reserves to cover unexpected shortages of funds as a consequence of frequent instability in financial markets 13

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Račić Ž., Stanišić N.  Analysis of the determinants of corporate cash holdings: Examples from companies in Serbia

(Stiglitz & Weiss, 1984). However, despite the benefits they bring, cash holdings generate certain costs. Mostly, this includes the high opportunity costs of cash holding. Cash and cashequivalent reserves do not provide a return, or that return is minimal if it is in the form of highly liquid securities. The most important theoretical concepts that explain a firm’s managers motives to keep a certain level of cash holdings in the assets are trade-off theory, pecking order theory, and free cash flow theory. Trade-off theory starts with the premise that a company should seek an optimal level of cash holdings. This is the level that equates the marginal costs and marginal benefits of cash holding. On the other hand, pecking order theory prefers internal sources for the financing of current business activities. Financing from the net profit is the most effective source of financing. If the net profit is not sufficient, companies use accumulated funds. Borrowing on the financial market is the last option for financing current business activities (Myers,1984). Finally, free cash flow theory explains that managers tend to increase cash holdings under their control. They therefore tend to increase the ability to make investment decisions, which allows them to avoid external borrowing and market discipline. A higher degree of independence may result in the agency problem, because managers are given the opportunity to invest in projects that can be useful for them and harmful to shareholders. On the basis of these theories, many characteristics of companies in previous research have been identified as determinants of cash holding. In this study, we aimed to assess the impact of certain empirical determinants on the level of cash holdings kept by companies in the Republic of Serbia. After the introductory part of the paper, in the second part we provide an overview of relevant research dealing with the analysis of the determinants of cash holdings. The third part provides a description of the sample used and the methodology. In the fourth part, the paper presents the results of 14

the research, on the basis of which the fifth part presents the conclusions.

LITERATURE REVIEW According to the consideration of the theories on corporate cash holdings, various companies’ features such as growth (Haris & Raviv, 1991; Shleifer & Vishny, 1992), financial distress (Mackie-Mason, 1990; Ozkan & Ozkan, 2004; Shah, 2011), cash flow volatility, size, dividend payments (Opler et al., 1999), leverage, profitability (Ferreira & Vilela, 2004; Opler et al., 1999), debt maturity (Stohs & Mauer, 1996), existence of a bank relationship, and cash cycle (Kalcheva & Lins, 2007; Mauer & Sherman, 1998) have been identified as determinants of cash holdings in previous studies. Pecking order theory has been used to explain that companies prefer internal financing sources as opposed to external sources. This means that companies with higher cash flows have more cash holdings (Almeida, Campello & Weishbach, 2004; Kalcheva & Lins, 2007; Mauer & Sherman, 1998). This is the same with volatile cash flows because such instability i ncreases the probability of facing a lack of cash flow (Minton & Schrand, 1999). Extra cash holdings thus provide a buffer when cashflows from operations unexpectedly fall. As a result, a positive relationship between cash holdings and cash flows is anticipated. The results of some research have indicated that there is a negative relationship between cash holdings and cash flows, which suggeststhat there are companies that consider cash flows an additional source of liquidity. The next significant determinant of cash holdings is net working capital. Net working capital is an indicator of investments in liquid assets, and many companies consider this an additional source of liquidity. Therefore, a negative relationship between cash holdings and net working capital is expected (Almeida et al., 2004; Kalcheva & Lins, 2007; Mauer & Sherman, 1998).

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Račić Ž., Stanišić N.  Analysis of the determinants of corporate cash holdings: Examples from companies in Serbia

Another significant determinant of cash holdings is the turnover coefficient of working capital. The higher the turnover coefficient, the faster the turnover of a company’s assets. This means that it is possible to finance the turnover with a smaller amount of working capital, which increases the efficiency of the company. Therefore, a negative relationship between cash holdings and the turnover coefficient of working capital is expected. The size of a company is also a significant determinant of cash holdings. Small companies are more likely to be faced with information asymmetry and financial constraints. Therefore, they face higher transaction costs in accessing external financing sources, which increases the possibility of facing low cash levels (Brennan & Hughes, 1991; Collins, Rozeff & Dhaliwal, 1981; Mikkelson & Partch, 2003; Pettit & Singer, 1985). The literature has suggested that the chances of bankruptcy are higher for small companies, as they tend to be less diversified (Rajan & Zingales, 1995; Titman & Wessels, 1988). Miller and Orr (1966) suggested that large companies have economies of scale that allow them to manage their cash holdings efficiently. Also, Peterson and Rajan (2003) argued that external borrowing is less costly for large companies. All these arguments in turn imply that small companies should hold more cash. On the other hand, Opler et al. (1999) argued that large companies are more capable to accumulate cash because they may be more profitable in comparison with smaller companies. The alternative hypothesis is that cash holdings are in a positive correlation with the size of the company (Shah, 2011). Numerous studies have indicated that financial leverage is a significant determinant of cash holdings. Companies may compensate for their lack of cash with funding from external sources. This implies that leveraging is in a negative correlation with the level of cash holdings. According to pecking order theory there is a negative correlation between cash holdings and financial leverage (Myers & Majluf,

1984). However, the relationship is not linear. As the agency theory suggests, companies with high leverage raise additional funds in a more difficult way and hold more cash (Ogundipe, Salawu & Ogundipe, 2012). It can be expected to have a positive relationship between leveraging and cash holdings. Recent research on determinants of cash holding has analysed companies operating in developed countries (Almeida et al., 2004; Dittmar, 2004; Shah, 2011) as well as in developing countries (Dittmar & Mahrt-Smith, 2007; Dittmar, MahrtSmith & Servaes, 2003; Ferreira & Vilela, 2004; Garcia-Terual & Martinez-Solano, 2008; Guney, Ozkan & Ozkan, 2007; Harford, Mansi & Maxwell, 2008; Isshaq, Bokpin & Onumah, 2009; Jensen, 1986). A research study conducted by Hall, Mateus and Mateus (2014), which also included a sample of companies from the Republic of Serbia, has analysed the differences in the levels of cash holdings between public and private companies, as well as differences in the levels of cash holdings between companies operating in developed markets and those operating in developing markets. This study has provided evidence on the determinants of cash holdings for companies from different sectors, expanding the knowledge about cash holdings among companies in the Republic of Serbia.

DATA AND METHODOLOGY Our research was based on the use of panel data analysis. The analysis was performed on a sample of companies operating in the Republic of Serbia. The specific features of the sample and the methodology used are presented in the following section.

Data The research was conducted on a sample of 2,352 non-financial companies from the Republic of Serbia, operating in 14 different 15

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Račić Ž., Stanišić N.  Analysis of the determinants of corporate cash holdings: Examples from companies in Serbia

sectors. In the period covered by the research, none of the analysed companies was in the process Variable

of liquidation, bankruptcy, or restructuring.

Data description

Source

Cash

Cash and cash equivalents / (Total assets - Cash and cash equivalents)

Balance sheet

Size

Ln (Total assets)

Balance sheet

(Net profit before taxes + Depreciation and amortisation expenses) / (Total assets- Cash and cash equivalents)

Balance sheet, Income statement

Nwc

(Current assets - Short-term liabilities - Cash and cash equivalents) / (Total assets - Cash and cash equivalents)

Balance sheet

Lvrg

(Short-term debt + Long-term debt) / (Total assets - Cash and cash equivalents)

Balance sheet

Turnover

Balance sheet, Income statement

Sales / Current assets

Table 1. Variable Descriptions. Source: Specified databases.

Table 1 shows the balance sheet items included in the formula for calculating the variables used in the model. The sample included only companies that meet the following criteria: Cash ≤ 1, -1 ≤ Cf ≤ 1, Nwc ≥ 5, Lvrg ≤ 5, and Turnover ≤ 30.

Methodology

the dynamics that can be crucial for a consistent evaluation of other parameters (Bond, 2002). Arellano & Bond (1991) estimator is considered to be suitable for the analysis of panel datasets which are characterized with small values of T (number of periods) and large values of N (number of observation units), which was a feature of the data set used in this study. Dynamic relationships are characterised by the presence of a lagged dependent variable among the regressors:

According to an overview of relevant studies dealing with the assessment and analysis of empirical determinants of cash holdings in companies, the paper used the generalised method of moments (GMM) yit = δ yi ,t −1 + xitT β + uit model (Arellano & Bond, 1991). This model is particularly suited for the analysis of linear = i 1,= K , N ; t 1 K ,T relationships in which the dependent variables are dynamic (dependent on the values from previous periods) and in which the independent where δ is a scalar, xit is 1 × K, and β is K × 1. We variables are not strictly exogenous. Also, the will assume that the uit follows a one-way error application of dynamic panel models is component model: considered to be effective in cases where the coefficients of the lagged variables are not of direct relevance for the model, because it allows 16

u= µi + ε it it

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Račić Ž., Stanišić N.  Analysis of the determinants of corporate cash holdings: Examples from companies in Serbia

where µi ~ IID ( 0,σ 2 µ ) and ε it ~ IID ( 0,σ 2ε ) are independent of each other. The lag variable is included in order to capture the inertia of the dependent variable. There are two sources of this inertia: autocorrelation due to the presence of a lagged dependent variable among the regressors and individual effects characterising the heterogeneity among the individuals. However, given that yit is a function of ε it , yi ,t −1 which is also a function of ε it , this means that yi ,t −1 , which is included in the dynamic model as a regressor, is correlated with the error term (Baltagi, 1995). It is for this reason that traditional regression models were not suitable: the Ordinary Least Squares (OLS) estimator is biased and inconsistent, the within estimator is biased and inconsistent even for a relatively large T, and the random effects estimator is biased. As a solution, Anderson & Hsiao (1980) proposed first differencing the model (to eliminate the individual fixed effects) and then using higher-order lags as instrument variables (e.g., ∆ yi ,t − 2 is an instrument for ∆ yi ,t −1 ), as these are expected to be orthogonal to the idiosyncratic error. Even though the method proposed by Anderson & Hsiao (1980) leads to consistent estimates of the parameters, it is not necessarily efficient. A more efficient method proposed by Arellano & Bond (1991) uses the same set of instruments but constructs moment conditions from them and uses the GMM to estimate the parameters. In this paper, we used a two-step GMM estimator:

In our case, the GMM model was specified as follows:

The validity of the instruments chosen for the assessment of the dynamic panel model was tested by the Sargan test. Accepting the null hypothesis test that the selected instrumental variables were not correlated to the residuals indicated that the specification of the dynamic panel model was suie. In addition, two diagnostics were computed using the Arellano & Bond (1991) GMM procedure to test for first-order and second-order serial correlation in the disturbances. If the model is properly specified, the null hypothesis (the absence of serial correlation) should be rejected in the first test, and should not be rejected in the second test (Baltagi, 2011).

ESTIMATION RESULTS Table 2 shows the results of the estimated impact of the determinants of cash holdings at the level of the whole sample. The Sargan test did not reject the null hypothesis that the instrumental variables were uncorrelated with the residuals, indicating that the instrumental variables were valid. Moreover, the test for first-order and second-order serial correlation in the disturbances did not reject the absence of the second-order serial correlation, which means that the model was suitable.

where W is the matrix of instruments for ∆ y −1 −1 and a matrix V N can be calculated from the residuals from the one-step Arellano and Bond (1991) estimation (see Baltagi (2011) for additional details). A consistent estimate of variance was calculated as follows:

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Račić Ž., Stanišić N.  Analysis of the determinants of corporate cash holdings: Examples from companies in Serbia

Variable

GMM estimates

lag(Cash, 1)

0.201***

Diagnostic tests

(0.086, 0.316) Size

-0.003

Sargan test: Chisq (9) = 14.20898 (p value = 0.11508)

(-0.012, 0.007) Cf

0.110*** (0.083, 0.138)

Nwc

Autocorrelation test (1): normal = -6.917792 (p value = 4.5874e-12)

-0.081*** (-0.103, -0.058)

Lvrg

0.013 (-0.010, 0.035)

Turnover

Autocorrelation test (2): normal = 1.609659 (p value = 0.10747)

-0.003*** (-0.005, -0.001)

Observations

n= 2,352, t= 3-6, N=14,109

Table 2. - Results of the dynamic linear panel model. Source: Authors’ calculations. Note: *, **, and *** indicate statistical significance at levels of 10%, 5%, and 1%, respectively.

The estimated coefficients for the lagged dependent variable and cash flow were statistically significant and had a positive sign, whereas the regression coefficients for the net working capital and turnover variables were statistically significant and had a negative sign. Table 3 shows the results of the estimated effect of the determinants of cash holding at the sector level of the sample for 14 sectors. The impact of the determinants of cash holdings in the companies from the above-mentioned sectors did not essentially differ from their influence on the level of the total sample except in the case of the companies from several sectors where the size variable showed a statistically significant impact on cash holdings.

CONCLUSIONS The obtained results led to the following conclusions regarding the cash holdings of non-financial companies in the Republic of Serbia. The effect of cash flows on cash holdings was positive and statistically significant. The positive value of Cf was compatible with the pecking order theory. Therefore, this suggests that companies with higher cash flows prefer to hold more cash because they rely more on internal financing. Since the financial market of the Republic of Serbia is bank-centred, preferring internal sources of financing may be a consequence of banks’ interest rates, which were at relatively high levels during the period covered by the research. The negative value of Nwc, which represents the

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Račić Ž., Stanišić N.  Analysis of the determinants of corporate cash holdings: Examples from companies in Serbia

liquidity variable, supported the hypothesis that companies with more liquid assets tend to reduce their cash levels. The obtained result is in accordance with the trade-off theory. The negative coefficient of the working capital turnover (the Turnover variable) suggests that companies with higher turnover of working capital have lower levels of cash holdings. The analysis of the results of the application of the model by sector may lead to identical conclusions, but in the case of several sectors, the coefficient of the size variable was negative and statistically significant. A reason for this is the fact that larger companies are more diversified, can get bank financing and access to capital markets far more easily, can minimise borrowing costs, and are less likely to go bankrupt. According to the results, it can be generally concluded that companies operating in Serbia tend to have the optimal level of cash holdings and to prefer internal sources of financing in comparison with external sources, which is in line with the principles of trade-off theory and pecking order theory.

Bond, S. R. (2002). Dynamic panel data models: Aguide to micro data methods and practice. Portuguese Economic Journal, 1(2), 141–162. doi: 10.1007/ s10258-002-0009-9 Brennan, M. J., & Hughes, P. J. (1991). Stock prices and the supply of information. The Journal of Finance, 46(5), 1665–1691. Collins, D., Rozeff, M., & Dhaliwal, D. (1981). The economic determinants of the market reaction to proposed mandatory accounting changes in the oil and gas industry. Journal of Accounting and Economics, 3(1), 37–71. Dittmar, A. (2004). Capital structure in corporate spinoffs. Journal of Business, 77, 9–44. Dittmar, A., & Mahrt-Smith, J. (2007). Corporate governance and the value of cash holdings. Journal of Financial Economics, 83, 599–634. Dittmar, A., Mahrt-Smith, J., & Servaes, H. (2003). International corporate governance and corporate cash holdings. The Journal of Financial and Quantitative Analysis, 38(1), 111–133. Ferreira, M. A., & Vilela, A. (2004). Why do firms hold cash? Evidence from EMU countries. European Financial Management,10, 295–319.

