Electronic Library of Scientific Literature


Volume 47 / No. 2 / 1999



Study Prepared on Behalf of the United Nations Economic Commission for Europe


The imbalance in external relations, the state budget deficit and the unemployment rate reached in 1998 the imbalance level of 1993. or partially it was even exceeded. Despite a still quite high pace of GDP growth (a break was reported in the 4. Q 1998 – the year-on-year GDP growth reached only 0.5%) this, at least, allows us to formulate a hypothesis that the Slovak economy got into crisis in 1998 and that the situation called for complex stabilizing measures.

A concentrated picture of the basic economic trends see in Table 1.

Table 1

Trends of Economic Growth and Macroeconomic Equilibrium in the Slovak Economy

  1993 1994 1995 1996 1997 1998
GDP growth year-on-year (in %) 1 -3.7 4.9 6.9 6.6 6.5 4.4
Unemployment rate (in %)2 14.4 14.8 13.1 12.8 12.5 15.6
Difference between productivity and real wages increases in percentage points3 0.0 3.6 0.7 -3.9 1.1 3.0
Ratio: state budget fiscal balance/ GDP (in %) -3.0 -3.6 1.9 -1.3 -1.8 -2.7
Ratio: final balance of the current account/ GDP (in %) -4.7 4.8 3.8 -11.0 -6.9 -10.1
Ratio: foreign currency reserves/ average monthly imports 0.7 3.1 4.6 4.0 4.3 2.3
SKK/USD foreign exchange rate4 32.70 31.28 29.57 31.90 34.78 35.82

1 According to data in constant 1995 prices.
2 At the end of the respective period.
3 Productivity increase given as year-on-year GDP increase per 1 employee.
4 At the end of year.

In 1998 the GDP growth rate declined from 6.5% to 4.4% and the value added growth rate from 7.4% to 4.7% (in constant 1995 prices). As typical remained the high dependency of the GDP growth on the value added growth in services sector (increase by 8.2%), while the total value added in agriculture, industry and construction decreased by 0.3% The negative tendencies in the Slovak economy are obvious when looking at the profit/loss development which have declined rapidly (by 50%) in 1998.

Industry output in 1998 raised by 4.6% (in manufacturing by 6.1%). The output growth was mostly achieved due to enormous growth in manufacture of transport equipment (by 81.1%) If the industry development is viewed without the output in manufacture of transport equipment, the industrial output in 1998 declined by 1.3% and in manufacturing by 0.5%. A sustainable output growth, except for manufacture of transport equipment output, has been achieved only in manufacture of electrical and optical equipment and in manufacture of other non-metallic mineral products. Other industries recorded rather negative tendencies in 1998. The reported labour productivity growth – by 9.1% in industry and by 11.1% in manufacturing – after excluding manufacture of transport equipment output was smaller too, in industry it reached 2.8 % and in manufacturing 3.9%.

Construction output, mainly due to public investment projects, in 1995 up to 1997 grew (by 2.9%, 4.4% and 9.2%), in 1998 declined by 3.7%.

Development in agriculture in 1998 was negatively impacted by price development which together with a drop in purchase of slaughtered animals (by more than 8%) and due to meager crops, caused a decline in sales of agricultural products (nominally by 2.5%, really by 2.2%). A meaningful impact on the agricultural development was seen at a constant increase in subsidised imports of agricultural and foodstuff commodities.

Basic relationship between the ongoing economic growth and changes on the demand side of the economy prove that in 1998 the descending phase of the transformation cycle including 1993–1998 marked its deepest point. Relatively high GDP growth rates in the appointed period are questionable, first of all because a big portion in formation of the gross capital and due to that also a considerable portion of the GDP increase resulted from foreign credits. (National gross savings in 1996 represented 74% of total resources used for the gross capital formation, in 1997 it was 73% and 69% in 1998).

Secondly, however, the rates of the GDP growth reported in 1996–1998 were also problematic. There are several indicators proving that those figures were deformed by overestimated value added in enterprises with 19 or less employees.

A slowdown in the economic growth in 1998 appears as a total influence of all components of demand, especially as a result of a slowdown in household consumption which plays a decisive role in the structure of GDP use. The influence of development in both internal and external demand (exports) on the economic growth rate highlighted the defective indication where the weak sides and a slowdown in the economic growth marked in the SR go hand in hand with a low and constantly weakening export performance of the Slovak economy. When considering the imports intensity of single components of the demand, we can see that in 1997 and 1998 the economic growth was supported mostly by exports than by the internal demand. In 1997 and 1998 the position of our enterprises on domestic market deteriorated significantly.

A price increase continued even in the situation of a deep macroeconomic imbalance in the pace which can be considered to be relatively low under the Central European economies in transition. A relatively low inflation rate (6,7% in 1998) could be hold up after 1996 only with the support of more restrictive monetary policy and due to an ongoing delay in deregulation of regulated prices.

The crisis of the Slovak economy in 1998 was evident also on labour market. Especially the unfavourable employment development in 1997 and 1998 proved that the reported GDP growth did not gain a desirable quality in that period. The unemployment rate climbed from 12.5% achieved at the end of 1997 up to 15.6% in December 1998.

The Slovak foreign trade development in 1998 was characteristic with the ongoing tendency of a rather high deficit in trade balance. Its share on the GDP in 1998 increased in comparison with 1997 from 10.5% to 11.2% and again it got very close to a critical 1996 level when it reached 12.1%. The increase in the volume of deficit SKK 80.8 bill. was caused by a considerably high nominal growth of imports (by 16.4%) and exports (by 16%).

As for a territorial structure of the SR foreign trade, a further strengthening of its orientation towards EU markets continued (increased share in exports from 47.1% in 1997 to 55.8% in 1998), lowering the share of the Czech Republic (in exports from 25.5% to 20.3%, in imports from 21.4% to 18.5%), of Russia and of developing countries. Nevertheless, the major role concerning the total passive balance was played by Russia (with the decline from SKK 42 bill. in 1997 to SKK 38.6 bill. in 1998) and the European Union (with the increase from SKK 17.5 bill. to SKK 20.4 bill.).

The balance of payments development in 1998 influenced negatively the growing trade balance deficit (USD 2293 mill), the deterioration of the balance of services and incomes and the insufficient inflow of foreign capital which dropped below the level allowing to compensate the deficit of the balance of payments’ current account. A total preliminary deficit on the balance of payments in 1998 posted USD 550 mill. (in 1996 USD 237 mill. surplus and in 1997 USD 46 mill. surplus).

A total gross debt of the SR during 1998 amounted up to USD 11.8 bill., which represented USD 2 191 per capita. The net foreign debt covering the same period reached USD 4.1 bill. and in comparison with the situation at the beginning of the year it increased from USD 1.9 bill. by USD 2.2 bill., i. e. by 115.8%.

The aggravation of the imbalance in both internal and external economic relationship of the SR touched considerably the financial and currency results of the economic development in 1998.

The optimistic assumptions about the state budget approved for the year 1998 proved to be unrealistic – the deficit of the state budget reported so far in 1998 totalling SKK 19.2 bill. exceeded the originally approved budget by 3.8 times. The tax revenues forming the base of the budgetary incomes lagged far behind the approved state budget for the year 1998 (by SKK 13.5 bill., i.e. by 8.1%) and did not reach the expectation of the later adjusted budget. Nevertheless, better results were achieved than in previous years in personal income tax collection which totalled SKK 29.4 bill. and represented 109.3% in comparison with corporate bodies income tax collection which reached only 88.8%. The excessive budgetary expenditures were negatively influenced by the fulfilment of the commitments of the state budget due to investments put into construction of highways and houses, and it resulted in SKK 10.4 bill. excess of assumed capital expenditures. Though restrictive measures adopted in the sphere of public consumption helped to lower the rate of state budget expenditures, however, on account of serious problems inflicted in education scheme, health care, in science and research and in the social sphere, where solutions had been delayed to the year 1999.

The real conditions in 1998 – a high state budget deficit, the slowdown of the economic growth rate and an insufficient inflow of foreign capital to compensate the deficit on the current account of the balance of payments – rather diverted from the NBS monetary program, especially when growing devaluation threat in the second half of the year caused that net foreign assets fell down. At the same time, settling the deficit of the state budget resulted in the growth of domestic assets called up by increased government’ s loans to finance this deficit.

The deterioration in external economic relationship development and a slump in foreign currency reserves forced up the cancellation of the fixed exchange rate regime which had been effected since 1st October 1998 and introduction of foreign currency floating. This exchange rate and currency measures seemed to be the only reasonable solution at the time to prevent creeping danger of a total fall of the exchange rate, however, without further steps recovering the external balance, such a solution would have only had a short term temporary effect. In addition, a delayed implementation of the turnaround in exchange rate regime and loosing the tied up exchange rate accounted for ample losses which were called up by previously long lasting NBS exchange rate interventions supporting the local currency. A negative impact of the floating SKK exchange rate upon business activities raised a question about active involvement of the exchange rate in favour of a regulated development of the macroeconomic balance, transparency and economic expectations, stimulation of exports, and thus of the overall economic growth – all that based on the SKK exchange rate regulation connected with crawling peg.

The outlook for the year 1999 is based on following assumptions:

It can be assumed that during the larger period of the year 1999, an impact of the international situation – the expected slowdown in economic growth abroad together with a decline in the Slovak economy rating which may in 1999 constrain Slovak enterprises accessing foreign loans – will multiply the accumulated internal barriers of the Slovak economy dynamism.

Main routing of the macroeconomic equilibrium recovery (of the balance between total demand and supply) in 1999, will introduce much more rigorous fiscal policy. The objective of the restrictive fiscal policy is not only to reduce the government consumption, but also to reduce final consumption of households. Reduced budgetary capital spending (by 17.9% compared to 1998) and also a reduction of capital spending from the off-budget state funds should be conducive to lowering the pace of growth in the investment demand.

Unfavourable prospects of the economic growth and unemployment is also stemming from the current macroeconomic regulation combining an inevitable restrictive fiscal policy and a stiff (inertia driven towards restriction) monetary policy.

With constraints of the Slovak enterprises accessing foreign loan resources, the prospects of the economic growth will still be more limited by rather high interest rates from loans.

Our prognosis (see Table 2) assumes that short term stabilising measures will prevent further deterioration of the macroeconomic imbalance, but cannot fully remove its effects. This, together with evident signs of recession in economic performance development presumably will be responsible for the fact that the year 1999 will be a critical year of the economy. Because of that we have to highlight that the recession started in the SR economy as early as in 1998 and thus also the year 1998 should be taken as the beginning of the critical period.