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Mikkelson, W. H., & Partch, M. M. (2003). Do persistent large cash reserves hinder performance? Journal of Financial and Quantitative Analysis, 38, 275–294. Miller, M. H., & Orr, D. (1966). A model of demand for money by firms. Quarterly Journal of Economics, 80(3), 413–435. Minton, B. A., & Schrand, C. (1999). The impact of cash flow volatility on discretionary investment and the costs of debt and equity financing. Journal of Financial Economics, 54(3), 423–460. Myers, S. C. (1984). The capital structure puzzle. Journal of Finance, 39, 575–592. Myers, S., & Majluf, N. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13, 187–221. Ogundipe, S. E., Salawu, R. O., & Ogundipe, L. O. (2012). The determinants of corporate cash holdingsin Nigeria: Evidence from general method of moments (GMM). International Journal of Social, Behavioral, Educational, Economic and Management Engineering, 6(1), 24–30. Opler,T. L., Pinkowitz, R. S., & Williamson, R. (1999). The determinants and implications of corporate cash holdings. Journal of Financial Economics, 52(1), 3–46. Ozkan, A., & Ozkan, N. (2004). Corporate cash holdings: An empirical investigation of UK companies, Journal of Banking and Finance, 28, 2103–2134. Peterson, M., & Rajan, R. (2003). Does distance still matter? The information revolution in small busness lending. Journal of Finance, 57, 2533–2570

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0.046 (-0.044, 0.135) 0.001 (-0.010, 0.012) -0.0003 (-0.019, 0.019) -0.020* (-0.043, 0.003) 0.001 (-0.025, 0.027) -0.003 (-0.023, 0.017) -0.008 (-0.048, 0.032)

0.100 (-0.137, 0.337)

0.130 (-0.115, 0.374)

0.238*** (0.092, 0.383)

-0.903*** (-1.355, -0.451)

0.178*** (0.053, 0.303)

0.048 (-0.086, 0.183)

0.599** (0.078, 1.119)

Administrative and support service activities

Agriculture, forestry, and fishing

Professional, scientific, and technical activities

Manufacturing

Information and communication

Electricity, gas, steam, and air conditioning supply

Construction

0.167* (-0.006, 0.341)

0.096*** (0.048, 0.143)

0.087*** (0.025, 0.149)

0.064 (-0.020, 0.149)

0.072*** (0.031, 0.112)

0.036 (-0.018, 0.089)

0.481 (-0.220, 1.182)

0.009 (-0.004, 0.021)

-0.007* (-0.015, 0.00001)

0.011 (-0.024, 0.047)

Accommodation and food service activities

Size

Lag (Cash, 1)

-0.207*** (-0.335, -0.079)

-0.079*** (-0.112, -0.046)

-0.041*** (-0.071, -0.011)

-0.037 (-0.122, 0.047)

-0.062*** (-0.104, -0.020)

-0.008 (-0.050, 0.034)

-0.367 (-0.897, 0.163)

0.003 (-0.005, 0.012)

Nwc

0.015 (-0.069, 0.099)

-0.004 (-0.041, 0.033)

0.026 (-0.012, 0.063)

0.009 (-0.069, 0.087)

-0.050* (-0.106, 0.006)

0.018 (-0.020, 0.056)

-0.167** (-0.317, -0.017)

0.006 (-0.005, 0.016)

Lvrg

-0.015*** (-0.023, -0.007)

-0.008*** (-0.012, -0.004)

-0.004 (-0.012, 0.005)

0.006* (-0.001, 0.013)

-0.006** (-0.011, -0.0002)

0.001 (-0.003, 0.005)

-0.021 (-0.067, 0.025)

-0.0001 (-0.001, 0.0003)

Turnover

Sargan: 0.045 (m1): 0.014; (m2): 0.098

Sargan: 0.6262 (m1): 0.000; (m2): 0.709

Sargan: 0.616 (m1): 0.011; (m2): 0.061

Sargan: 0.451 (m1): 0.350; (m2): 0.281

Sargan: 0.258 (m1): 0.000; (m2): 0.336

Sargan: 0.549 (m1): 0.038; (m2): 0.366

Sargan: 0.092 (m1): 0.338; (m2): 0.614

Sargan: 0.777 (m1): 0.072; (m2): 0.297

Diagnostic tests (p values) Račić Ž., Stanišić N.  Analysis of the determinants of corporate cash holdings: Examples from companies in Serbia

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-0.027 (-0.103, 0.049) 0.017 (-0.034, 0.068)

-0.075 (-0.485, 0.335)

-0.135 (-0.736, 0.465)

-0.021* (-0.045, 0.002)

0.398 (-0.146, 0.942)

-0.011* (-0.023, 0.001)

-0.011 (-0.041, 0.018)

-0.153 (-0.906, 0.600)

0.166 (-0.039, 0.372)

-0.011 (-0.083, 0.061)

-0.254 (-1.053, 0.544)

0.177* (-0.002, 0.355)

0.035 (-0.451, 0.521)

0.153*** (0.093, 0.214)

0.183* (-0.005, 0.370)

0.050 (-0.031, 0.131)

-0.003 (-0.088, 0.082)

-0.220** (-0.402, -0.038)

-0.001 (-0.181, 0.179)

-0.104*** (-0.143, -0.066)

-0.076* (-0.157, 0.005)

-0.033 (-0.080, 0.013)

0.007 (-0.035, 0.048)

0.001 (-0.145, 0.147)

0.148 (-0.658, 0.953)

0.063*** (0.025, 0.102)

0.033 (-0.055, 0.121)

0.016 (-0.025, 0.057)

-0.003 (-0.095, 0.089)

Source: Authors’ calculations. Note. *, **, and*** indicate statistical significance at levels of 10%, 5%, and 1%, respectively.

Table 3. - Results of the dynamic linear panel model (the application of the model by sectors).

Other service activities

Arts, entertainment, and recreation

Wholesale and retail trade; repair of motor vehicles and motorcycles

Water supply, sewerage, and waste management

Transportation and storage

Real estate activities

-0.013 (-0.037, 0.012)

-0.005 (-0.021, 0.011)

-0.001 (-0.004, 0.002)

-0.004 (-0.014, 0.006)

-0.002 (-0.005, 0.001)

-0.0003 (-0.009, 0.009)

Sargan: 0.999 (m1): 0.299; (m2): 0.269

Sargan: 0.612 (m1): 0.892; (m2): 0.076

Sargan: 0.559 (m1): 0.001; (m2): 0.507

Sargan: 0.082 (m1): 0.100; (m2): 0.906

Sargan: 0.380 (m1): 0.601; (m2): 0.272

Sargan: 0.714 (m1): 0.526; (m2): 0.653

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Račić Ž., Stanišić N.  Analysis of the determinants of corporate cash holdings: Examples from companies in Serbia

ANALIZA DETERMINANTI KORPORATIVNIH GOTOVINSKIH POZICIJA - PRIMERI IZ REPUBLIKE SRBIJE Rezime: Cilj ovog istraživanja je analiza empirijskih determinanti vrednosti gotovinskih pozicija na uzorku industrijskih privrednih društava koja posluju u Republici Srbiji. U tu svrhu, korišćenjem generalizovane metode momenata, specificiran je dinamički panel model za period posmatranja od 2008. do 2013. godine. Rezultati analize ukazuju da društva koja imaju veće novčane tokove imaju veće vrednosti gotovinskih pozicija. Veća društva, kao i ona koja imaju više likvidnih sredstava u svojoj imovini, imaju tendenciju smanjenja vrednosti gotovinskih pozicija. Društva koja posluju u Republici Srbiji drže optimalne vrednosti gotovine i preferiraju interne izvore finansiranja, što je u skladu sa principima „trade-off” i „pecking order” teorija upravljanja gotovinskim pozicijama.

Ključne reči: likvidnost, izvori finansiranja, korporativne gotovinske pozicije, Republika Srbija, dinamički panel model. Received: March 31, 2017 Correction: April 5, 2017 Accepted: April 11, 2017

EJAE 2017, 14(1): 24-31 ISSN 2406-2588 UDK: 336.1 347.73 DOI: 10.5937/ejae14-13167 Original paper/Originalni naučni rad

INTERNATIONAL REGULATORY CHANGES IN FINANCIAL SYSTEMS AS A FACTOR OF STABILITY Dimitar Anevski ¹*, Elena Temelkovska-Anevska ² Komercijalna Banka AD Skopje, Branch Office Bitola 18 Nikola Tesla Street, Bitola, R. Macedonia 2 Faculty of Law, University St. Clement of Ohrid Partizanska bb Street, Bitola, R. Macedonia 1

Abstract: The necessity of regulating certain legal and finance systems derives from the possibility that they may have a major impact on essential processes in countries. Therefore, depending on the market conditions and integration intentions of specific political or financial groups, the countries are forced to implement new regulations. Such regulations are different everywhere in the world; there are hundreds of laws and legal acts arising from national and local governments, which cover various aspects of the economy. The paper examines the international capital agreements and legal acts responsible for the stability of the finance sector and its members, which lead to overall stability of a society. Analyzing the contemporary literature reveals the countries which have successfully managed to implement the high-demand criteria.

INTRODUCTION Regulation of finance systems and supervision of its members has been the matter of interest and debate in recent times, largely because of the political and financial turmoil. The challenge for regulators worldwide, according to recent experiences obtained during the financial crisis, continues to be the design of an appropriate “safety net”, which ensures the reliability of the finance system (Dorota, 2013, pp. 1-10). Therefore, besides the imperative of simply harmonizing regulations, 24

* E-mail: dimitar.anevski@gmail.com

Key words: regulation, Basel standards, stability.

it is particularly important that the regulatory framework is the same for all institutions in a single system. In this manner, the impact of legislation in terms of market competitiveness of banks is the same for all banks within a banking system (Poposka et al., 2013, p. 136). Banks are one of the oldest financial institutions and subject to regulations since their foundation. The regulations aim to maintain a secure and stable banking system while protecting the interests of depositors and other creditors who have invested their own funds in the banks.

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They are intended to encourage competition, to create an efficient payment system, to protect the consumers and other financial institutions etc. These regulations also contribute to a more efficient allocation of capital, constant source of loans, supporting the clients and companies to balance their investment to the consumption (Ingves, 2015, p. 65). At the present time, there are multiple reasons for the regulation of the banking system. It is proven that countries that had the highest scores in terms of regulation quality were the countries least resistant to the global recession (Forbes et al., 2013, pp. 1-8). Certainly, the most important reason is the pressure that comes from the pace imposed by the globalization process through advances in communication technology, erasing borders between countries and so on. The globalization creates opportunities for carrying out operations abroad, without the need to physically build offices. The banks seized opportunities to expand their operations abroad, thus causing concern to government authorities by what means to harmonize and align national banking regulations among states.

THE FIRST CAPITAL ACCORD - BASEL I The need for the regulation of the finance systems internationally is not new, although the reasons are similar. The main reason is to assure stability of the systems and to facilitate transfers of money and capital across national economies. In the period from 1965 to 1981, eight bank bankruptcies were reported in the United States, which was one of the reasons that the leaders of the central banks and supervisory authorities from 10 countries met in Basel, Switzerland, to prevent the recurrence risk (Fadi, 2017). In terms of stability, historically speaking, the first Capital Accord or Basel I was completed in 1988 and implemented by Member States by the end of 1992 (Goodhart, 2011; Toniolo, 2005; Bank for International Settlements, 2016). The main benefit of this agreement was

submitted capital focus to risk exposures of individual banks and higher capital ratio encouraged. From January 1993, banks active internationally were obliged to comply with the minimum ratio of risk assets or „risk asset ratio” (RAR) of 8%. Later, in January 1998, some banks had to include market risks despite the credit risks in the calculation, maintaining a minimum of 8% RAR. In 1999, the World Bank and the IMF began with the FSAP - Financial Sector Assessment Program, in order to systematically approach the status of the banking systems in the countries and to propose specific recommendations for reform (Barth et al., 2012, pp. 2-5). In this regard, the Bank for International Settlements – BIS, the International Monetary Fund – IMF and the World Bank worked on designing effective strategies to reform the financial sector, passing on recommendations to states and providing assistance for their implementation in order to achieve efficiency and stability of the financial system in these countries. International regulation of the banking system was entrusted to the newly established Basel Committee on Banking Supervision, a part of the Bank for International Settlements in Basel, Switzerland, which consists of representatives of central banks and bank regulators in developed economies. The Banking Supervision Committee of Basel includes central banks representatives and regulatory establishments of the following states: Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, the United Kingdom, the United States and Luxembourg (Bank for International Settlements, 1988, p. 1).

THE SECOND CAPITAL ACCORD - BASEL II: A REVISED FRAMEWORK Since the first agreement showed deficiencies in terms of its application based on the free will of the Member States, in terms of the methodology proposed standardized approach, market distortions, etc., the Basel Committee on Banking 25

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Anevski D., Temelkovska-Anevska E.  International regulatory changes in financial systems as a factor of stability

Supervision, in June 1999, proposed fundamental adjustments to the original agreement. According to them, the new framework for the assessment of capital adequacy included three “pillars” covering:

I Pillar – Outlines the least capital requirements, II Pillar – Defines the process for supervisory review, and III Pillar – Manages the discipline of the financial market.

I Pillar The minimum criteria for capital requirements remains unchanged with the minimum rate of 8%, which is calculated through several core risk components: the risk of credit, the risk of operations and the risk of the market efficiency (Bronack, 2009). Concerning the credit risk, the Committee permits banks to select one of two approaches for calculating their requirements for capital in accessing the risk (Bank for International Settlements, 2006, p. 33). Banks can choose the standardized method that uses external credit assessments or the internal ratings-based approach, which is centring mainly on a bank’s supervisor approval, and allows banks to utilize their own evaluation schemes for credit risk. Concerning the operational risk, banks are stimulated to use different available approaches in developing complex evaluation schemes and practices. Its frame comprises the following practices for calculating operational risk: the basic indicator method, the standardized method and the advanced measurement method (Bank for International Settlements, 2006, p. 158). The first approach is forcing banks to retain capital for operational risk equivalent to preceding three year average of a fixed percentage of positive yearly gross revenue. For the second standardized method, the activities of banks are separated into multiple corporate lines: agency services, asset management, commercial banking, finance, payment clearing, retail banking and brokerage 26

and trading. Under the third method, capital requirements equal the amount of risk measured by the bank’s own measurement system for operational risk, using the quantitative and qualitative criteria. Regarding the last method, the market risk is the matter of mechanisms associated to interest rate, trading book equities, foreign exchange and commodities risk in the bank (Bank for International Settlements, 2006, p. 171).

II Pillar The regulators use more progressive tools regarding the first accord, which are used by the second pillar to manage the challenges of the first one. This pillar offers a frame for risks such as the risk of concentration, legal and liquidity risks, systemic and strategic risks. There are four fundamental principles of the supervisory review (Bank for International Settlements, 2006, pp. 205-220). The first principle is obliging banks to implement the method for evaluating their overall capital adequacy in relation to the risk profile, also creating a plan for retaining their capital positions. The second principle is obliging supervisors to review the banks evaluations and strategies, as well as to observe and ensure their compliance with the capital ratios stipulated by the regulatory bodies. The third principle expects banks to function above capital ratios set by the regulatory bodies as a minimum and obliges banks to retain capital in addition to the minimum. The fourth principle is obliging supervisors to pursue timely intervention to prevent capital from decreasing below the minimum levels, which are obligatory to support a bank’s risk structures and should require prompt corrective act if capital levels are not preserved or returned.

III Pillar The aim of the third pillar, known as the market discipline, is to balance the capital requirements from the first pillar and the process of supervisory

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review from the second pillar. This pillar objective is promotion of firmness in the financial system, allowing proper functioning of market discipline. That requires from banks the public risk controlling activities, the method of risk valuation and the risk dispersion. Done accordingly, the participants in the market will gather adequate information of the bank’s activities and its methods for risk control, gaining ability to differentiate banks who rationally cope with risks. The agreement requires banks to increase their capital ratio when facing higher risks. This means that banks will have less money available for lending during the recession or crisis (Gordy & Howells, 2004). Though lending to small firms using standardized or internal ratings-based approaches points to the need for lower capital requirements than for loans to large firms, Basel II agreement still implies that riskier loans have higher capital requirements. Depending on the risk level, the costs for small firms can be more expensive than for loans to large companies. Basel II increases administrative costs to create and maintain the loan portfolio due to sophisticated new rules (Balling et al., 2009, p. 12). Systems for automated decision-making, rating or scoring models used for companies, are needed to evaluate the information in more beneficial and resourceful way (Altman & Sabato, 2005, pp. 1-25). The implementation of Basel II regulations vary from country to country. The EU countries had completed implementation followed by Australia, Brazil, Canada, India, Japan, Korea, Mexico, Saudi Arabia, Singapore, South Africa and Turkey. The institutions in the United States are enforced to implement the innovative methods to assess credit and operational risk. The banks made major improvements in implementing a parallel submission of information on Basel I and Basel II capital indicators on a periodical basis (Bank for International Settlements, 2013).

THE THIRD CAPITAL ACCORD - BASEL III

The Basel III framework is released on December 2010 and it builds on previous frameworks and enhances them. Basel III is a wide-ranging set of improvement methods (Bank for International Settlements, 2017) created by the Committee to reinforce the banking sector regulation and supervision and its risk management. This accord sets greater levels for capital requirements thus introducing different universal liquidity frame. For example, the Minimum Common Equity Capital Ratio rises from 3.5% in 2013 to 4.5% in 2019 (Bank for International Settlements, 2013). The Capital Conservation Buffer is implemented with 2.5% till 2019. The Minimum common equity plus capital conservation buffer rises from 3.5% in 2013 to 7% in 2019. Tier 1 minimum capital buffer rises from 4.5% in 2013 to 6% in 2019. The Minimum Total Capital plus conservation buffer rises from 8% in 2014 to 10% in 2019. There is also a change in liquidity, introducing Liquidity Coverage Ratio – the minimum requirement of 100% in 2019. These measures aim at improving the banking sector’s ability to absorb shocks caused by economic stress and financial risk management, as well as at strengthening banking transparency.