Table 2

Selected Macroeconomic Indicators

  1998 1999
  prognosis reality prognosis
Annual GDP growth (in %) 1 var. A2 4 to 5 4.4 1 to 3

var. B3

    -1 to +1
Unemployment rate (in % )4 13.5 13.8 16.0– 17.0
Net exports in goods and services ratio to GDP (in %)2 -6.0 -10.8 -7.0
Annual increase in consumer prices (in %) 7.5 to 8 6.7 10.0– 11.0

1 In constant1995 prices.
2 Applying the existing way of calculating the GDP.
3 Applying a more precise GDP calculation.
4 Monthly average of values.

Restructuring of the Banking Sector in Slovenia in View of its Accession to the European Union

Mojmir MRAK

Transition to a market economy in Slovenia has, similarly as in other countries in transition, required a drastically changed role for the financial sector. The main challenge for policy makers in this area has been to overcome the legacy of the past and at the same time design and develop an efficient system of financial markets and institutions. There are at least three reasons why financial sector restructuring has been of strategic importance in Slovenia. First, without an active financial market mechanism, its economy, having abandoned planning, has no alternative allocation mechanism. Second, well-functioning financial institutions help to mobilise domestic financial resources and promote efficiency in their allocation. Third, efficient financial institutions help impose hard budget constraint on enterprises.

Although development of non-banking sectors, namely insurance and capital markets, has been very rapid over the last decade and clearly offers a substantial potential to complement the banking sector in meeting financing needs of the corporate and public sector as well as of the population at large, banks continue to dominate the financial sector in Slovenia. It is for this reason that banking sector restructuring has been in the forefront of financial reforms in the country.

The main objective of the paper is to provide an overview of the current status and issues of the banking sector development in Slovenia with special reference to the challenges faced by this sector in view of the country’s accession to the European Union.

The introductory chapter of the paper presents the evolution of the banking sector in Slovenia between its independence in 1991 and completion of the bank rehabilitation in 1997. At the time of the country’s independence, the banking sector of Slovenia was faced with four major problems: (i) the sector was highly concentrated, as one bank, Ljubljanska banka, accounted for more than 80 per cent of the total assets of the banking system, (ii) some 30 to 40 per cent of the banks’ loans were non-performing, and consequently, the banks operated at excessively high intermediation spreads and real lending rates, (iii) regulatory and supervisory regime lagged badly behind international standards, and (iv) Slovene banks lost assets in former SFRY as a result of independence, but retained liabilities, especially those with foreign creditors.

In order to address the most pressing problem of bad debts, the authorities initiated in 1992 rehabilitation of thee banks - Ljubljanska banka, Kreditna banka Maribor and Kreditna banka Nova Gorica. The process, conducted by the Bank Rehabilitation Agency, started by writing off current bank losses against their capital and by replacing their non-performing assets for bonds issued by BRA. A total of DM 1.9 billion of bonds was issued what was equivalent to just under 10 per cent of the 1993 GDP. By early 1997, all the three banks had satisfied all the conditions of the Bank of Slovenia set for ending the rehabilitation process and the process was officially concluded in July 1997.

Successful banking rehabilitation has contributed to the significantly improved financial health of the banking sector as whole. Several indicators of the sector’s performance in the 1992– 1996 period, including pre-tax profit, return on assets and capital, net interest margin and operating costs, confirm this conclusion.

The next chapter discusses the existing structures, trends and problems in the Slovenian banking sector approaching the European Union. At the end of 1998, there were 25 banks in Slovenia, 6 savings banks and 70 credit institutions. Of the total number of banks, 11 were fully owned by domestic entities while another 3 were either wholly-owned or controlled by foreign owners. The remaining 11 banks had a majority of domestic ownership (in 8 of them, foreigners have less than 1 per cent ownership share while in one of them, SKB, foreign ownership represented 49 per cent of the capital).

In the years 1997 and 1998, several changes have been registered in the institutional structure of the sector. The following two are the most important: (i) banking groups; The 1997, has witnessed the establishment of the first four banking groups in Slovenia in what may be the first step towards a complete merger. (ii) mergers and liquidations; In this period, the number of banks was reduced by three, liquidation process was initiated in one of the savings banks, and the number of savings co-operatives was decreased by one. In addition, there were several banking sector merger initiatives launched in 1998. By far the largest attention has attracted the ”letter of intent” signed by the management of the two largest banks, namely Nova Ljubljanska banka and SKB. The issue was also discussed by the governing bodies of the both banks. The initiative has received a rather cool response from the government, the dominant shareholder of Nova Ljubljanska banka has, at least for the time being, been put off the table.

As far as the structure of banking sector assets is concerned, the combined share of government bonds and Central Bank bill declined to 28.8 per cent in 1998 (from over 30 per cent in previous two years) while the share of claims to non-monetary sector increased to 60.1 per cent. On the liabilities side, the trend of decreasing the share of liabilities to the banking sector and increasing the share of liabilities vis-a-vis the customers other than banks continued also in 1997 and the first half of 1998.

In 1997, Slovenian banks realised a pre-tax profit of SIT 21.3 billion (15 per cent more than in 1996) and in the first half of 1998 its level amounted to SIT 14.2 billion (7.7 per cent higher than in the first half of 1997). By far the largest profits were again registered by the two largest banks while many small banks had rather low profitability rates.

Although asset quality and financial performance of Slovenian banks has improved significantly over the recent years, mainly as a result of successfully completed rehabilitation of the two largest banks, the country’s banking sector is nevertheless faced with a number of actual and potential problems and challenges. Their common denominator is the lack of restructuring activities of banks which is needed for their effective adjustment to the challenges of the EU accession in this area and, in more general terms, to the challenges of global financial services liberalisation. In spite of the large number of banks in Slovenia, the market continues to be characterised with high concentration and low degree of competition (at the end of 1997, the top three banks accounted for more than 50 per cent of total banking sector assets), and with high financial margins (their level is twice as high as more commonly found in the EU). In addition, the system is still shallow not only in comparison with OECD countries but also in relation to some other countries in the region. In providing their services to the enterprise sector, most banks continue to restrict their activity to classical banking services while more sophisticated products and services, such as investment banking, are in very early stages of development.

As far as harmonisation with the EU legal framework is concerned, the new Banking Law adopted in January 1999, is fully harmonised with all so called “Stage One measures” in the banking sector as defined in the White Paper (these measures are aimed at providing the overall legal framework and at addressing fundamental principles and procedures governing the sector). The Banking Law is, however, not yet fully harmonised with all “Stage Two measures” (they are linked directly to the creation of the EU’s internal market). This refers mainly to certain provisions in the Second Council Directive, such as the principle of single banking licence and the home country control principle.

The last chapter of the article outlines policy directions for completion of banking sector reforms in Slovenia. Key objective of these reforms is to increase international competitiveness of the sector to a level that will allow its successful financial integration not only into EU but also in the global market for financial services in general. By setting this objective, Slovenia has de-facto decided to significantly accelerate the transformation of its banking financial sector in order to meet international competition associated with the single EU market for banking services. The EU accession requirements in the banking sector are an important push towards reforms which will bring Slovenian banks fully up to the Western standard. These reforms would eventually have to be done whether the country joins the EU or not.

The relevant policy measures required to achieve the stated objectives in the banking sector can be classified in the following three groups: (i) competition and internal restructuring; Policy measures in this area include opening of the sector more widely to foreign competition, privatisation of both state-owned banks and the abolishment of the inter-bank agreement on the maximum deposit interest rates as well as intensification of internal restructuring in banks aimed at reducing their operating costs and at expanding the range of their services. (ii) banking regulation and supervision; There are two areas where an intensified banking regulation and supervision seems to be increasingly important in Slovenia (a) foreign exchange exposure of banks, and (b) financial conglomerates and the so-called connected persons. (iii) straight legal approximation to EU legislation; Although the Banking Law is an important step forward, further approximation to the EU banking legislation is required in order to meet all the key provisions of the Second Council Directive.



Since 1st January 1999, the EURO became a new official European currency of 11 advanced European states. Despite the fact that Deutsh Marks, French Francs and the currencies of other members of the European Union will become a part of history as late as in 2002, they lost definitely their independence in the beginning of this year. The origin of EURO is the biggest event of the post-war history of the world currency system. There has occurred a European currency which is to be used by 291 million people who produce ca 20% of the world production. The origin of EURO is an enormous project, the aim of which is to increase competitiveness of European economy and procurement of intensive industrial growth. The EURO eliminates the risk of exchange rate fluctuation and removes fees charged at financial transactions within EU. For the customers, EURO will simplify transactions due to the fact that it will be payable in many countries.

The origin of EURO has a prevalent impact on EU members, however its consequences reach all world financial markets. Common EU citizens will be involved especially in 2002. In this year, national currencies will definitely disappear from circulation and all transactions will be due in EURO. Within the course of the subsequent three-year period, the number of traders who will quote their prices in both national currency and EURO will gradually grow. Hence, in this way the customers should become aware and accustomed to the new currency. Similarly, entrepreneurs are involved just as well. For them, the use of EURO is not obligatory until 2002 and the transition will be gradually accomplished in 2002.

The only areas where EURO has become obligatory already, are financial markets. The prices of shares and bonds are quoted singly in EURO. Foreign currency trading has become already a part of past history too.

After starting the third phase of monetary unification, the introduction of Euro will demand new qualities not only from the members of the European Union, but also from the membership candidates including Slovakia. Owing to the fact that up to now our current ambition is only to enter the EU, the position of our commercial banks will become rather disadvantageous, just as well as the position of those which occur within EU, yet beyond the Euro-zone. It is also necessary to be aware of the fact that in the year 2005 the measures protecting our banking sector against the banks within EU will lose entirely their protective effect. All our banks must gradually prepare themselves for a tougher competitive environment in relation to the banking sector of EU.

In respect of the year 2000, the banking sector in Slovakia occurs in a situation where it will be necessary to perform significant changes. The changes will involve the entire banking sector, but especially the banks which are actually controlled by the state, namely Všeobecná úverová banka and Slovenská sporite¾òa, the assets of which represent as much as 40% of the assets of all commercial banks operating within the Slovak territory and which still yield an unfavourable structure of their loan portfolios. They yield a common need of restructuring and subsequent recapitalization in association with privatization. Naturally, this process of changes will avoid neither the group of private and specialised banks, the share of which is 41% of total assets.

The whole process involves not only the changes in issues which can appear as evident, as e.g. the product portfolio, quality of services, the endeavour to enter the strategic alliances, including the processes of fusions and acquisitions, but also the management of risk in respect of exchange rate, loans and strategy.

The success of Euro introduction will depend on the activities of banks, large, medium-sized and small enterprises. It will require an extensive preparation, especially in the field of internal organisation of banks, as well as banking services and products. A similar situation will be brought about in firms with exporting and importing activities. The changes will be demanding especially for the commercial banks because it is them for which money represents the basis of their business.