The timeline and implementation progress of Basel III The implementation of Basel III regulations is in progress. If you take, for example, the European Union as a leader in the implementation of Basel II regulations, then it can be stated that the EU lost the leading position in the implementation of Basel III regulation, due to the required harmonization of the European Parliament, the Council and the Commission. However, EU countries have successfully implemented the standards. Other countries that have implemented the standards are Australia, Brazil, Canada, China, India, Indonesia, Mexico, Japan, Saudi Arabia, 27

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Singapore, South Africa, Switzerland and Turkey (Bank for International Settlements, 2013). The Committee is monitoring the implementations of Basel III standards, presenting them in the updated reports. The members should adapt the following standards (Bank for International Settlements, 2016): ◆◆ Capital: the participants decided to implement Basel III starting from January 1, 2013, focusing on temporary and phase-in activities, with the deadline on January 1, 2019. ◆◆ Leverage ratio: the implementation began with bank-level reporting to national supervisors until January 1, 2015. ◆◆ Liquidity Coverage Ratio began with the implementation on January 1, 2015. This ratio is in a temporary preparation phase before proceeding to full implementation on January 1, 2019. ◆◆ NSFR or Net Stable Funding Ratio is to become a permanent standard by January 1, 2018. ◆◆ G-SIB framework requirements started with implementation on January 1, 2016, with the time limit of January 1, 2019, etc. The empirical analysis showed that regulation of the financial system, including the Basel III framework, is helping to ensure the stability of the financial system reducing the likelihood of financial crises, although costs may occur in the short term. The regulation eliminates the risks and most importantly, there are also benefits to the society as a whole. Thus, the regulation of the banking system and the Basel III framework is especially important in supporting strong and steady growth (Ingves, 2015, p. 71).

BENEFITS OF REGULATION The implementation of the Basel standards, though it entails costs in the banking sector, brings important advantages. The main advantage is the 28

increase of confidence in banks. A bank that has implemented these standards is considered highly liquid and solvent even in times of unexpected crises. Besides the customers, bank shareholders have major benefits of implementing the standards because they know that the reports were prepared pursuant to strict regulation, transparent and reliable, which makes the assessment of management success easier. The third group that benefits from these standards includes corporate customers and the overall economy. The financial institutions that comply with these standards are resistant to shocks. In times of crisis, they continue to supply the much needed credit funds to the economy. Basel III standards are intended for strengthening the capital framework and introducing new liquidity standards in order to strengthen the short-term resilience of banks and potential liquidity problems and protect the long-term mismatch of assets and liabilities. Therefore, the introduction of two liquidity rates is envisioned: the coverage rate of liquidity which may not be less than 100% and the net stable funding sources, which should also be over 100% (National Bank of Macedonia, 2010, pp. 9-11). These two rates are more complex and therefore the Basel Committee opted for a long period of gradual implementation of the new liquidity standards, due to the need to adjust to them. For that reason, banks will be directed toward finding stable funding sources (deposits and long-term assets). It should be expected that this demand will increase competition between banks in attracting stable sources of funds and it will affect financing costs, net interest margin and profitability.

ANALYSIS OF THE REGULATION IMPLEMENTATION BY FINANCIAL INSTITUTIONS IN THE REPUBLIC OF MACEDONIA The regulation of the banking system is complex and it is essential for banks to implement

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it in order to ensure its stability. In that context, the level of capital ratio, which banks are obliged to maintain, must be no lower than 8%. The governor of the National Bank of Macedonia may prescribe a higher rate of 8% for a particular bank or a group of banks, if necessary due to the nature, category and range of activities executed by the bank and the risks to which it is vulnerable as a consequence of those activities. In addition to the paper, a comparison table (Table 1) on the rate of capital adequacy for groups of banks is presented for the period from 2004 to 2015 (Parliament of the Republic of Macedonia, 2015, Official Gazette no. 67/07, 90/09, 67/10, 26/13, 15/15 and 153/15, Article 65). Based on the data from the table, it can be concluded that banks, in the period covered by the analysis, fulfil the minimum statutory rate of capital adequacy ratio of 8%. It can be noticed that the group of small banks has a constant rate fall since 2007 when it reached its maximum of 66.9%, versus only 18.7% in 2015. Nevertheless, the group of small banks still has the highest rate of capital adequacy, followed by the group of medium-sized banks. The lowest rate of capital adequacy has the large size bank group with only 14.9%. In 2010, only one bank in this index was close to the total minimum of 8.5%, with only 8.6%. Taking into account the so far elaborated rate of capital adequacy, it can be confirmed that banks have successfully fulfilled this standard. Nevertheless, the National Bank of the Republic of Macedonia expects uncertainty in certain segments of the banking system. The uncertainty expected in the coming years is based on the analysis made by the central bank (National Bank of Macedonia, 2015), processed from financial institution filled questionnaires. The risks that can distress the operation of banks are clustered into several groups. The first group comprises the risks of the macroeconomic environment, the second group the financial market risks, the third the risks in the banking segment, the fourth group involves strategic individual or group risks, and the last, fifth group

contains the risks of regulation changes. Banks consider the risks rising from the macroeconomic environment to be the highest, followed by the banking segment risks and the regulation changes risks. Concerning the last regulatory risks, banks anticipate greater adjustment in the level of significance and influence of these risks on the processes. The expectations are founded on the subsequent potential risk elements, like the deficiency of transparency and participation of banks in the improvement of regulations that have impact on their operation, short time parameters for implementation of the different regulation, and non-compliance of regulations by separate national establishments. However, given the established goal to maintain the banking and financial system solid, the activities for consolidation of banking supervision will continue.

CONCLUSIONS The financial crisis has shown that bank systems face major problems in terms of liquidity, solvency and high indebtedness. Therefore, it is clear that banking systems have to become resistant to all financial tremors in the future, whether they are expected or not. The international regulation is subject to constant change with the aim of providing a strong banking sector. Based on the elaborated, it can be concluded that banks in the Republic of Macedonia may keep up with modern trends, fulfil high regulatory requirements and satisfy the minimum criteria concerning the rate of capital adequacy. But not all financial institutions meet all of the criteria. Some of the banks are not facing problems while gradually implementing the Basel III standards. However, for some of them, it is necessary to carry out recapitalization, and a small part will probably face serious problems in implementation. This leads to the inevitable process of the banking sector consolidation, where a number of small banks are continuously going down. 29

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Anevski D., Temelkovska-Anevska E.  International regulatory changes in financial systems as a factor of stability

REFERENCES

Altman, I.E., & Sabato, G. (2005). Effects of the New Capital Accord on Bank Capital Requirements for SME. Journal of Financial Services Research, 28(1), 1-25. DOI:10.1007/s10693-005-4355-5 Balling, M., Bernet, B., & Gnan, E. (2009). Financing SMEs in Europe. Vienna: SUERF. Bank for International Settlements. (2013, March). Status of adoption of Basel II regulations. Retrieved February 9, 2017, from http://www.bis.org/publ/ bcbs/b2prog_rep_table.pdf. Bank for International Settlements. (2017, February). Basel III: international regulatory framework for banks. Retrieved February 9, 2017, from http:// www.bis.org/bcbs/basel3.htm. Bank for International Settlements. (2013, March). Status of adoption of Basel III (capital) regulations. Retrieved February 9, 2017, from http://www.bis. org/publ/bcbs/b3prog_rep_table.pdf Bank for International Settlements. (2013). Basel III phase-in arrangements. Retrieved March 25, 2017, from http://www.bis.org/bcbs/basel3/basel3_phase_ in_arrangements.pdf Bank for International Settlements. (2016, December). History of the Basel Committee. Retrieved February 5, 2017, from http://www.bis.org/bcbs/history.htm. Bank for International Settlements. (2016, December). Eleventh progress report on adoption of the Basel regulatory framework. Retrieved March 25, 2017, from http://www.bis.org/bcbs/publ/d388.pdf Bank for International Settlements. (2006, December). International Convergence of Capital Measurement and Capital Standards: A Revised Framework Comprehensive Version. Retrieved February 10, 2017, from http://www.bis.org/publ/bcbs128.pdf. Barth, J.R., Caprio, Jr.G., & Levine, R. (2012). The Evolution and Impact of Bank Regulations. Policy Research Working Paper No. 6288, pp. 2-5. Retrieved February 11, 2017, from https://openknowledge.worldbank.org/handle/10986/12183 Basel Committee on Banking Supervision. (1988). International Convergence of Capital Measurement and Capital Standards. Basel: Bank for International Settlements. Retrieved February 11, 2017, from http://www.bis.org/publ/bcbs04a.pdf Bronack, T. (2009, July). Basel II Overview, Data Center Assistance Group. Retrieved February 11, 30

2017, from http://www.dcag.com/images/Basel_II_ Overview.pdf. Dorota, S. (2013). The Influence of Regulatory And Institutional Framework and Shareholder Structure Upon Risk of Financial Institutions in Central Europe. National Bank of Poland Working Paper No. 149, pp.1-10. DOI:10.2139/ssrn.2264066 Fadi, Z. (2017, February). How Basel 1 Affected Banks. Retrieved February 10, 2017, from http://www.investopedia.com/articles/07/baselcapitalaccord.asp Forbes, W., O’Donohoe, S. & Prokop, J. (2013). Financial Regulation and Nation State Crisis Management: Evidence from Germany, Ireland and the UK. Zentra Working Papers In Transnational Studies No. 18, pp.1-8. DOI:10.2139/ssrn.2264058 Goodhart, C. (2011). The Basel Committee on Banking Supervision: A history of the early years 1974-1997. Cambridge: Cambridge University Press. Gordy, M.B., & Howells, B. (2004). Procyclicality in Basel II: Can We Treat the Disease Without Killing the Patient? Retrieved February 8, 2017, from http:// www.bis.org/bcbs/events/rtf04gordy_howells.pdf. Ingves, S. (2015). Supporting sustainable growth: The role of safe and stable banking systems. Financing the economy: New avenues for growth, Banque de France Financial Stability Review No. 19, pp. 65-72. National Bank of Macedonia. (2010). Amendments to the Basel Capital Accord (Introduction of Basel 3) and preliminary estimates of their impact on the capital adequacy of banks in the country (pp. 9-11). Skopje: National Bank of Macedonia. National Bank of Macedonia. (2015). Financial Stability Report for the Republic of Macedonia in 2014. Skopje: National Bank of the Republic of Macedonia. National Bank of Macedonia. (2015). Strategic plan of the National Bank of Macedonia for the period 2016-2018. Skopje: National Bank of the Republic of Macedonia. Parliament of Republic of Macedonia. (2015). Law on Banks. Skopje: Official Gazette No. 67/07, 90/09, 67/10, 26/13, 15/15 and 153/15, Article 65. Poposka, K., Iloski, I., & Todevski, D. (2013). Analysis of the profitability of banks, profitability Internal factors - case study. Skopje: Tabernakul. Toniolo, G. (2005). Central Bank cooperation at the bank for international settlements, 1930-1973. Cambridge: Cambridge Univeristy Press.

EJAE 2017  14 (1)  23-31

Anevski D., Temelkovska-Anevska E.  International regulatory changes in financial systems as a factor of stability

Bank Size

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Large

13.70%

12.40%

12.70%

13.40%

13.80%

14.10%

15.00%

15.3%

15.8%

14.6%

14.9%

Middle

27.60%

23.80%

20.90%

16.70%

17.40%

17.00%

17.20%

22.2%

18.8%

18.0%

16.3%

Small

42.40%

49.80%

66.80%

61.90%

48.10%

54.70%

38.60%

18.8%

17.6%

18.7%

Banking system

21.30%

18.30%

17.00%

16.20%

16.40%

16.10%

16.80%

17.1%

16.8%

15.7%

15.5%

Table 1. - Capital adequacy by groups of banks in the Republic of Macedonia for the period 2005-2015. Source: Summarized by the author based on Capital adequacy ratio data and indicators of the banking system of the Republic of Macedonia - Indicators of banks capital adequacy, the National Bank of Macedonia, as of December 31, 2015.

PROMENE MEĐUNARODNE REGULATIVE FINANSIJSKIH SISTEMA KAO FAKTOR STABILNOSTI Rezime: Neophodnost regulacije određenih pravnih i finansijskih sistema proizilazi iz mogućnosti da oni mogu imati veliki uticaj na osnovne procese u zemljama. Stoga, u zavisnosti od tržišnih uslova i namera integracije određenih političkih ili finansijskih grupa, zemlje su primorane da sprovode nove propise. Uredbe su svuda drugačije u svetu; postoji stotine zakona i pravnih akata koji proističu od nacionalnih i lokalnih vlasti, i koji pokrivaju različite aspekte privrede. U radu se razmatraju međunarodni sporazumi kapitala i zakonskih akata koji su odgovorni za stabilnost finansijskog sektora i njegovih članova, što dovodi do ukupne stabilnosti društva. Analiza savremene literature otkriva zemlje koje su uspele da sprovedu veoma zahtevne kriterijume.

Ključne reči: regulativa, Bazel standardi, stabilnost. Received: February 20, 2017 Correction: March 20, 2017 Accepted: March 27, 2017

EJAE 2017, 14(1): 32-47 ISSN 2406-2588 UDK: 368:338.46(4-664) DOI: 10.5937/ejae14-11418 Original paper/Originalni naučni rad

INSURANCE INDUSTRY IN SELECTED TRANSITION COUNTRIES Aleksandra Stojaković * DDOR Novi Sad

Abstract: The growth and development goals of a national economy are successfully achieved through implementation of a properly selected investment policy, and for that reason, foreign investments are one of the main fundamental means for reaching the goals of economic and regional development. The insurance is one of the industries that have gone furthest ahead in globalization of the world markets. The main focus of this article is the insurance industry and economic development of the selected transition countries, some of them already members of the European Union, others still in the EU accession procedure. The importance of the insurance industry can be seen in the results of the displayed types of insurance in the period from 2010 to 2014. Transition countries may expect a significant encouragement to economic development by investments in the insurance industry. The subject of this study is to determine if these expectations are met or the improvements are achieved only in the domain of types and ways of selling insurance products.

INTRODUCTION AND METHODICAL ISSUES The insurance industry has an important role in social and economic development of every economy and society. It is important to emphasize that the modern way of life and the increase in living standards are directly related to economic growth and financial market development, whereby the insurance industry development is expected, starting from high-quality insurance services to stable business operations of insurers 32

* E-mail: astojakovic0812@gmail.com

Key words: insurance, development, countries in transition, insurance premium, claims.

and building trust of insured parties. The purpose of insurance indicates a specific type of protection of the property and persons, i.e. confidence and security when damage occurs. The insurance industry has an extremely high level of funds that have the characteristics of a specific capital. Its accumulation is influenced by: branch of insurance, covered insurance risks, scope of application re-insurance instruments, insurers’ obligations etc. Under modern conditions of market business operations, there is a need for stable economic and social relations, which

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Stojaković A.  Insurance industry in selected transition countries

imply the possibility of successful realization of the insurance service. The insurance ranking in the financial system of the country stems from the many specifics of this industry. The subject of this research is the analysis of the situation in the insurance industry in the countries of the former Yugoslavia and certain countries in the region (Hungary, Romania – with considerable foreign investment in the insurance industry) at the time of the economic crisis and few years after, in the period from 2010 to 2014. Some countries of the former Yugoslavia have become member states of the European Union (EU). The analysis is based on the economic indicators of the invoiced premium, movements of the technical part of the premium (damage), as well as the ratio between the invoiced premium and GDP. These parameters, mandatory by law, represent the relevant starting point for understanding the situation in insurance in all the above mentioned countries. The power of the insurance industry, as a collector of the financial means, is proportional to the economic development of the national economy in general. The objective of the research is to establish whether the insurance potential is sufficient to be able to grow in certain countries (some of which are in transition) independently from conditions of the economic-financial crisis. For this reason, the period of the research covers the period of 5 years, from 2010 to 2014. The main hypothesis, based on the research objective, is to see whether the insurance industry could increase its coverage of the market independently from conditions of the economicfinancial crisis that we perceive through a share of the insurance in GDP. The auxiliary hypothesis in this research should examine whether the insurance sector has a larger share in the GDP in certain countries where foreign investments have been made in the insurance industry or only the range of insurance products has increased.