In coincidence with acceleration of Euro introduction, many firms will endeavour to maintain or even improve their image. On the other hand a whole series of banks and firms, namely beyond the EU count with the fact that within the transitory period from 1999 to 2002 they are going to keep their accounts in two currencies.

It will be necessary to keep two ledgers, one in national currency and the other in Euro, and most of all to perform all operations in them. Naturally this fact will increase the laboriousness and demands arduous work in all functions of each company.

The banks which are in the forefront of this process must be prepared for the introduction of Euro in advance to their clients. Each bank not wanting to lose its modern and prosperous trend must therefore build its Europe-oriented strategy not only on its own behalf but especially on that of its clients. The strategy should focus on the following:

· gathering of information,
· coordination in the process of Euro introduction,
· assessment of adaptation fields,
· definition of the strategy of transition to Euro definition of changes (as for the banks, this means especially the changes in the field of services and products).

The banks’ basic priorities reside in strategies of their approach to their clients, stra-tegy of competition, access to banking services and products payable in Euro. Flexibility in internal organisation of banks is considered as an immensely important property. One of the most important conditions of Euro introduction depends on the stage of preparation of state administration bodies which the banks naturally cannot influence directly. The introduction of Euro requires the following activities of Slovak commercial banks:

· adjustment of information systems,
· staff training,
· adjustment in the field of legal agenda (especially in that of banking methods),
· new competitive services for the management,
· conversion in the field of products (especially in payments).

Regarding the significant impact of European monetary unification of exchange markets, the transformation of the national currency into Euro will represent a significant change for the participants of currency trades. Hence, the domestic currency markets will spread beyond the borders of individual states and all currency traders will gradually incorporate. Therefore the strategy will include also many questions of foreign exchange trading. Central banks of individual EU members will have to continue monitoring the currency markets and to work out the appropriate prognoses.

The introduction of a unified currency will have an impact on commercial banks by changing the conditions and losing some comparative advantages.

· The European consolidated market will substitute the field of national market structure of government bonds. Therefore two main resources of comparative advantages of domestic banks will disappear, namely the approach to domestic investors and the advantage of a precise knowledge of national currency policy. A whole series of tools derived from national interest currency which have been produced during the past years will disappear and they will be substituted with several tools based on Euro.

· The main current resources of comparative advantages of capital trades include the estimation of loan risks and currency denomination which can facilitate the placing of domestic investments and to perform secondary trades owing to better comprehension of national macro-monetary policy.

· After introducing the unified currency these advantages brought about by the existence of national currencies disappear. The domestic banks will have a comparative advantage which resides in relation to clients and estimation of loan risks in domestic enterprises. The current relationship between the national origin of both issuer and underwriter will stay to be one of the resources of comparative advantages of domestic banks. However, as soon as the national firms decide to transfer their financial organisational units into another country, the portfolio of domestic clients can thus undergo changes.

· Currently, the dynamic development and dispersed administration of funds will gradually undergo changes. The European markets will be influenced by index funds which will compete with the funds based on the analysis of individual countries or industrial branches.

· The introduction of the unified currency will have an impact on the system of Euro-deposit and international payments. Regarding the fact that the placement of Euro-deposit markets is influenced by the relative extent of regulatory and fiscal burdens, it is necessary to know the tools of the future European monetary policy in this field.

· The main advantage of European Monetary Union coincides with ECU being the international currency. Euro can become a counterbalance of the American Dollar, namely on the basis of historical experience with the growing share of Deutsch Mark within the past 30 years. This process, however, has a long-term horizon. The international task of monetary unification will more or less facilitate the underwriting and trading with securities issued in third countries. The intensive changes will inflict also the foreign exchange trades between Euro and other currencies.

The common currency will change the essence of the domestic loan risk since the domestic recession will not be moderated by flexible national monetary policies.

A Focus on Institutions and Policies in the Period 1993-1996


This paper presents some review of institutions and policies related more or less directly to foreign direct investment. It covers wide range of aspects starting from general environment and macro-economic policy to various institutions and industrial policy elements.

Macro-economic policy has been successful in maintaining stability of currency and inflation. The increasing rate of economic growth since 1994 to 1996 was accompanied by a decreasing rate of the consumer price index. Nevertheless, since 1995 an increase in foreign trade deficit has been coupled with the budget deficit. The government had tried to improve the balance of payment situation by imposing some protective measures like import quotas for some products and has established a duty for importers to request certificates for products imported. By the use of tight monetary policy and other measures, the development of domestic demand and the rate of growth in imports moderated during the second half of 1997, following a period of high current account deficit during the first six months.

Also the general level of taxation can contribute to the attractiveness of a country for FDI. Examples of countries with lower rates of corporate taxation show that they are often more successful than their neighbours. System of taxation in Slovakia has undergone substantial transformation starting with the introduction of a new tax system in 1993. Former turnover tax has been substituted by value added tax and some new taxes have been introduced simultaneously. Some objections have arisen that the new system might discourage foreign investors. This was linked to the fact that the income tax rate has been raised from 40 to 45 per cent, and no tax holidays for FDI was envisaged.

In the past industrial policy followed various "industry support" goals. The consequence was that tax rules allowed to provide special advantages to support certain targets of industrial policy like, e.g. tax holidays. This was accepted in cases of attracting foreign investors, for development of small and medium enterprises, for development of certain regions and for stimulation of active employment policy. Later this possibilities have been substantially reduced.