The structure and setting of the analyzed data is based on the official data of the institutions that are in charge of the annual review of the insurance markets. According to the subject of the research and the set hypothesis, the paper contains introductory methodological explanations on how the research was carried out, a presentation of the insurance industry and economic growth with the relevant economic indicators and analytical data of premium ratio and GDP, especially in the selected EU member states and selected non-EU countries. Following this presentation, there is the analytical part the Insurance Market of the Selected Countries in Transition, again in both EU member states and non-EU countries, with special reference to the specifics of the market in Serbia. The insurance industry data are classified into life and non-life insurance. The part Comparative Overview of Insurance Premiums and Paid Damages for the Period 2010 to 2014 provides the analysis of a ratio of the collected premium and a ratio of the share of damage in the total premium, all aimed at evaluating the economic efficiency of the insurance industry. The Conclusion presents the results of the research in relation to the set hypothesis and the inference that the insurance industry could not have increased coverage at the market independently from the existing economic conditions, which indicates that the development of insurance requires the economic growth shown by an increase of GDP. Unlike the main hypothesis that was not proved, the auxiliary hypothesis was proved in the countries where investments in the insurance industry existed and the range of products was increased and through this type of diversification, it was possible to prevent a large drop in the insurance share in GDP. Economic development cannot be viewed outside the context of the entire social development because the economy is one of the major subsystems of a social system, so its development is inseparable from the overall 33

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Stojaković A.  Insurance industry in selected transition countries

social development. Social, political, historical, geographical, cultural and other non-economic areas significantly affect the economic dimensions of development changes. It is a complex social process by which each country seeks to transfer from a lower to a higher stage, while economic growth is defined as the increase in national production higher than the rate of population growth during a period of time. From this definition, we can see that economic development is broader and more complex process than economic growth (Šulejić et al., 2006, p. 85). In support to the economic growth, the insurance regulation needs to be strong enough to protect the insured, but not so prescriptive as to stop insurance companies from supporting economic activity through the products they provide and the investments that they make. One of the main components of economic development is changing the social structure and the economy, and such changes are most evident in the manufacturing part, with participation of agriculture and industry in the total production growth, in order to achieve higher social and national income. The statistical data was collected from the relevant institutions, such as departments for insurance supervision from each country of the region and Insurance Europe websites, which are committed to monitoring insurance markets and publishing economic data for research. The actual data are presented in tables and graphs of the insurance market investigation. This study covers the period from 2010 to 2014 where the majority of surveyed countries are from the region and from Europe. It differs from other researches with respect to the sample of selected analyzed countries. The selected observed states include the countries of the former Yugoslavia, out of which Slovenia and Croatia have become the EU member states whereas Serbia, Montenegro and Macedonia have not joined the EU yet. Other countries in the region, chosen for the analysis, have only recently joined the EU community. 34

EMPIRICAL RESULTS

This study deals with the analysis of correlation between the insurance and the economic growth of selected countries undergoing transition, based on the relevant economic indicators in the period 2010-2014. The subject of this study refers to the countries of the Western Balkans (Serbia, Montenegro and Macedonia) and the member states of the European Union in Southeast Europe (Slovenia, Croatia, Hungary and Romania). The analysis is based on observation of a share of the insurance premiums in gross domestic product and in ratio of the paid claims in relation to the premiums. Insurance companies are significant institutional investors at the international financial market and countries in transition expect a significant growth of the insurance industry and gross domestic product (GDP). Economic indicators of the share of the insurance industry in GDP and growth of GDP are the basic economic indicators for this type of economic analysis (Jeremić, 2012, p. 27). The analysis results should show whether the invested funds in the insurance industry had an impact on economic growth observed through the GDP indicators. The research structure of this paper will present the empirical results based on the collected data in the insurance industry for the selected countries and their economic growth, changes in GDP and characteristics of the insurance market within the analyzed relationship in life and non-life insurance premium, as well as the explanation of the comparative overview of insurance premiums and paid damages for the period 2010-2014.

The insurance industry and economic growth The economic growth can be determined with the following parameters: the growth rate of gross

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Stojaković A.  Insurance industry in selected transition countries

domestic product, changes in gross domestic product, national income etc. The economic development also refers to the existing relationship of macroeconomic aggregates, such as national product, investment, employment and consumption, and other economic and noneconomic factors of a multidimensional process. In order to provide economic development, it is important to identify two primary goals, which include developing the productive potential and raising the population living standard. The insurance industry has a significant influence in economic and social development of each country in transition: ◆◆ It encourages better evaluation in risk management, but also compensation to protect the ensured; ◆◆ It provides high protection to individuals and companies with the reliability to involve in economic activity and development in general; ◆◆ The insurance industry supports stability of economic growth by means of long-term investments (Insurance Europe, 2014).

For the purpose of supporting the economic development, the insurance sector needs to have its regulation strong enough to provide protection to the insured, and at the same time, to stimulate insurance companies to continue their economic activity through the insurance products, services and investments. It is important to notify that continued economic development depends on the development level and size of a country, which leads to the selection of development goals and priorities. Therefore, it would be necessary that each country makes the right choice of development priorities and to provide economic conditions for the achievement of important objectives. The representative indicator of economic development is participation of insurance premiums and its share in the gross domestic product (GDP). The insurance, as a part of the financial industry economic activities, is expressed in percentages of the total gross insurance premiums ratio and GDP.

Country

2010

2011

2012

2013

2014

Slovenia

5.66%

5.57%

5.70%

5.47%

5.20%

Croatia

2.74%

2.73%

2.75%

2.78%

2.65%

Hungary

3.13%

2.82%

2.69%

2.71%

2.66%

Romania

1.56%

1.38%

1.41%

1.27%

1.21%

EU 27

8.40%

7.90%

6.70%

6.80%

6.95%

Table 1. The share of insurance premiums in gross domestic product – the selected EU countries compared to the EU27 for the period 2010-2014.

Country

2010

2011

2012

2013

2014

Serbia

1.80%

1.70%

1.90%

1.80%

1.90%

Montenegro

2.05%

1.97%

2.01%

2.18%

2.11%

Macedonia

1.52%

1.50%

1.52%

1.44%

1.45%

EU 27

8.40%

7.90%

6.70%

6.80%

6.95%

Table 2. The share of insurance premiums in gross domestic product – the selected non-EU countries compared to the EU27 for the period 2010-2014. 35

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Stojaković A.  Insurance industry in selected transition countries

The transitional countries of the region were ranked below the average of EU countries in the period from 2010 to 2014, according to the results of the contracted insurance premiums. According to the Tables 1 and 2, it can be concluded that, the newer Member States of the EU, Hungary and Croatia, are following other EU countries in the participation of insurance premium in GDP for the period 2010 to 2014. The analyzed countries have positive trends in basic macroeconomics globally, which is important for the assessment in the insurance market. However, the level of economic development for analyzed countries is still lower than the level of the EU founding countries. In the years of economic crisis, the price of securities on the capital market declined, as well as insurance companies portfolio. The collapse of the European financial market did not include insurance companies, because the insurers invested their available funds carefully, compared to the banks. Investments in insurance industry are based on the diversification of the least risky securities, which is the reason why their assets are mostly bonds and stocks that make the largest share in its portfolios. The investment portfolio of European insuance companies increased and it amounted to EUR 6.963 billion, which was the highest reported level compared to the period 2000-2010. The portfolio of non-life insurance did not change significantly, while portflio of life insurance gained up to EUR 2.000 billion, which was double than non-life insurance. In the European investment portfolio, the United Kingdom has the largest share of aggregate (BMI Research, 2015a) and it is followed by France (BMI Research, 2015b), and Germany (BMI Research, 2015c), with the total 50% over of the investments in the life insurance industry. In the portfolio structure of European insurers, the largest part of the investment portfolio accounts percentage is in debt securities and actions, as well as loans, followed by real estate and other property. 36

Institutional investors, as a group of insurance companies, have extensive capital, invested primarily in the capital market. The structure of investment in different segments of financial markets in Europe depends on the development of financial markets and the quality of securities, which is the reason for providing greater opportunities for adequate investment to the insurance companies. Therefore, the OECD guidelines for insurance regulation and supervision in transition economies (OECD, 2016) provide the basis for a regulatory framework, investment regulations, procedures for licensing, reinsurance, compulsory insurance, supervision, solvency provisions, etc. The purpose is to ensure the development of modern insurance markets in emerging countries (OECD, 2016). The annual estimate of concluded insurance premiums vs. paid damages shows better overview of the insurance industry, which indicates that many subjects and factors have a combined effect on the prevalence of insurance market, no matter how different economic and social conditions in regional countries are. These differences can mostly be seen in countries where the emerging market population is relatively young, which generally leads to increased sales of all insurance products.

Insurance market in selected transition countries In the developed countries, there are important institutional investors, which are far above the countries that have the financial system at an initial stage of economic development. For this reason, the insurance industry has surpassed the banking industry, despite the fact that banks were leaders in the financial market for years. In the last six years, the balance sheet of banks was never below 90%, and its capital lasted during that period to the specified percentage (Table 5). Therefore, it can be stated that the capital of the insurance

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Stojaković A.  Insurance industry in selected transition countries

industry has decreased during the global economic crisis, and reached its lowest level.

for policyholders, which could contribute to the expected growth.

In the recent period, the insurance sector in Serbia has low average development in comparison with the EU countries. Accordingly, economic and social crisis represents the main characteristic of the macroeconomic environment in which insurance companies operate. Insolvent enterprises and impoverished population, which make the large part of policyholders, constitute a major part of the problem. Insurers, primarily through insurance premiums, compete for a larger share of the market, leaving aside other elements of competitiveness and expecting some tax incentives

The insured also expect state intervention on the revenue side, as well as the care about their standard of living.

Country Slovenia

Croatia

Hungary

Romania

For that reason, we have an unfavourable portfolio structure of the insurance industry in Serbia and some other countries in the region. A comparison of the insurance markets was carried out in this analysis in order to determine the development level and position of the insurance markets in Serbia and the countries of Slovenia, Croatia, Romania, Hungary, Macedonia and Montenegro.

2010

2011

2012

2013

2014

2,093,464,202

2,092,244,519

2,036,424,881

1,977,182,583

1,937,555,622

life insurance

27.63%

27.95%

28.45%

30.50%

31.34%

non-life insurance

72.37%

72.05%

71.55%

69.50%

68.66%

1,234,384,913

1,220,993,992

1,206,738,985

1,211,829,105

1,143,038,451

life insurance

26.58%

26.59%

27.23%

27.97%

30.81%

non-life insurance

73.42%

73.41%

72.77%

72.03%

69.19%

3,077,806,058

2,941,788,749

2,724,072,598

2,855,039,571

3,006,355,162

life insurance

46.02%

47.84%

46.85%

48.50%

48.24%

non-life insurance

53.98%

52.16%

53.15%

51.50%

51.76%

1,553,887,606

1,463,268,830

1,855,328,789

1,825,113,816

1,818,821,310

life insurance

20.35%

23.00%

21.83%

20.12%

20.29%

non-life insurance

79.65%

77.00%

78.17%

79.88%

79.71%

TOTAL

Table 3. Realized insurance premiums and the portfolio structure in the selected EU countries for the period 2010-2014 (in EUR).

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Stojaković A.  Insurance industry in selected transition countries

Country Serbia

Montenegro

Macedonia

2010

2011

2012

2013

2014

463,065,066

469,786,910

503,800,852

524,930,418

568,893,492

life insurance

16.51%

17.44%

19.29%

21.96%

23.06%

non-life insurance

83.49%

82.56%

80.71%

78.04%

76.94%

62,185,580

64,791,699

66,922,021

72,774,509

72,416,868

life insurance

13.45%

13.98%

14.16%

14.94%

17.34%

non-life insurance

86.55%

86.02%

85.84%

85.06%

82.66%

105,638,246

110,974,703

114,322,039

117,254,066

124,380,948

life insurance

5.47%

7.30%

8.53%

10.14%

11.64%

non-life insurance

94.53%

92.70%

91.47%

89.86%

88.36%

TOTAL

Table 4. Realized insurance premiums and the portfolio structure in the selected non-EU countries for the period 2010-2014 (in EUR).

In the Tables 3 and 4, we can clearly see that the ratio of life and non-life insurance is even only in Hungary, whereas non-life takes precedence over life insurance in all other countries. It was noticed that life insurance has not experienced higher growth only in Romania, with occasional variations, compared to other countries in the table above. However, a progress has occurred in Serbia from 16.51% share at the fifth place in 2010 to one place higher, with life insurance participation of 23.06% in 2014. These growth indicators bring positive development that the EU member states (Slovenia, Hungary and Croatia) already have, since their financial industries are more developed and achieve positive results (Babić, 2015). Recently, besides the growth of insurance premiums in Serbia, the equal participation of life and non-life insurance premium was observed. In order to improve insurance services and necessary changes in the design of insurance products, especially in life insurance, an insurance company needs to recognize the preferences of policyholders. Therefore, it would be enough that the global trend, in terms of preferences of clients, is adopted from developed countries, such as orientation to the risk of severe illness or similar health insurance, with the newer perspective on different products in life insurance. 38

However, the steady service of non-life insurance has not experienced changes for many years. According to the data from Europe Insurance, the investment portfolio of European insurers increased in 2013 to EUR 8.527 billion, making them leading investors in the European financial market, while the average share of public debt to GDP ratio in the EU increased from 65% in 2007 to 92% in 2014 (Insurance Europe, 2016, p. 23). It should be noted that this regulation is attributed to zero-rate payment of capital for bonds of EU countries, and as such they are considered risk-free bonds. It is realistic to expect that insurance companies in these countries will introduce significant changes in their portfolio in order to optimize capital needs. To maintain the stability of the financial system, it is necessary to establish an adequate supervision of financial institutions, and that applies to investments and insurance companies. In addition, to protect the basic rights of insurance beneficiaries and policyholders, the main reason for insurance supervision should be the protection of domestic insurers and increased funds for future investments in the domestic financial market. That kind of control would have a positive effect on the balance of payments in each country. With the persistent planning and constant organization,

EJAE 2017  14 (1)  32-47

Stojaković A.  Insurance industry in selected transition countries

it is more certain that foreign companies will be attracted to invest and establish their businesses under such transparent conditions. The basic function of the National Bank of Serbia is to timely recognize and implement procedures and measures, and to ensure that its management is uniformed with international standards and procedures that apply in the supervision of the EU insurance companies.

In the European Union, the largest institutional investors are insurance companies that provide significant amount of life-savings and voluntary pension funds, which contribute to financial security as a secure cash-flow of long-term capital supporting the stability and efficient functioning of financial markets.

Banks

Leasing

2010

2011

2012

2013

2014

2010

2011

2012

2013

2014

Balance sheet amount

91.8

92.4

92.6

92.4

92.0

3.6

2.8

2.3

2.2

2.0

Capital

92.5

93.0

93.2

93.5

93.6

1.5

1.4

1.2

0.9

1.1

Number of employees

71.8

71.0

70.3

69.0

67.9

1.1

1.2

1.1

1.2

Insurance

Voluntary pension funds

2010

2011

2012

2013

2014

2010

2011

2012

2013

2014

Balance sheet amount

4.2

4.4

4.5

4.8

5.2

0.4

0.5

0.6

0.7

Capital

6.0

5.7

5.6

5.5

5.4

Number of employees

26.8

27.4

28.3

29.5

30.5

0.3

0.4

0.3

Table 5. Participation in the overall financial industry in Serbia for the period 2010-2014 (in%).