Increasing problems with state budget deficit and decreasing ability to repay country's foreign debt has led the Slovak government to look more intensively for FDI. This was especially seen in 1996 and persisted in late 1997. The government was aware that the situation when foreign investors are treated in the same way as domestic ones if registered in Slovakia cannot secure some rapid inflows of FDI. Especially if competing countries possess some comparative advantages. This fact gives a rise to growing interest in making the economy more attractive for foreign firms by providing some advantages.

There is a close relation between FDI and trade, which has been discussed in literature. Sometimes import barriers foster FDI, in other cases FDI follows successful trade experience. Some foreign firms located in Slovakia have experienced both restricted trade and marketing arrangements (until 1989) and liberal environment since then. Trade policy is now liberal using low rate of protection of the domestic market. In some periods, however, Slovakia provides certain measures for protection of its producers. Among recent ones is an attempt to protect home-located breweries by introducing quota on beer imports. The government's foreign trade policy also uses licensing policy. The paper provides some details on this issue as well as on customs policy in general.

With its tradition of state responsibility for research and development, Slovakia is trying to introduce complex system of support for these activities. This is a critical factor in the situation when many firms have not enough capital to start or continue their own research activities. But this policy can hamper initiative of firms and make pressures for shrinking state budget. The attempt of the state to be more active in industrial policy has been recognised also by growing number of special institutions, some of them are mentioned in the paper.

In its Strategy of financial policy for 1994, Slovak government announced its plan to use tax credits and, in special cases, tax exemption for a certain period to support business activities. It was aware that investing in a lower developed region increases rate of risk for firms and that it should combine these incentives with credit guarantees, provided to the business by commercial banks or to pay up part of interests from state budget funds’ credits. Then, the government's financial policy had following goals in relation to regional policy: to stop decline of economic activities in the regions, to limit negative impacts of structural changes and unemployment and to maintain social peace, to stop pollution of environment and to increase business activity especially in the economically backward regions.

Several laws have been passed since 1990 that have relevance to FDI, including the Act on Enterprises with Foreign Participation (1989). This act has been liberalised several times and foreign investment activities have been supported by Commercial code introduced in 1992. It created equal conditions both for domestic and foreign firms. Since then, foreign investors can get a stake in a company over 50% and can also establish new enterprises. An introduction of current account convertibility at the beginning of 1991 removed all restrictions concerning the repatriation of profits and capital and enabled repatriation of capital gains as well. There are the same tax conditions for operation and the same legal conditions as for local firms. Tax rate amounts to 40% of a tax base, less deductible items.

The situation in support of FDI can be characterised as equal approach to all subjects. State administration can, within the framework given by laws, support development of business subjects, both domestic and foreign with various instruments, e.g. tax allowance, subsidies or credit guarantees. Other measures, like, e.g. national treatment, agreements on support and protection of investments are considered by investors as standard ones. Slovakia does provide neither any support in the area of corporate taxation nor supportive measures in acquisition of real estates.

Privatisation method has had its impact on FDI inflows, at least in the first transition phase. The Slovak privatisation process after the first wave of privatisation has followed a different path than in the Czech republic, stressing more direct forms of privatisation. This fact has limited possibilities for immediate privatisation of companies by foreign subjects. Nevertheless, there was an offer to invest for foreigners. Besides the fact that foreign investors had participated in both waves of privatisation, there always been a possibility for them to purchase or invest in newly privatised companies.

With the second wave of privatisation foreign investors are no longer in a better position in comparison to domestic ones. Support to domestic investors has been firmly adopted over the second wave period. Foreign investors have no legal privileges in standard methods of privatisation. The government often had made a commitment in the contract concluded with a foreign investor to cover all or part of the environmental costs, to settle the claims of former proprietors, and to write off bad debts. Since foreigners had not been insiders, they had a more difficult position in some privatisation cases. Taking with the fact that some big Slovak companies are eager to privatise Slovak state-owned banks and that there is a list of "strategic" enterprises with a restricted possibility to be privatised, for the very next future it cannot be expected that foreign companies will enter certain areas as full acquisition or majority joint-venture.

From corporate governance perspective FIEs belong to the least problematic group of companies compared to those controlled by investment funds and management groups. In the area of corporate strategy the theory distinguishes two kinds of foreign firms operating on local markets. The first group is represented by a firm that serves local market only and the second one consists of firms serving not only local markets but also markets in neighbouring countries. Such firms thus serve as regional centres. In Slovakia there are both two groups. The paper provides one case of a company representing the second group.

Foreign companies are seeking specific country or market advantages. The paper mentions Siemens' approach towards investment in foreign countries and also tries to stress that any decision of company to invest in a host country is based on individual set of evaluation. This evaluation covers both product/market and country characteristics and cannot be linked only to general country evaluation. There can be another factor in play, namely, evaluation of investment behaviour of competitors and alliance partners. Our case-study experience and other researches on FIEs from last three years have shown that FIEs performance in acquired domestic firms or joint ventures have improved in several areas. For example liabilities after date of maturity have remained or have been reduced, volume of production has increased, labour productivity has increased in those cases where response was obtained. The average rate of foreign managers participation in management of 8 FIEs analysed was 22.6%. The biggest FIEs frequently invest in all three basic forms. There is no clear intention to prefer foreign or domestic suppliers and firms rather increase their research and development contents than vice versa. All these experiences are based on a sample of several FIEs representing firms with well-known foreign investors. From the cases rather positive than negative conclusions can be made.

Competition policy also matters in attracting FDI. We have found one case of antimonopoly procedure – against Slovnaft company. After certain period the company was allowed to buy a petrol station network – step originally called in question. In the paper are mentioned also strategic alliances. This topic has close relation to competition policy, because some kinds of alliances are considered as cartel-like structures.