In Serbia, the entry of insurance companies with foreign ownership and green field investments considerably influenced the increase of participation in the financial system and the insurance market. It is important to point out other financial institutions presented in Table 5, which participate with significant share in the economic development through the existing equity and the number of employees. Some of the changes, with foreign ownership insurance companies, were observed, where the most prevalent participation in life insurance premium was 92.5% and in non-life insurance 61.1% in 2010, with total assets from 66.7% and the number of

employees to 65.6%. But in 2012, the prevailing participation was different in the life insurance premium with 90.8% or premium share of 57.6% in non-life insurance and the total assets were 68.8%, with the number of employees of 65.5%. Finally in 2014, the participation in the life insurance premium has reached 91.5%, with non-life insurance at 64.7%, and the total assets 75.0%, also with the higher number of employees up to 68.8%. In order to succeed in its strategic objective, the NBS has developed a modern control system by which it monitors the insurance companies as well as their exposure to risks. The NBS recommendations to insurance companies, with the purpose to 39

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strengthen corporate governance and improve the processes of internal control, were the following: improving risk management, applying investment valuation techniques (Jeremić, 2010, p. 111), regular education of all potential insured and enhancing transparency to customers, which contributes to further development of insurance activities and strengthening trust on the insurance market. The share of insurance premium in GDP was 1.7% in 2013, which placed Serbia in the 66th place in the world, while this indicator reached 7.5% for the EU Member States. Despite the fact that the group of developing countries has the average share of insurance premium in GDP of 2.7%, compared to the countries of Eastern and Central Europe with an average of 2.0%, the main conclusion can be that Serbia has a satisfactory position, ahead of Romania, Turkey and Russia. The observed progress of the insurance market in Serbia, in the reported period from 2010 to 2014, showed a positive trend. At the same time, there was a visible decline in the share of real estate in the context of fixed assets. With the development in the long-time transition process, Serbia and other neighbouring countries are aware how important the economic role of insurance is for the global development of national and social systems which follow recommendations of the NBS accordance with the prescribed EU Solvency II Directive. At the same time, the countries of the region, that recently joined EU, still have some unresolved political and financial problems which affect their economic development, while foreign direct investments have slower intensity than expected which creates unfavourable environment for the insurance market and its development. Hungary, as the first Central European country which has reformed its insurance system in 1990, had a significant transaction when the state-owned insurance company Hungaria Bisztosito was sold out to the foreign consortium Allianz (Ulst, 2005, p. 101). Slovenia, on the other hand, protected the 40

interests of its most efficient national insurance company Triglav. The Slovenian example shows that a country in transition is able to build a stable and strong insurance sector, primarily life insurance, and to thereby avoid the domination of foreign capital (Kočović, 2012, pp. 7-8). Lovćen Insurance in Montenegro, and Kopaonik Insurance in Serbia are the property of the Triglav Group (Mondo, 2006). A significant transformation of the state property in Macedonia was completed in 2013, when the company ADOR QBE Macedonia was purchased and renamed in Akcionersko Društvo za Osiguruvanje i Reosiguruvanje Makedonija Skopje - Vienna Insurance Group (Vienna Insurance Group, 2013). Later, on the remains of the global economic crisis, other economic industries of banking, industrial production, including real estate and car sales, have also slowed down the development in the field of life insurance as a result of higher unemployment and lower income of residents. The data for the period from 2010 to 2014 showed signs of a successful economic recovery in most transition countries and the direction of the financial system development had certain changes in the operating results of both insurance companies and banks, leasing companies and voluntary pension funds.

Comparative overview of insurance premiums and paid damages for the period 2010 to 2014 In addition to the ability of insurers to make insurance premium at a level sufficient for damages, it is necessary to provide a good collection. Otherwise, the insurer may face the problem of failing to fulfil its obligations to policyholders. Respecting the prescribed rules for the control of claims payments by the National Bank of Serbia, companies continued to improve business practices towards the positive trend related to the contracted and paid insurance premiums.

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The analysis of completed insurance premiums and paid damages lead to an important business segment of an insurance company, which is the scope of coverage consideration, leading to effective risk management. Each insurance company should determine the program of reinsurance coverage, as insurance companies are exposed to different possibilities of damages on the basis of accepted risk of the insured, and thus they have different financial stability, management culture and leadership, as well as coverage of risk management. Therefore, due to the insurance specificity, companies have different total liabilities and the contracted insurance. A unique approach to creating programs in reinsurance has to be adapted to the real needs of each insurance company, in order to protect the interests of all insurance participants.

Insurance companies deal with the following areas that include adequately established system of internal control: improving risk management, improving valuation techniques of investment, increase of transparency and strengthening good business practices. With timely payment of damages and activities on the education of potential insured, we contribute to greater confidence of the insured and create conditions for the development of this segment of the financial system. The Tables 6 and 7 clearly show that the ratio of claims paid and insurance premiums collected is almost constant for a longer period of time. This information helps insurance companies plan the costs, where claims paid occupy a dominant position.

Country

2010

2011

2012

2013

2014

Slovenia

60.81%

62.77%

67.59%

68.83%

68.44%

Croatia

47.54%

49.95%

51.28%

51.56%

51.53%

Hungary

61.62%

64.79%

71.73%

71.78%

64.96%

Romania

61.04%

57.31%

57.57%

55.96%

56.02%

Table 6. Comparison of the ratio of collected insurance premiums and paid damages in the selected EU countries for the period 2010-2014 (in %).

Country

2010

2011

2012

2013

2014

Serbia

40.70%

41.27%

40.51%

40.94%

39.60%

Montenegro

51.02%

35.12%

33.43%

36.83%

42.15%

Macedonia

46.11%

44.15%

42.97%

41.14%

40.02%

Table 7. Comparison of the ratio of collected insurance premiums and paid damages in the selected non-EU countries for the period 2010-2014 (in %).

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Figure 1. Comparative review of share - insurance premiums and claims paid in the regional countries for the period 2010-2014 (in EUR).

The data in the above Figures and Tables were used and analyzed for Serbia (Sektor za nadzor nad obavljanjem delatnosti osiguranja NBS, 2010-2014), Slovenia (Slovensko zavarovalno združenje Republika Slovenija, 2010-2014), Croatia (Hrvatski ured za osiguranje, 20102014), Montenegro (Agencija za nadzor osiguranja Crna Gora, 2010-2014), Macedonia (Agencija za supervizija na osiguruvanje Republika Makedonija, 2010-2014), Hungary (Magyar Biztosítók Szövetsége, 2010-2014) and Romania (Autoritatea de Supraveghere Financiară Romania, 2010-2014). The data in the Figure 1 points to the comparative review of share between insurance premiums and claims paid in the regional countries, which clearly indicates that a greater percentage of claims have been paid in the EU Member States in the reporting period. The main reason for that remains the stable development and its influence on the insurance market, as well as powerful financial strength of the insurance companies, but also better trust and loyalty of 42

the insured and policyholders. With its constant progress, the society creates a liberal free market economy for the future (Turnock, 2005, p. 101). On the other hand, transition countries, which are less developed, with lower ratio of claims paid according to invoiced insurance premiums, have very different direction of insurance market development compared to the EU countries. Insurance premiums indicate the degree of economic development of countries, such as the EU Members, for example Slovenia, Romania, Hungary and Croatia that have significant funds available in the insurance sector and provide, through transparent legislation, secure investments of raised funds following up current economic trends. According to the given parameters, insurance market in Serbia demonstrates the largest potential compared to Montenegro and Macedonia. As previously mentioned, insurance companies provide a transfer of risk, with the financial investment power of foreign insurance companies, and distribution of risk, with widespread increased

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number of individuals like risk carriers. However, they remain aware of the frequency of unfortunate coincidences and the risk occurrence. After all, the insurance companies expand their business and operation risks toward new insurance markets or potential insured, transferring on that way the risk to a much larger number of community members. The basic motive of investments, the reason why foreign insurance companies are operating in the international markets, is profitable transfer of risk. For insurance companies, that is a very useful investment because it provides the accumulation of financial assets. Thereby, insurance companies provide a large community of insured risks, or exposed units, and also anticipate the costs participation more easily. From an economic point of view, this insurance function provides security and financial protection to people and companies in case of an unfortunate event. They thus achieve to maintain a basic living standard and thereby insurance companies enable proper insurance cover for as much people and businesses as possible (Insurance Europe, 2015). Accordingly, it is expected that the sale conditions of life insurance and non-life insurance could be difficult in the future, with a high hope that the growth of the insurance industry accompanied with the development of the capital market and economy will have a positive direction.

CONCLUSIONS Using the assessment of the collected data, it is shown that the life and non-life insurance, individually and collectively, contributed to economic growth in a sample of selected EU member states and selected non-EU countries, in the period from 2010 to 2014. The following can be concluded: ◆◆ The first hypothesis has not been proved, i.e. that the insurance industry could not increase coverage at the market indepen-

dently from the existing economic conditions, which indicates that the economic growth, shown by increase of GDP, is necessary for the insurance development; ◆◆ Unlike the main hypothesis that has not been confirmed, the auxiliary hypothesis has produced evidence that the range of insurance products increased in the countries in which investments were made in the insurance industry, and through this type of diversification, it was possible to prevent a large decline of the insurance share in GDP; ◆◆ The observed period covered the time after the occurrence of the financial and economic crisis and therefore there was low growth in gross domestic product; ◆◆ Low and slow economic growth resulted in a sharp decrease in the insurance industry; ◆◆ As an outcome of foreign investments in the insurance business, the range of insurance products and methods of sales were enhanced, which resulted in the increased competitiveness. According to the present developments and results, the insurance industry has the opportunity to promote economic growth. At the same time, the functions of insurance companies represent an important segment for economic growth by providing resources, risk management and allocation of resources. Adequate guidelines could present suggestions for future policymakers in the insurance industry, as insurance companies will assume the position of leading financial investors in the future, since they possess large amounts of capital to invest in different segments of the financial market. In any case, the key is to implement business policy that will ensure institutional improvements for the promotion of competition, which contributes to increased efficiency, particularly in risk management and new products development. In this regard, many countries deal with demographic challenges and problems in the social security system, and they should implement incentives to stimulate and 43

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increase participation of insurance companies in the form of supplementary voluntary pension and health insurance. The development trends of the insurance markets in the future, in the countries that are not EU member states, could be more dynamic as compared to the overall GDP. By creating more favourable investment climate at the insurance market, the governments of less developed countries could achieve the first goal of any advanced society - better quality of life for every citizen. Insurance could give its full contribution and be a driving force for the development. Such trends are rather predictable and give a chance to foreign insurers to increase their financial means by coming to underdeveloped insurance markets (investment risk is small, i.e. the profitability of investment is certain). It is possible that the development of the insurance industry would contribute to the economic growth, and enable future research due to connectivity and data availability in the integration of an increasing number of transition countries.

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Autoritatea de Supraveghere Financiară Romania. (2012). Report on the romanian insurance market and the insurance supervision in 2012. Retrieved April 09, 2016, from http://asfromania.ro/en/publications/annual-report/asf-annual-report/2323asf-annual-report-2012 Autoritatea de Supraveghere Financiară Romania. (2013). Report on the romanian insurance market and the insurance supervision in 2013. Retrieved April 09, 2016, from http://asfromania.ro/en/publications/annual-report/asf-annual-report/2323asf-annual-report-2013 Autoritatea de Supraveghere Financiară Romania. (2014). Report on the romanian insurance market and the insurance supervision in 2014. Retrieved April 09, 2016, from http://asfromania.ro/en/publications/annual-report/asf-annual-report/2323asf-annual-report-2014 Babić, B. (2015). Croatia Osiguranje trećinu novozaposlenih lani preotela konkurenciji. Retrieved June 03, 2016, from http://www.poslovni.hr/trzista/cotrecinu-novozaposlenih-lani-preotela-konkurenciji-289215. In Croatian. BMI Research. (2015a). United Kingdom Insurance Report. Retrieved May 06, 2016, from http://www. store.bmiresearch.com/united kingdom-insurancereport.html BMI Research. (2015b). France Insurance Report. Retrieved May 06, 2016, from http://www.store. bmiresearch.com/france-insurance-report.html BMI Research. (2015c). Germany Insurance Report. Retrieved May 06, 2016, from http://www.store. bmiresearch.com/germany-insurance-report.html Hrvatski ured za osiguranje. (2010). Godišnji izveštaj tržišta osiguranja u Republici Hrvatskoj za 2010. Retrieved April 09, 2016, from http://www.huo.hr/ hrv/statisticka-izvjesca/18/publikacije-arhiva/2010. In Croatian. Hrvatski ured za osiguranje. (2011). Godišnji izveštaj tržišta osiguranja u Republici Hrvatskoj za 2011. Retrieved April 09, 2016, from http://www.huo.hr/ hrv/statisticka-izvjesca/18/publikacije-arhiva/2011. In Croatian. Hrvatski ured za osiguranje. (2012). Godišnji izveštaj tržišta osiguranja u Republici Hrvatskoj za 2012. Retrieved April 09, 2016, from http://www.huo.hr/hrv/statisticka-izvjesca/18/publikacije-arhiva/2012. In Croatian.

Hrvatski ured za osiguranje. (2013). Godišnji izveštaj tržišta osiguranja u Republici Hrvatskoj za 2013. Retrieved April 09, 2016, from http://www.huo.hr/ hrv/statisticka-izvjesca/18/publikacije-arhiva/2013. In Croatian. Hrvatski ured za osiguranje. (2014). Godišnji izveštaj tržišta osiguranja u Republici Hrvatskoj za 2014. Retrieved April 09, 2016, from http://www.huo.hr/ hrv/statisticka-izvjesca/18/publikacije-arhiva/2014. In Croatian. Insurance Europe. (2014). How insurance stimulates growth. Retrieved June 05, 2016, from http://www. insuranceeurope.eu/search/type/publications/ How insurance stimulates growth Insurance Europe. (2014). Why insurers differ banks. Retrieved June 05, 2016, from http://www.insuranceeurope.eu/Why insurers differ banks Insurance Europe. (2015). The benfits of insurance. Retrieved June 05, 2016, from http://www.insuranceeurope.eu/search/type/publication/The benfits of insurance Insurance Europe. (2016). The demographic challenge revisited innovative measures in the European insurance industry. Retrieved June 05, 2016, from:// www.insuranceeurope.eu/sites/files/attachments/ The demographic challenge revisited innovative measures in the European insurance industry.pdf Insurance Europe. (2012). Insurance Annual Report 2011-2012. Retrieved April 09, 2016, from http:// www.insuranceeurope.eu/annual-report-2011-2013 Insurance Europe. (2013). Insurance Annual Report 2012-2013. Retrieved April 09, 2016, from http:// www.insuranceeurope.eu/annual-report-2012-2013 Insurance Europe. (2014). Insurance Annual Report 2013-2014. Retrieved April 09, 2016, from http:// www.insuranceeurope.eu/annual-report-2013-2014 Insurance Europe. (2015). Insurance Annual Report 2014-2015. Retrieved April 09, 2016, from http:// www.insuranceeurope.eu/annual-report-2014-2015 Insurance Europe. (2016). Insurance Annual Report 2015-2016. Retrieved April 09, 2016, from http:// www.insuranceeurope.eu/annual-report-2015-2016 Jeremić, Lj. (2010). Istraživanje tržišta i prodaja osiguranja. Beograd: Univerzitet Singidunum. In Serbian. Jeremić, Lj. (2012). Ekonomika osiguranja. Beograd: Univerzitet Singidunum. In Serbian. Kočović, J. (2012). Prezentacija Trendovi u razvoju srpskog tržišta osiguranja u poslednjoj dekadi. 45

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Beograd: Ekonomski fakultet Beograd. In Serbian. Magyar Biztosítók Szövetsége. (2010). Hungarian Insurance Companies’ Yearbook 2010. Retrieved April 09, 2016, from http://www.mabisz.hu/images/stories/docs-eng/publications/yearbook-2010english.pdf Magyar Biztosítók Szövetsége. (2011). Hungarian Insurance Companies’ Yearbook 2011. Retrieved April 09, 2016, from http://www.mabisz.hu/images/ stories/docs-eng/publications/yearbook-2011english.pdf Magyar Biztosítók Szövetsége. (2012). Hungarian Insurance Companies’ Yearbook 2012. Retrieved April 09, 2016, from http://www.mabisz.hu/images/ stories/docs-eng/publications/yearbook-2012english.pdf Magyar Biztosítók Szövetsége. (2013). Hungarian Insurance Companies’ Yearbook 2013. Retrieved April 09, 2016, from http://www.mabisz.hu/images/ stories/docs-eng/publications/yearbook-2013english.pdf Magyar Biztosítók Szövetsége. (2014). Hungarian Insurance Companies’ Yearbook 2014. Retrieved April 09, 2016, from http://www.mabisz.hu/images/ stories/docs-eng/publications/yearbook-2014english.pdf Mondo. (2006). Slovenački Triglav kupio Kopaonik osiguranje. Retrieved June 03, 2016, from http:// www.mondo.rs/a31757/Info/Drustvo/SlovenackiTriglav-kupio-Kopaonik-siguranje.html. In Serbian. OECD. (2016). Insurance Guidelines for Economies in Transition. Retrieved June 03, 2016, from http:// www.oecd.org/finance/insurance/insuranceguidelinesforeconomiesintransition.htm Sektor za nadzor nad obavljanjem delatnosti osiguranja NBS. (2010). Godišnji izveštaj za 2010. Retrieved April 09, 2016, from http://www.nbs.rs/internet/latinica/60/60_6/izvestaji/izv_IV_2010.pdf. In Serbian. Sektor za nadzor nad obavljanjem delatnosti osiguranja NBS. (2011). Godišnji izveštaj za 2011. Retrieved April 09, 2016, from http://www.nbs.rs/internet/latinica/60/60_6/izvestaji/izv_IV_2011.pdf. In Serbian. Sektor za nadzor nad obavljanjem delatnosti osiguranja NBS. (2012). Godišnji izveštaj za 2012. Retrieved April 09, 2016, from http://www.nbs.rs/internet/latinica/60/60_6/izvestaji/izv_IV_2012.pdf. In Serbian. Sektor za nadzor nad obavljanjem delatnosti osiguranja NBS. (2013). Godišnji izveštaj za 2013. Retrieved April 09, 2016, from http://www.nbs.rs/internet/latinica/60/60_6/izvestaji/izv_IV_2013.pdf. In Serbian. 46

Sektor za nadzor nad obavljanjem delatnosti osiguranja NBS. (2014). Godišnji izveštaj za 2014. Retrieved April 09, 2016, from http://www.nbs.rs/internet/latinica/60/60_6/izvestaji/izv_IV_2014.pdf. In Serbian. Slovensko zavarovalno združenje Republika Slovenija. (2010). Statistical Insurance Bulletin 2010. Retrieved April 09, 2016, from http://www.zav-zdruzenje.si/ statistical-insurance-bulletin/-2010/ Slovensko zavarovalno združenje Republika Slovenija. (2011). Statistical Insurance Bulletin 2011. Retrieved April 09, 2016, from http://www.zav-zdruzenje.si/ statistical-insurance-bulletin/-2011/ Slovensko zavarovalno združenje Republika Slovenija. (2012). Statistical Insurance Bulletin 2012. Retrieved April 09, 2016, from http://www.zav-zdruzenje.si/ statistical-insurance-bulletin/-2012/ Slovensko zavarovalno združenje Republika Slovenija. (2013). Statistical Insurance Bulletin 2013. Retrieved April 09, 2016, from http://www.zav-zdruzenje.si/ statistical-insurance-bulletin/-2013/ Slovensko zavarovalno združenje Republika Slovenija. (2014). Statistical Insurance Bulletin 2014. Retrieved April 09, 2016, from http://www.zav-zdruzenje.si/ statistical-insurance-bulletin/-2014/ Šulejić, P., Vujović, R., Mrkšić, D., Žarković, N., Rašeta, J., Miloradić, J. (2006). Osnovi osiguranja. Beograd: Univerzitet Singidunum. In Serbian. Turnock, D. (2005). The East European economy in context: Communism and transition. London: Routledge. Ulst, I. (2005). Linkages of Financial Groups in the European Union: Financial Conglomeration Developments in the Old and New Member States. Budapest: Central Eurpean University Press. Vienna Insurance Group. (2013). Vienna Insurance Group in Macedonia: Integration of Macedonia Insurance successfully completed. Retrieved June 03, 2016, from http://www.vig.com/en/press/pressreleases/detail/vienna-insurance-group-in-macedonia-integration-of-makedonija-osiguruvanjesuccessfully-completed.html

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RAZVOJNE PROMENE U SEKTORU OSIGURANJA ZEMALJA U TRANZICIJI Rezime: Ostvarivanje ciljeva rasta i razvoja nacionalnih ekonomija uspešno se postiže putem realizacije pravilno odabrane politike ulaganja, pa otuda i stav da su strana ulaganja jedno od osnovnih sredstava za ostvarivanje ciljeva ekonomskog i regionalnog razvoja. U globalizaciji svetskog tržišta osiguranje je jedna od grana koja je najdalje otišla. U ovom radu sagledava se odnos sektora osiguranja i njegove razvojne promene kod odabranih zemalja u tranziciji, od kojih su neke od njih već članice Evropske unije, a neke još uvek u postupku pristupanja. Značaj sektora osiguranja vidi se u rezultatima prikazanih vrsta osiguranja u periodu od 2010. do 2014. godine. Zemlje u tranziciji očekuje značajan podsticaj privrednom razvoju ulaskom investicija u delatnost osiguranja. Da li su ova očekivanja ispunjena ili su unapređenja ostvarena samo u domenu vrste i načina prodaje proizvoda osiguranja predmet je ove studije.

Ključne reči: osiguranje, razvoj, zemlje u tranziciji, premija osiguranja, štete. Received: August 8, 2016 Correction: August 25, 2016 Accepted: September 16, 2016

EJAE 2017, 14(1): 48-62 ISSN 2406-2588 UDK: 659.113.25(497.11) 004.738.5:339 DOI: 10.5937/ejae14-13242 Original paper/Originalni naučni rad

THE ANALYSIS OF SERBIAN CUSTOMERS SATISFACTION WITH E-SERVICES QUALITY DIMENSIONS OF LODGING E-INTERMEDIARIES Nikola Mihajlović ¹* ¹ Singidunum University, 32 Danijelova Street, Belgrade, Serbia

Abstract: With the constantly rising share of online accommodation bookings, finding out how customers perceive the website e-service quality is becoming increasingly important in order to build strong satisfaction and create loyal customers. The main goal of the study was to analyze how Serbian customers perceive the quality of service provided by lodging e-intermediaries. Correlation matrix and multiple regression analysis were used to determine the impact of each of 6 e-service quality dimensions on satisfaction of e-intermediary customers. The questionnaires were distributed during the research period of 3 months (July-September, 2015). The study has shown that only three out of six dimensions have impact on customer satisfaction, comprising 63.9% of total customer satisfaction: reliability, information quality, and personalization.

INTRODUCTION Information technologies have a significant influence on the tourism as a whole, especially the rise of the Internet which accelerated innovation in the tourism sector. Predictions are that this trend will continue (Avdimiotis et al., 2009). The worldwide number of Internet users is constantly growing, followed by the growing 48

* E-mail: nikola.mihajlovic.11@singimail.rs

Key words: service quality, online shopping, Serbia, customer satisfaction, e-intermediaries.

number of Internet users purchasing online. This trend affected the hotel industry too, with online sales today being an indispensable distribution channel for hotels, regardless of their size, category or location. The overall number of accommodation bookings over the Internet is constantly growing, which is confirmed each year by numerous researchers. According to Phocuswrite, in some developed countries and regions of the

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Mihajlović N.  The analysis of Serbian customers satisfaction with e-services quality dimensions of lodging e-intermediaries

world, booking accommodation over the Internet makes up more than 40% of the total number of bookings (Europe - 45%, USA - 43%). In developing countries, this percentage is significantly lower (Eastern Europe - 27%), but it records constant and higher growth. The average growth in the period 2011-2015 for Eastern Europe accounted for 25%, which is several times more than in Europe (8%) or the US (7%) (World Travel Market, 2015). Tourism is an information-intensive industry with information exchange between the seller and the buyer carrying a high risk of losing quality of information or misunderstanding. The value of information is derived from its systematicity, comprehensiveness, completeness, objectivity and specificity (Popesku, 2011). Internet and e-commerce are enabling greater interactivity and flexibility of operations, faster and cheaper operations compared to traditional, higher level of integration of business segments, etc (Vitić-Ćetković, 2009). Following this trend, there is the need to understand how customers perceive the e-service quality (e-SQ) when purchasing accommodation. Having a high service quality and satisfied customers is an important goal in the strategy of any successful organization. Thus, a large number of research studies have been done in this field. According to data of the Serbian Statistical Office in 2015 (Kovačević et al., 2015), 65.3% of people used the Internet in the last three months, following the continuous growth of the Internet users in Serbia over the past years. Although the number of internet users in Serbia, who bought or ordered goods or services online over the past 12 months, increased in the last three years by 11% (33.3% in 2015 compared to 22% in 2012), the number of those users who have purchased accommodation online grew in the same period by only 2.8%, which is significantly smaller percentage of growth in relation to the total increase of users who purchase goods and services online (Vukmirović et al. 2012).

The questions are what causes this situation, what Internet users in Serbia expect while purchasing accommodation online and whether the customers perceive website service as satisfactory. The particular research focus of this study was the use of lodging e-intermediaries, namely Online Travel Agencies (OTA), companies operating online which mediate between companies that provide tourist services and its customers (Davidson & Burgess, 2006). Therefore, the research problem was exploring the e-SQ dimensions of lodging e-intermediaries when purchasing accommodation and their impact on the satisfaction of Serbian customers. The goal was to answer what e-SQ dimensions affect Serbian user satisfaction the most, from the aspect of quality of e-service provided by lodging e-intermediaries.

LITERATURE REVIEW Service quality Most studies on customer perceived satisfaction of provided service are based on traditional models. One of the most widely used and most well-known models for customer satisfaction research is certainly the SERVQUAL model. Parasuraman et al. (2005) note that the literature on the subject of service quality is dominated by the research of the services provided by the people - the traditional concept of quality of service. However, purchasing online (e-commerce) means that the customers are primarily interacting with the website instead of the person as the service provider. Therefore, the question remains as to whether the conclusions of the traditional service quality research are valid in the context of services provided online, where the interaction takes place between customers and technology, as well as determining how similar the process of evaluation of the traditional quality of service is compared to quality of electronic services. 49

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The quality of e-services can be defined as the customers´ overall evaluation and judgment of the excellence and quality of e-services offerings in the electronic environments (Santos, 2003, quoted in Bauernfeind et al., 2006). Zeithaml et al. (2002) defined the concept of e-services quality as “extent to which a website facilitates efficient and effective shopping, purchasing, and delivery of products and services” (Zeithaml et al., 2002). Furthermore, Zeithaml et al. (2009) identified neither low price nor quality of the website as the key success factors for the company that uses the latest technology, but the e-SQ. According to Bogdanovych et al. (2007), there is a shift in user preferences from products and services to experiences. For many travelers, the service has become secondary, and service providers must provide the user experience above the basics. Only good service is not enough. Travelers nowadays decide on the purchase based on the quality of experience they receive in the course of travel choices. It is unlikely that customers will thoroughly evaluate each sub-process during online purchase, but will rather perceive the service as an overall process and outcome (van Riel et al., 2001, cited in Lee & Lin, 2005). Also, the customer-specific attributes can influence the attributes that customers desire in an ideal website and the performance levels that would signal the superior e-service quality (e-SQ) (Parasuraman et al., 2005). Udo et al. (2010) have shown that the benefits offered by the provider and the content of the website have a significant positive effect on the customers’ e-SQ perception. Although, unlike the traditional service quality research, e-SQ research is at the initial stage (Serkan et al., 2010), a number of previous studies suggest that the e-service satisfaction, and consequently the behavioral intentions of consumer or e-loyalty, are largely influenced by the quality of e-services provided (Lee & Lin, 2005; Cristobal et al., 2007; Cyr, 2008; Marimon et al., 2010; Bernardo et al., 2012 ; Alonso-Almeida et al., 2014). 50

E-service quality research models

Yoo & Donthu (2001) developed the nineitem scale of SITE-QUAL with the following four dimensions of quality: ease of use, aesthetic design, processing speed, and security quality dimensions (Su, 2014). Loiacono et al. (2002) developed WebQual, a scale with 12 dimensions which is developed at several stages, in different domains, providing information mainly regarding the web site design while having limited results when it comes to service quality as experienced by customers. According to Barnes & Vidgen (2002), despite the provision of a valid profile of e-SQ, WebQual does not give descriptive advice on how an organization can improve its online sales and services. Wolfinbarger & Gilly (2003) developed a four-dimensional eTailQ scale: website design, reliability/fulfillment, privacy/security and customer service. Zeithaml et al. (2000, 2002) and Parasuraman et al. (2005) conducted a study related to the quality of internet services having their previous research of the quality of services provided through the traditional distribution channels as starting point, which resulted in development of ES-QUAL scale with four dimensions (out of the original 11 dimensions) and E-RecSQAUL three-dimensional e-recovery service quality scale. In addition to these models, a number of researchers offered additional models which were modified in order to be more adjusted to specific questions and research problems. As most of the research was concentrated on the online retailing services or the quality of the website design, Cristobal et al. (2007) have proposed a four-dimensional model indicating other aspects of eservices, in addition to the design and usability, which affect the consumer’s perception of eSQ, called PESQ, and include web design, customer service, assurance and order management. This model was modified with the aim to provide

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Mihajlović N.  The analysis of Serbian customers satisfaction with e-services quality dimensions of lodging e-intermediaries

the analysis of profits generated by higher perceived quality in terms of user satisfaction and loyalty, which is also considered by Smith & Synowka (2014) as not fully analyzed. Raman et al. (2008) were doing research on the Internet banking adoption and suggested a model with six dimensions of quality e-services: ease of use, appearance, reliability, customization, communication and incentive. Swaida & Wigand (2009) also proposed a six-dimensional model: website usability, information quality, reliability, responsiveness, assurance and personalization. They identified that individual e-service quality dimensions are related to different types of customer loyalty (e.g. whether the loyalty is tied to the price or personal preferences). Santouridis & Krikoni (2016) added two dimensions to E-S-QUAL model aiming to include e-SQ hedonic aspects. Among them is the modified model E-S-QUAL, developed by Bauernfeind et al. (2006) intended to study the online B2C recommender systems quality of service, which was used as the basis for the herein conducted research (Figure 1).

RESEARCH MODEL AND HYPOTHESES

Research Model Starting from initial areas of E-S-QUAL scale, an e-service quality instrument developed by Parasuraman et al. (2005), which has been identified by Zeithaml et al. (2000), Bauernfeind et al. (2006), conducted a study intended to research the e-SQ of 15 online B2C recommender systems. The main goal of their research was to develop a research instrument which would be more suitable for recommender systems e-SQ research, having in mind the non-profit context of some recommender websites and lack of emphasis of personalization of the search and configuration process and the conversational character of this process within the existing instruments. As a result, they developed the scale with six dimensions of e-SQ (System Availability/Reliability, Structure/Usability, Information Quality, Efficiency, Safety/Privacy, and Personalization) with a total number of 22 items.

Figure 1. - Structural model developed by Bauernfeind et al. (2006). 51

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Mihajlović N.  The analysis of Serbian customers satisfaction with e-services quality dimensions of lodging e-intermediaries

E-service quality dimensions and development of hypotheses

Research developed by Bauernfeind et al. (2006), which also included some of the lodging e-intermediaries, was considered the best suitable model for this research having in mind the similarities (almost half of the e-intermediaries used in the Bauernfeind et al. (2006) research were lodging e-intermediaries). As the analysis of Serbian customers perception of e-SQ provided by lodging e-intermediaries and their impact on satisfaction was the primary goal of the study, the question imposes as to which of the six dimensions defined by Bauernfeind et al. (2006) have an impact on satisfaction perceived by Serbian customers. In accordance with the research problems, and the dimensions of the model used, six starting hypothesis were defined: ◆◆ Hypothesis 1: “System Availability/ Reliability has positive influence on e-SQ satisfaction”. ◆◆ Hypothesis 2: “Structure/Usability has positive influence on e-SQ satisfaction”. ◆◆ Hypothesis 3: “The Information Quality has positive influence on e-SQ satisfaction”. ◆◆ Hypothesis 4: “Efficiency has positive influence on e-SQ satisfaction”. ◆◆ Hypothesis 5: “Safety/Privacy has positive influence on e-SQ satisfaction”. ◆◆ Hypothesis 6: “Personalization has positive influence on e-SQ satisfaction”.

RESEARCH METHODOLOGY Measures As mentioned, the model developed by Bauernfeind et al. (2006) was used as a basis for the questionnaire used in the survey conducted herein. The collection of information about the user experience in the process of booking 52

accommodation through lodging e-intermediaries, as well as showing the impact of individual e-SQ dimensions on the overall consumer satisfaction, were the main directions of the questionnaire design process. A seven-point Likert scale was used for measuring e-service quality items, anchored at one (completely irrelevant / fully disagree) and seven(very important / fully agree), representing the extent to which respondents agree or disagree with the statements. The questionnaire consisted of two parts. The first part was designed to gather the basic information about customers, as well as information on habits and use of lodging e-intermediaries for booking accommodation. The second part of the questionnaire which refers to dimensions and aspects of the e-SQ provided by a websites, has a total of 25 items of which 22 are related to the e-SQ dimensions (6 dimensions) with the remaining three items related to customer satisfaction (Table 1). Given that this research relates to to a narrower field of research than Bauernfeind et al. study, focusing exclusively on lodging e-intermediaries, individual items of the questionnaire were adapted accordingly.