Often low cost of production factors in a country contributes to its higher attractiveness. The paper classifies costs and evaluates their importance for potential investors using also international comparisons. Slovakia has always been known as the country with very cheap labour costs. Comparison of the average monthly wage in Slovakia with that of other CEECs shows differences between these countries, which give Slovakia comparative advantage in this area. Low labour costs coincide with highly qualified population. The education and research still belong to the problematic areas of all transforming economies. A table in the paper gives comparative look on labour costs development in the Slovak industry and in Denmark, Finland and Sweden. The table shows that the best situation in unit labour costs development is in the area of short-term consumer goods. In the science and technology the Slovak government prepared a concept of state science policy concentrating on foreign co-operation in education, science and technology. Priority is given to co-operation of universities and research institutes in international programs. Slovakia is characterised by high capital costs and limited availability of capital for certain groups, especially smaller entrepreneurs. Interest rates for credits are very high and this leads to increase of the user’s cost of capital. Unlike small and medium sized enterprises, there are no problems with access to capital for the biggest companies since they belong to the favourite targets of banks. Situation on the money markets also matters. Very high interest rates make impossible for newly privatised firms to find cheap credits at home. Despite legal arrangements in privatisation allowing new private owners to postpone their payments, these owners face severe problems related to their obligation to pay up several kinds of credits.

Being in the investment-driven stage of development, it is critical for Slovakia in its move towards the innovation-driven stage to have more sophisticated areas of production. This could be difficult to achieve without massive future FDI to such areas. Given the high costs of domestic capital, decreasing public financing of research and limited possibilities to use the capital market as an efficient and stable source of external financing, there is a low probability that the country can overcome its innovation lag by its own sources and capacities.

There are still problems with transaction costs connected to the efficiency of public administration, institutions and physical infrastructure. It is necessary to further enhance ability of administration linked to FDI to make the investment process smoother. Despite efforts which have been made since the beginning of transformation, there are still some problems with attracting FDI. Among them we can find: administrative barriers in obtaining information, permissions and certificates, not always clear competence and responsibilities of various governmental bodies in their relations to FDI, lacks governmental support for institutions working in the area and an insufficient infrastructure. As concerns other costs, increase in price of electricity for the business sphere has been done several times since 1990. There are expected some further adjustments in price energy for households, which have roughly 25% share on total energy consumption. Slovakia, however, still belongs to countries with the cheapest energy. Among other costs important for evaluation of an investment are transaction costs. This kind of cost includes broad range of items. Sometimes environment, regulations or practices make it necessary to hire local experts, which leads to further increase of transaction costs. Despite limited importance, also e.g. poor corporate governance and absence of some special services for investors, have increased transaction costs.

Economic policies have contributed to speed up the transformation. In this context, FDI plays an important role as a component of enterprise modernisation. It is so, even if governments want to limit their importance when some nationalistic feelings exist. For instance, internal or external privatisation methods using vouchers limit the role of foreign capital. For a part of the population, the selling off some "crown jewels" means that country is deprived of its wealth. Decision selecting certain privatisation model therefore represents specific policy measure, which can influence FDI inflows to a country. Since there are differences between volumes of state property to be privatised in developed and transition economies, it is no surprise that this measure has more pronounced consequences for FDI in the latter case. Also standard policy measure fostering or hindering FDI are mentioned.

As concerns standard measures oriented towards FDI, Slovakia has limited investment incentives for foreign investors compared with neighbouring countries and far less advantageous environment than has some of developed market economies. The only two measures important for foreigners are custom relief provided under very limited conditions and some contributions for creating new workplaces. New measures prepared in the area of strategic enterprises limits opportunities for foreign firms to participate in privatisation. An experience confirms that "golden share" and "strategic enterprise" had been, after their introduction in the Act on Enforcement of State Interest in Strategically Important Enterprises and Joint-Stock Companies, carefully analysed by foreign investors.

In the period 1992– 1993, the government planned to promote capital inflows for investment in infrastructure, ecological projects, and in regions affected by the restructuring (armament conversion) process. This strategy was not successful at that period. With shift from industrial to more liberal policy and, later on, to favouring more domestic entrepreneurs the situation has changed and now there are practically no special incentives for foreign investors. There are only standard guarantees given by bilateral agreements oriented on protection of investments which give possibility to repatriate profits. Another advantage is the possibility to obtain customs relief for import of high technologies. If current economic policy is added into evaluation, then existing protection can be sometimes advantageous for investors. While for certain periods there had been import duty in force, now this protection takes form of certification, which covers substantial share of the whole commodity range.

The government follows equal treatment of Slovak and foreign companies. There can be, however, in some special cases case-by-case approach to foreign or domestic firm with some advantages (e.g. postponement of payments in privatisation) limited by existing legal framework. Any such request must be submitted to the Ministry of Finance. Speaking about barriers and incentives for FDI inflows, one aspect cannot be missed. It is real change in understanding that some more steps in making the country more attractive should be done. This awareness of necessity to change its approach towards FDI is not only new for the Slovak government but also for other CEECs. Recent researches among FIEs in Slovakia show that as barriers for business FIEs consider especially non favourable investment environment, protection of domestic market and limited access to finance. Firms fully-owned by foreigners stressed the same first two factors as FIEs but ranked as third and fourth most important factors poor business culture and insufficient business infrastructure, respectively. Both categories agreed that taxation and frequent changes of legal system represent important barriers for business. Position of Slovakia has been also weakened with the decision of the European Commission to evaluate differently applications of countries wishing to join the European Union. This can be a negative factor especially for investors wishing to operate in European area. Slovak government should aware of this fact and follow more open policy both at internal and external levels.