Subjects and procedure Research questions and hypotheses were done on the basis of the existing models of e-SQ research and literature references. In order to further ensure the validity of the research, the authors have conducted a pilot test with ten PhD students from several universities in Serbia who reviewed the original questionnaire, after which the final version was developed. Given that this research was intended solely for citizens of Serbia, the questionnaire was made only in Serbian, and distributed over the Internet and in printed form. The online questionnaire was created as an online form for easier automated data collection. The sample was formed by using the convenience sampling. A total of 384 question-

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Mihajlović N.  The analysis of Serbian customers satisfaction with e-services quality dimensions of lodging e-intermediaries

e-SQ dimensions

Questionnaire items

System Availability/Reliability The website is immediately available and does not need long loading times. The website operates without problems. Structure/Usability The website’s structure is good. Type face and size are appropriate. A booking procedure is clearly structured and traceable. The user finds easily what he/she is looking for. Information Quality The user gets sufficient additional information about the property. The recommendations are clearly arranged. The system gives sufficient information about the accommodation. The recommendations are up-to-date. Efficiency Recommendations can be obtained with a minimum of effort (data input). A comparison between properties, rates and offers is easily available. The recommendations meet my expectations regarding usefulness and quality. The system enables me to get results quickly. Safety/Privacy Enough information about security issues is given at this web site. The user is informed about the handling and utilization of personal data. Security standards seem to be sufficient. Information about the security system appears to be sufficient. The use of a security certificate is announced explicitly. Personalization I had the impression that the recommendations and suggestions are targeted to my user profile. 53

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Mihajlović N.  The analysis of Serbian customers satisfaction with e-services quality dimensions of lodging e-intermediaries

e-SQ dimensions

Questionnaire items The impression was given that the system considers my preferences and constraints. The bookings can be individually tailored.

Customer Satisfaction Overall, I am satisfied with this website. I booked accommodation satisfactorily with this website. The recommendations meet my expectations. Table 1. - E-SQ dimensions and questionnaire items of research model, Bauernfeind, 2016.

naires were collected in the period from July 2015 to September 2015. This period was chosen because of the holiday season with the assumption that larger number of customers would be more active in this period from the aspect of booking accommodation online. The research time-frame of three months was set to minimize the possibility of significant changes and differences in the perceptions in order to additionally insure the validity of the study. All the data collected were from customers who had previously used the lodging e-intermediaries. Out of the total number of questionnaires, only 148 questionnaires or 38.54% were valid, and met the pre-requirements that the respondent was a citizen of Serbia and that the respondent booked accommodation through any lodging e-intermediary in the last twelve months. Only fully completed questionnaires were taken into consideration for further processing. Out of the total number of respondents, 56.75% belong to the age group of 25-34, and 12.16% are respondents who belong to the age group of 4554. The largest number of respondents (89.19%) have college or higher university education, and 87.84% are employed or students. If compared with the total population of customers from Serbia who were purchasing accommodation online, it is obvious that this sample largely coincided with the total population of these users in Serbia. The relationship of individual dimensions of the e-SQ and their impact on total customer satisfaction 54

was a potential reason for the relatively slow growth in the number of users from Serbia who purchase accommodation online.

Statistical analysis SPSS 20 software was used for all data analyses. Research reliability was confirmed by using Crombach’s Alpha, which was 0.942 for the whole research, while individual coefficients of all dimensions were greater than 0.800, except for Usability that has an acceptable coefficient of 0.647, with cross-correlations higher than 0.3. Pearson correlation matrix was used to indicate the relationship straight between the variables assumed in the hypotheses (Satapathy et al., 2013). The proposed hypotheses were tested by the use of multiple regression analysis to determine the impact level of e-SQ dimensions on the overall satisfaction.

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Mihajlović N.  The analysis of Serbian customers satisfaction with e-services quality dimensions of lodging e-intermediaries

RESULTS

Demographics, use of accommodation booking e-intermediaries and service quality satisfaction The first part of the research aimed to present the demographic data in this study and to indicate the way in which customers use lodging e-intermediaries to find and book accommodation. Most of the respondents were women (58.11%), while most of the examined persons aged 25-44 years (81.08%). The majority of respondents are employed (82.43%) and have college or university degree (89.19%). Having used the convenience sampling method, a relatively large number of highly educated respondents is understandable and expected, given that the majority of respondents was obtained through university and business networks and groups on social networks. Serbian customers book accommodation via e-intermediaries up to 10 times a year, mostly for stays of maximum six nights and with no preferences when it comes to the reason for traveling (business or pleasure). Most customers begin the process of booking accommodation by going directly to the homepage of the preferred e-intermediaries or use Google search. The most commonly used e-intermediary is Booking.com. During the selection process, the majority of Serbian customers will compare multiple properties, usually even 15 and more, and will mostly book double rooms in hotels, while other types of properties are about equally represented. The following section of the questionnaire examines the six dimensions of e-SQ and the user perception of satisfaction with the lodging e-intermediaries service. The means for individual dimensions show that Serbian customers expressed the lowest satisfaction with Security (4.989) and Personalization (5.527). On the other hand, Reliability (6.318) and Usability (6.098) are the dimensions that customers were most satisfied with, though satisfaction with the Information quality (5.905) and Efficiency (5.804) show average values.

The item that customers are most satisfied with is “The web site is immediately available and does not need long loading times” indicating that the access speed is very important for customers from Serbia. Accordingly, another item that customers are most satisfied with is “The website operates without problems”. Upon observing the first five aspects that customers are the most satisfied with, it is clear that the speed of website access and fast and easy booking process are very important for Serbian lodging e-intermediary customers. On the other hand, items that customers are most dissatisfied with show that the greatest concern of lodging e-intermediary customers is safety and use of personal data. An overview of mentioned items shows that people are not completely confident that their data are well guarded and will not be abused, or that the possibility of their misuse is excluded.

Pearson correlation matrix The following correlation matrix indicates that the e-SQ dimensions show a positive correlation with customer satisfaction. Dependent (customer satisfaction) and independent variables (e-SQ dimensions) both show the correlation coefficients smaller than 0.700, indicating that there is no multicollinearity (Sekaran and Bougie, 2010). A significant positive relationship can be seen between the e-SQ dimensions and satisfaction, with Information Quality having the strongest relationship of 0.695, followed by Efficiency (0.642) and Personalization (0.630), while the weakest relationship is with safety (0.461). This research shows that the information quality is the most dominant of e-SQ dimension for Serbian customers.

Regression analysis Regression analysis was used to test e-SQ dimensions against the customer satisfaction. Hypotheses were tested to determine e-SQ dimensions significance to customer service. 55

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Sig. (1-tailed)

Pearson Correlation

System Customer Availability/ Satisfaction Reliability

Usability

Information Quality

Efficiency

Safety/ Privacy

Personalization

Customer Satisfaction

1.000

0.572

0.591

0.695

0.642

0.461

0.630

System Availability/ Reliability

0.572

1.000

0.668

0.442

0.490

0.290

0.424

Usability

0.591

0.668

1.000

0.618

0.671

0.440

0.447

Information Quality

0.695

0.442

0.618

1.000

0.659

0.531

0.478

Efficiency

0.642

0.490

0.671

0.659

1.000

0.511

0.541

Safety/ Privacy

0.461

0.290

0.440

0.531

0.511

1.000

0.598

Personalization

0.630

0.424

0.447

0.478

0.541

0.598

1.000

Customer Satisfaction

0.000

System Availability/ Reliability

0.000

Usability

0.000

Information Quality

0.000

Efficiency

0.000

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Mihajlović N.  The analysis of Serbian customers satisfaction with e-services quality dimensions of lodging e-intermediaries

0.000

Personalization

0.000

Customer Satisfaction

148

System Availability/ Reliability

148

Usability

148

Information Quality

148

Efficiency

148

Safety/ Privacy

148

Personalization

148

Safety/ Privacy

Table 2. - Pearson correlation matrix.

Change Statistics

Model

R Square

Adjusted R Square

Std. Error of the Estimate

R Square Change

F Change

df1

df2

Sig. F Change

0.808ª

0.653

0.639

0.517

0.653

44.308

141

0.000

a. Predictors: (Constant), System Availability/Reliability, Usability, Information Quality, Efficiency, Safety/Privacy, Personalization b. Dependent Variable: Customer Satisfaction

Table 3. - Regression analysis - model summary. 57

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Mihajlović N.  The analysis of Serbian customers satisfaction with e-services quality dimensions of lodging e-intermediaries

Model

Unstandardized Coefficients B

Std. Error

(Constant)

0.760

0.379

System Availability /Reliability

0.216

0.068

Usability

-0.005

Information Quality

Standardized Coefficients

Sig.

Beta

95.0% Confidence Interval for B Lower Bound

Upper Bound

Collinearity Statistics Tolerance

VIF

2.005

0.047

0.011

1.509

0.217

3.178

0.002

0.082

0.351

0.526

1.901

0.093

-0.005

-0.058

0.954

-0.190

0.179

0.368

2.721

0.396

0.073

0.392

5.433

0.000

0.252

0.540

0.471

2.122

Efficiency

0.135

0.071

0.145

1.888

0.061

-0.006

0.276

0.414

2.415

Safety/ Privacy

-0.046

0.044

-0.071

-1.061

0.291

-0.133

0.040

0.549

1.821

0.231

0.049

0.316

4.677

0.000

0.133

0.329

0.539

1.855

Personalization

a. Dependent Variable: Customer Satisfaction

Table 4. - Coefficients.

The results (Table 3) show that e-SQ dimensions in this study provide an explanation for 63.9% of consumer satisfaction following that the coefficient of determination (R2) is 0.639.

According to Cohen’s rules for the effects sizes, the coefficient of determination over 13.8% is considered large (Cohen, 1998, as cited in Jitpaiboon & Rao, 2007).

Model

Sum of Squares

Mean Square

Sig.

Regression

70.940

11.823

44.308

0.000b

Residual

37.625

141

0.267

Total

108.565

147

a. Dependent Variable: Customer Satisfaction b. Predictors: (Constant), System Availability/Reliability, Usability, Information Quality, Efficiency, Safety/Privacy, Personalization

Table 5. - ANOVA test.

ANOVA test (Table 5) showed that the used model was adequate, as the F-statistic = 44.308 was significant at the 1% level (p < 0.01) and that there is a statistically significant relationship between the e-SQ dimensions and customer satisfaction. On the other hand, it is necessary to check whether this applies to all e-SQ dimensions individually. 58

Based on the standardized regression coefficient ß and T-static values at p< 0.01 (Table 4), the individual model variables revealed that Information Quality (0.392), Personalization (0.316) and Reliability (0.217) have a significant and positive relationship on customer satisfaction. On the other hand, Efficiency although having

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Mihajlović N.  The analysis of Serbian customers satisfaction with e-services quality dimensions of lodging e-intermediaries

a positive relationship (ß = 0.145), is not statistically significant (t = 1.888, p> 0.01), while Usability (ß = -0.005, t = -0.058, p> 0.01) and Safety (ß = -0.071, t = -1.061, p> 0.01) show a negative effect on customer satisfaction, but their effect is not statistically significant.

DISCUSSION This research has shown that there is a significant relationship between the e-SQ dimensions and Serbian customer satisfaction with the e-service of lodging e-intermediaries. The survey results clearly show that the research model used is reliable and valid. Initial hypotheses were tested in order to resolve the research problem. E-SQ dimension

means ranged (1 to 7) from 4.989, which was the mean for Safety, to 6.318 for Reliability. Correlation matrix showed that all e-SQ dimensions tested in this study have had a positive correlation with customer satisfaction. Furthermore, the regression analysis showed that the Serbian user satisfaction is mainly affected by three e-SQ dimensions: Information Quality, Personalization and Reliability. Thus, the hypotheses related to these e-SQ dimensions have been confirmed. On the other hand, concerning the remaining three dimensions (Efficiency, Usability and Safety), although having some relationship with customer satisfaction, the effects were not statistically significant. Consequently, the hypotheses related to these e-SQ dimensions have been discarded. Table 6 shows the overview of the confirmed and discarded hypotheses.

Hypothesis

Result

Hypothesis 1: System Availability/Reliability has positive influence on e-SQ satisfaction

Confirmed

Hypothesis 2: Structure/Usability has positive influence on e-SQ satisfaction

Discarded

Hypothesis 3: Information Quality has positive influence on e-SQ satisfaction

Confirmed

Hypothesis 4: Efficiency has positive influence on e-SQ satisfaction

Discarded

Hypothesis 5: Safety/Privacy has positive influence on e-SQ satisfaction

Discarded

Hypothesis 6: Personalization has positive influence on e-SQ satisfaction

Confirmed

Table 6. - Confirmed and discarded hypotheses.

The hypotheses testing proved that some of the e-SQ dimensions are positively affecting satisfaction of Serbian customers. On the other hand, if we compare the means of the respondents expressed satisfaction for e-SQ dimensions with the relationship of those dimensions with customer satisfaction, we come to the conclusion that Serbian customers are most satisfied with the reliability of lodging e-intermediaries, whose effect on satisfaction is the smallest. Customer satisfaction with the remaining two e-SQ dimensions that have proven to have effect on customer satisfaction is lower, and leaves room for improvement.

If we compare the results of this research with the results that Bauernfeind et al. acquired in Austria, it is evident that both studies have shown that the e-SQ dimensions have an effect on customer satisfaction. However, there are differences regarding which dimensions affect user satisfaction and which do not, meaning that there are differences in the perception of e-SQ of e-intermediaries in different regions and countries (Table 7). Based on these differences, it is possible to conclude that the number of e-SQ dimensions is not exhaustive, and that further research is required to investigate a larger number of dimensions. 59

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Bauernfeind et al.(2006)

Results of the research on Serbian customers

Efficiency

Information Quality

Personalization

Safety

Reliability

Table 7. - Differences in E-SQ dimensions affecting customer satisfaction across researches.

Given that this research was conducted on a convenient sample and that the sample is relatively small, this study cannot be considered as representative, but as a starting point for further research.

CONCLUSIONS Customer satisfaction in this study was conceptually set very narrow within the framework of the six e-SQ dimensions. Following that the e-SQ dimensions show variation in representing the customer satisfaction with a total of 63.9%, there is a significant space of 36.1% of variation explained by factors which are not examined herein. The study refers to the perception of satisfaction with e-service offered by lodging eintermediaries exclusively, and therefore has limited use when it comes to other types of websites and e-intermediaries in different industries. The information quality has shown the largest effect on customer satisfaction in this study. There is a possibility that in different circumstances and/or environment, some other dimensions may show a much greater importance. This research has shown that the e-SQ dimensions have an essential role in achieving the customer satisfaction. The results also show that there is a possibility for further improvement of lodging e-intermediary services as the customers are not fully satisfied with the most significant e-SQ dimensions. Also, the results and the differences in the results of this and other studies show that it is necessary to further improve the personalization of websites and adapt them to 60

customers from different regions and countries. Partial differences in the results of this study compared to other studies indicate that, due to the changing preferences of customers and their perception of the quality, there is a necessity to conduct analyses of the perception of the e-SQ on a regular basis, in order to be up-to-date with the ever changing needs and expectations of customers. Also, the differences in the e-SQ dimensions that have effects on customer satisfaction indicate that it is necessary to set up a broader research framework involving a larger number of e-SQ dimensions for further research.

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Popesku, J. (2011). Menadžment turističke destinacije. Beograd: Univerzitet Singidunum. In Serbian

Buhalis, D. & Licata, M.C. (2001). The Future eTourism intermediaries. Tourism Management, 23(3), 207220. DOI: 10.1016/S0261-5177(01)00085-1

Raman, M., Stehenaus, R., Alam, N., & Kuppusamy, M. (2008). Information Technology in Malaysia: E-Service Quality and Uptake of Internet Banking. Journal of Internet Banking and Commerce, 13(2), 1-18. Sekaran, U., & Bougie, R. (2010). Research methods for business: A skill building approach (5th ed.). Chichester, UK: John Willey & Sons Ltd.

Cristobal, E., Flavian, C., & Guinaliu, M. (2007). Perceived E-Service Quality: Measurement Validation and Effects on Consumer Satisfaction and Website Loyalty. Managing Service Quality: An International Journal, 17(3), 317-340. DOI: 10.1108/09604520710744326

Serkan, A., Eda, A., & Safak, A. (2010). Re-assessment of E-S-Qual and E-RecS-Qual in a pure service setting. Journal of Business Research, 63, 232-240. DOI: 10.1016/j.jbusres.2009.02.018

Cyr, D. (2008). Modelin Website Design across Cultures: Relationship to Trust, Satisfaction and E-loyalty. Journal of Management Information Systems, 24(4), 47-72. DOI: 10.2753/MIS0742-1222240402

Swaid, S.I., & Wigand, R.T. (2009). Measuring the quality of e-service: Scale development and initial validation. Journal of Electronic Commerce Research, 10(1), 13-28.

Davidson, A.P., & Burgess, S. (2006). E-commerce in tourism: use of websites by small regional and urban enterprises. Gold Coast, Queensland, Australia: CRC for Sustainable Tourism.

Udo, G.J., Bagchi, K.K. & Kirs, P.J. (2010). An assessment of customers’ e-service quality perception, satisfaction and intention. International Journal of Information Management, 30, 481-492. DOI: 10.1016/j.ijinfomgt.2010.03.005

Jitpaiboon, T., & Rao, S.S. (2007). A meta-analysis of quality measures in manufacturing system. International Journal of Quality & Reliability Management, 24(1), 78-102. DOI: 10.1108/02656710710720349 Kovačević, M., Pavlović, K., & Šutić, V. (2015). Upotreba informaciono-komunikacionih tehnologija u republici Srbiji, 2015. Beograd: Republički zavod za statistiku. In Serbian. Lee, G., & Lin, H. (2005). Customer perceptions of eservice quality in online shopping. International Journal of Retail & Distribution Management, 33(2), 161-176. DOI: 10.1108/09590550510581485 Loiacono, E., Chen, D., & Goodhue, D. (2002). WebQual™ Revisited: Predicting the Intent to Reuse a Web Site. In 8th Americas Conference on Information Systems - AMCIS 2002, Paper 46, Dallas, USA: Association for Information Systems Marimon, F., Vidgen, R., Barnes, S. & Cristobal, E. (2010). Purchasing behaviour in an online supermarket: the applicability of E-S-QUAL. International Journal of Market Research, 52(1), 111-129. DOI: 10.2501/S1470785310201089

Vitić-Ćetković, A. (2009). Inovacije u tehnologiji i ekonomija znanja – refleksija na globalne marketing tokove hotelijerstva. Turističko poslovanje, 4, 189-196. In Serbian. Vukmirović, D., Pavlović, K., & Šutić, V. (2012).Upotreba informaciono-komunikacionih tehnologija u republici Srbiji, 2012.Belgrade, Serbia: Republički zavod za statistiku. In Serbian. Wolfinbarger, M., & Gilly, M.C. (2003). eTailQ: dimensionalizing, measuring and predicting etail quality. Journal of Retailing, 79(3), 183-198. DOI: 10.1016/ S0022-4359(03)00034-4 World Travel Market (2015). WTM Global Trends Report 2015. London, UK: World Travel Market. Yoo, B., & Donthu, N. (2001). Developing a Scale to Measure the Perceived Quality of an Internet Shopping Site (SITEQUAL). Quarterly Journal of Electronic Commerce, 2(1), 31-47. DOI: 10.1007/9783-319-11885-7_129 Zeithaml, V.A., Bitner, M. J. & Gremler, D. D. (2009). Services Marketing: Integrating Customer Focus across the Firm (5th ed.). New York, USA: McGraw Hill. 61

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Mihajlović N.  The analysis of Serbian customers satisfaction with e-services quality dimensions of lodging e-intermediaries

Zeithaml, V.A., Parasuraman, A. & Malhorta, A. (2002). Service quality delivery through web sites- a critical review of extant knowledge. Journal of the Academy of Marketing Science, 30(4), 362-375. DOI: 10.1177/009207002236911 Santouridis, I., & Krikoni, E. (2016). Extending E-SQUAL with hedonic dimensions to measure the quality of internet travel services and its effects on perceived value, loyalty and switching barriers. International Journal of Technology Marketing, 11(3), 301-318. DOI: 10.1504/IJTMKT.2016.077395

Satapathy, S., Patel, S.K., Biswas, A. & Mishra, P.D. (2013). A methodology to measure the service quality of online shopping of electronic goods in India. International Journal of Indian Culture and Business Management, 6(2), 227-247. DOI: 10.1504/ IJICBM.2013.052002 Su, Q. (2014). Research of instrument to measure customer perceived service quality of mobile data services. International Journal of Networking and Virtual Organisations, 14(1/2), 176-196. DOI: 10.1504/ IJNVO.2014.065101

Smith, A.A., & Synowka, D.P. (2014). E-commerce quality and adoptive elements of e-ticketing for entertainment and sporting events. International Journal of Business Information Systems, 15(4), 450-48. DOI: 10.1504/IJBIS.2014.060397 Received: February 23, 2017 Correction: March 31, 2017 Accepted: April 12, 2017

INSTRUCTIONS FOR AUTHORS The European Journal of Applied Economics is a biannual, peer-reviewed journal which publishes significant original scientific research and reviews. The Journal is devoted to the publication of research results in the following areas: economy, management, tourism and hospitality. It is essential that authors write and prepare their manuscripts according to the instructions and specifications listed below. The length and effectiveness of the peer review process will largely depend upon the care used by authors in preparing their manuscripts. Therefore, contributors are strongly encouraged to read these instructions carefully before preparing a manuscript for submission, and to check the manuscript for conformance before submitting it for publication. The manuscripts must be written in English using Microsoft Word (*.doc or *.docx). Make sure that your manuscripts are clearly and grammatically written. Please note that authors who are not native-speakers of English can, to a certain amount, be provided with help in rewriting their contribution in correct English. The Editorial Board expects the editors, reviewers and authors to respect the well-known standard of professional ethics. Types of contributions: ◆◆ Original papers - (about 10 typewritten pages) report original research which must not have been previously published. ◆◆ Preliminary communications - (up to 3 pages) report unpublished preliminary results of sufficient importance to demand rapid publication. ◆◆ Subject reviews - (about 15-20 pages) present an overview of the author’s current research with comparison to data of other scientists working in the field. Manuscripts should be submitted using the Online Submission System. The manuscript must be uploaded as a *.doc or *.docx file (tables and figures should follow the text, each on a separate page). No articles will be published without first undergoing an anonymous refereeing procedure (please read carefully Editorial policy). To facilitate the reviewing process, authors are encouraged to suggest up to three persons competent to review their manuscript. Such suggestions will be taken into consideration but not always accepted. The editor reserves the right to make the final decision with respect to publication. If you have any questions, do not hesitate to contact the Managing Editor at sstanisic@singidunum.ac.rs. 63

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Manuscripts should be typed in English (standard British English) with 1.15 spacing in A4 format leaving 2.5 cm for margins. Manuscript elements: 1. Title page with: 1. title (and short title) 2. name(s) of author(s) 3. name and address of workplace(s) â&#x20AC;&#x201C; affiliation(s) 4. personal e-mail address(es) 2. Abstract 3. Keywords 4. Introduction 5. Methodology 6. Results and Discussion 7. Reference lists 8. Tables (each on a separate page) 9. Figures (each on a separate page). Each of these elements is detailed below.

1. TITLE PAGE 1.1. Title (and short title)

We suggest the title should be relatively short but informative. If a long title is necessary, please prepare an optional short title.

1.2. Name(s) of author(s)

A list of all authors of the paper should be prepared. We need full first name and full last name. Initial(s) for middle name(s) is optional.

1.3. Name and address of workplace(s)- affiliation(s)

Authors' affiliations should be indicated in this section. Either endnote or footnote are not recommended.

1.4. Corresponding authorâ&#x20AC;&#x2122;s e-mail address

One e-mail address is needed. It will be used as the corresponding author's email address in all contacts with the authors.

2. ABSTRACT An abstract must accompany every article. It should be a brief summary of the significant items of the main paper. The abstract should give concise information about the content of the core idea of your paper. It should be informative and not only present the general scope of the paper but also indicate the main results and conclusions. The abstract should not normally exceed 200 words. It should not contain literature citations or allusions to the tables or illustrations. All non-standard symbols and abbreviations should be defined. In combination with the title and keywords, the abstract is an indicator of the content of the paper. Authors should remember that online systems rely heavily on the content of titles and abstracts to identify articles in electronic bibliographic databases and search engines. They are therefore requested to take great care in preparing these elements. 64

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3. KEYWORDS List of keywords proposed by the authors, separated by commas. Up to 5 key terms can be selected. We would suggest to avoid repeating the title.

4. TEXT General rules for writing: ◆◆ use simple and declarative sentences, avoid long sentences, in which the meaning may be lost by complicated construction;

◆◆ be concise, avoid idle words; ◆◆ make your argumentation complete; use commonly understood terms; define all nonstandard symbols and abbreviations when you introduce them; ◆◆ Latin words, as well as the names of species, should be in italic, as for example: i.e. or e.g. ◆◆ explain all acronyms and abbreviations when they first appear in the text. Generally a standard scientific paper is divided into: ◆◆ introduction,

◆◆ main text, ◆◆ conclusion. Footnotes/Endnotes/Acknowledgements: We encourage authors to restrict the use of footnotes. If necessary, please make endnotes rather than footnotes. Information concerning research grant support or the assistance of colleagues should appear in a separate Acknowledgements section at the end of the paper, not in a footnote.

5. REFERENCE LIST A complete reference should give the reader enough information to find the relevant article. Please pay particular attention to spelling, capitalization and punctuation. The article should contain no fewer than 25 references, preferably published recently. Completeness of references is the responsibility of the authors. Please avoid references to unpublished materials, private communication and web pages. The surname of the author and the year of publication appear in parentheses after the citation, for example (Fisher, 2010). If more than one publication by the same author appear in one year, they must be distinguished by an a, b etc., for example 2001a, 2001b. In case of quoting the actual words of another author, the page number should be provided, e.g. (Hollard, 2010, p. 23). If the name naturally occurs in the sentence, only the year is given in parentheses, e.g. “Benoliel (1999) thinks…” If there are two authors, the surnames of both should be given (Fisher and Hollard, 2009). If there are more than two authors, the surname of the first author only should be given, followed by et al. (Wilson et al., 2008). However, full names of all authors should be given in the list of references. The original journal title is to be retained in the case of publications published in any language other than English (please denote the language in parenthesis after the reference in the Reference list).

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Instructions for authors

1. Book a. Book (one author) Format: Author. (Year of publication). Book title. Place of publication: Publisher. Example: Baxter, R. (1982). Exactly solvable models in statistical mechanics. New York: Academic Press. b. Book (two or more authors) Format: Author1, Author2 & Author3. (Year of publication). Book title. Place of publication: Publisher. Example: Kleiner, F.S., Mamiya C.J. & Tansey R.G. (2001). Gardnerâ&#x20AC;&#x2122;s art through the ages (11th ed.). Fort Worth, USA: Harcourt College Publishers. c. Book chapter or article in an edited book Format: Author(s) of chapter. (Year of publication). Chapter title. In Editors of the book (Ed.), Book title (Chapter page range). Place of publication: Publisher. Example: Roll, W.P. (1976). ESP and memory. In J.M.O. Wheatley & H.L. Edge (Ed.), Philosophical dimensions of parapsychology (pp. 154-184). Springfield, IL: American Psychiatric Press. d. Proceedings from a conference Format: Author(s). (Year of publication). Title. In Conference name, Date (Page range). Place of publication: Publisher. Example: Field, G. (2001). Rethinking reference rethought. In Revelling in Reference: Reference and Information Services Section Symposium, 12-14 October 2001 (pp. 59-64). Melbourne, Victoria, Australia: Australian Library and Information Association. e. E-book Format: Author(s). (Year of publication). Title. Publisher. Retrieving date, http address. doi. Example: Johnson, A. (2000). Abstract Computing Machines. Springer Berlin Heidelberg. Retrieved March 30, 2006, from SpringerLink http://springerlink.com/content/w25154. doi: 10.1007/ b138965. f. Thesis Format: Author(s). (Year of publication). Title. Information, Place of publication. Example: Begg, M.M. (2001). Dairy farm women in the Waikato 1946-1996: Fifty years of social and structural change. Unpublished doctoral dissertation, University of Waikato, Hamilton, New Zealand.

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Instructions for authors

g. Government publication Format: Institution name. (Year of publication). Title. Place of publication: Publisher. Example: Ministerial Council on Drug Strategy. (1997). The national drug strategy: Mapping the future. Canberra: Australian Government Publishing Service. 2. Article a. Journal Article (one author) Format: Author. (Year of publication). Article title. Journal Title. Volume (issue), range of pages. doi. Example: Nikora, V. (2006). Hydrodynamics of aquatic ecosystems: Spatial-averaging perspective. Acta Geophysica, 55(1), 3-10. doi: 10.2478/s11600-006-0043-6. b. Journal Article (two or more authors) Format: Author1, Author2 & Author3. (Year of publication). Article title. Journal Title. Volume (issue), range of pages. doi. Example: Cudak, M. & Karcz, J. (2006). Momentum transfer in an agitated vessel with off-centred impellers. Chem. Pap. 60(5), 375-380. doi: 10.2478/s11696-006-0068-y. c. Journal article from an online database Format: Author(s). (Year of publication). Article title [Electronic version]. Journal Title. Volume (issue), range of pages. Retrieved date of access, from name of database. doi. Example: Czajgucki Z., Zimecki, M. & Andruszkiewicz, R. (2006, December). The immunoregulatory effects of edeine analogues in mice [Abstract]. Cell. Mol. Biol. Lett. 12(3), 149-161. Retrieved December 6, 2006, from PubMed database on the World Wide Web: http://www.pubmed.gov. doi: 10.2478/s11658-006-0061-z. d. Newspaper article (no author) Format: Article title. (Publication date). Journal Title. page. Example: Amazing Amazon region. (1989, January 12). New York Times, p. D11. 3. Other formats a. Web page Format: Author/Sponsor. (last update or copyright date). Title. Retrieved date of access, from URL. Example: Walker, J. (1996, August). APA-style citations of electronic resources. Retrieved November 21, 2001, from http://www.cas.usf.edu/english/walker/apa.html. 67

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b. Lecture note Format: Author(s). (Date of presentation). Lecture title. Lecture notes distributed in the unit, at the name of the teaching organisation, the location. Example: Liffers, M. (2006, August 30). Finding information in the library. Lecture notes distributed in the unit Functional Anatomy and Sports Performance 1102, University of Western Australia, Crawley, Western Australia. c. Patent Format: Author. (Year). Patent number. The location. Issue body. Example: Smith, I. M. (1988). U.S. Patent No. 123,445. Washington, D.C: U.S. Patent and Trademark Office. d. Standard Format: Issue body. (Year). Standard name. Standard number. The location. Example: Standards Association of Australia. (1997). Australian standard: Pressure equipment manufacture. AS4458-1997. North Sydney. e. Computer software Format: Author(s). (Year). Title [computer software]. The location: Company. Example: Ludwig, T. (2002). PsychInquiry [computer software]. New York: Worth. Tables and figures and/or schemes should not be embedded in the manuscript but their position in the text indicated. In manuscript tables and figures should follow the text, each on a separate page.

6. TABLES Authors should use tables to achieve concise presentation or where the information cannot be given satisfactorily in other ways. Tables should be prepared with the aid of the Word table function, without vertical lines. The minimum size of the font in the tables should be 10 pt. Tables should not be incorporated as graphical objects. Styles and fonts should match those in the main body of the article. Tables should follow the text on the end of the manuscript and should be numbered consecutively using Arabic numbers and their position in the text should be indicated. Each table should have an explanatory caption which should be as concise as possible.

7. FIGURES Authors may use line diagrams to illustrate theses from their text. The figures should be clear, easy to read and of good quality. Styles and fonts should match those in the main body of the article. Lettering and lines should be of uniform density and the lines unbroken. Axis labels should be in bold face. Units should be placed next to variables in parentheses. Figures should follow the text on the end of the manuscript and should be numbered consecutively using Arabic numbers and their position in the text should be indicated. 68

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Mathematical equations should be embedded in the text. Complex equations should be prepared with the aid of the Word Equation editor. All equations must be numbered, Arabic numbers, consecutively in parenthesis at the end of the line, as presented:

= NSV

â&#x2C6;&#x2018; NP k =0

â&#x2039;&#x2026; ak

(1)

CIP - Каталогизација у публикацији Народна библиотека Србије, Београд 33 The EUROPEAN Journal of Applied Economics / editor-in-chief Milovan Stanišić. - Vol. 12, No. 1 (2015). - Belgrade : Singidunum University, 2015- (Loznica : Mobid). - 28 cm Dva puta godišnje. - Је наставак: Singidunum Journal of Applied Sciences = ISSN 2217-8090 ISSN 2406-2588 = The European Journal of Applied Economics COBISS.SR-ID 214758924 70