The future will depend on foreign investor's evaluation of advantages and disadvantages of Slovak markets. Each case thus represents individual evaluation, with the special focus on regional and aspects important for particular industry and on general country risk, investment incentives, potential profitability and market growth. Despite the advantages mentioned earlier there are also negative factors, which affect the attractiveness of the country. World Bank and EBRD ratings confirm good position of Slovakia. Nevertheless, the biggest differences are in the area of political development. This rating places the country not only behind the Czech Republic, but also behind other CEECs. The size and growth of the host country market contribute to increase in FDI and so does foreign trade activity. Certain disadvantage for Slovakia represents its small market. It is a disadvantage for those MNCs, which have strategy to serve, via their subsidiaries, host country's market only. Nevertheless, there are other disadvantages, e.g. low level of language skills.

In comparison to the CEEC-4 countries Slovakia's current results in attracting FDI are not favourable. Slovakia needs higher inflow of long-term foreign capital. We have mentioned several pros and cons of the Slovak economy. Their evolution can shift attractiveness of the country in various directions. It will depend on behaviour all market subjects and political representatives how the future Slovak investment environment will be shaped. Despite the effort the government gives to cope with lack of foreign capital, the average rate of foreign investment is not increasing. This fact has not been adequately explained so far. It is not possible, based on given data, to provide an explanation of this fact, but the size of the Slovak market probably matters here together with political factors.

Low level of FDI is not a sign of poor macro-economic performance. Slovakia has high economic growth rates and also the highest level of domestic savings in the CEEC-4 region. With changing patterns of consumer behaviour and estimated wage and price development, we can expect the rate of savings to be decreasing over the next decade. This can negatively affect investment activity if the current low level of capital inflow will persist. Continuing absence of special FDI incentives and less competitive FDI environment have led to continuity of lack of huge FDI projects. Future policy measures should focus more on this kind of FDI. Usually country does this policy by setting limits defining eligibility for foreign investors to obtain certain advantages. Only FDI policy reflecting the current situation in other countries can help to solve persistent problems with FDI and improve competitiveness of the country.

At the end are presented some issues for further discussion. One conclusion here is that policy-makers should foster policies aimed at attracting foreign capital. The main reason is that there are more business opportunities world-wide for large firms like, e.g. multinationals, with well-established networks. To attract such a company, it is necessary to improve investment conditions by improving of economic policy, political culture, institutional framework and democratic practices. Parallel activities here can bring more confidence of foreign investors and potentially more FDI.

Reflections on Results of a Questionnaire Research


Research team of management teachers at the Faculty of Mechanical Engineering, Slovak University of Technology, performed in September– October 1998 a questionnaire research in selected manufacturing enterprises in Slovak Republic. The main objective of this research was to discover what is the managers’ and employees’ attitude toward radical restructuring of their enterprises (and even toward business processes reengineering – as defined in literature), what are, in their opinion, main barriers to this process and what type of activities they plan in the nearest future in order to radically improve their performance.

First part of the paper describes the sample of respondents, methods used, content of questionnaires and main results of the research. Questionnaires were sent to 88 manufacturing enterprises – large and medium-sized companies. The response rate was 39.7 per cent from 35 enterprises, forming the respondents sample, 88.5 per cent were large companies and the rest were medium-sized enterprises. Wholly owned (or majority owned) foreign subsidiaries were not included into the research because in these companies radical restructuring was initiated and actually managed by the foreign partner. Industry profile of respondents was as follows: 23 enterprises in machinery industry, me-tallurgy and chemical industry, 3 companies in electrical engineering and then a heterogeneous group of companies from different industries. Profitability indicators of respondents corresponded to the average situation in Slovak manufacturing.

First group of questions in the questionnaire was oriented on the problems of forming company’s strategy as a precondition to successful restructuring.. The second group of questions was aiming at identifying the attitudes toward reengineering. Although the concept of reengineering becomes popular among some Slovak managers and in mana-gement theory (and even some consulting services in this field are provided), the well-known definition of this concept by M. Hammer and J. Champy was repeated in the questionnaire. The third part of the questionnaire was devoted to communication problems – both within the company and between a company and its environment. Questions were designed to verify research hypothesis that communication problems are a significant barrier to improving economic performance of Slovak firms. The fourth part of the questionnaire was devoted to innovation activity issues because intensifying innovation can be an important way to improving competitiveness. Finally, the fifth group of questions was dealing with problems of building quality systems in enterprises.

From answers to the first group of questions it seems that managers are aware of the importance of long-term strategy; 85.7 per cent of respondents state that they have defined their vision, strategic objectives and particular measures to achieve these objectives. However, just part of them (two thirds of respondents) declares that a system of monitoring changes in external and internal environment exists in their companies. What are the strategies of other companies based on?

More than 50 per cent of respondents states that reengineering of some business processes is included in their strategy. They plan reengineering in production processes, employees motivation system, information systems, new product development processes, supplier relations, etc. In some companies a reengineering team, responsible for designing and implementing these radical changes has been created. As main barriers to reengineering (and radical restructuring in general) are mentioned: organisation culture existing in the company, prevailing management system and information system in the firm, macroeconomic and legal environment, etc. 60 per cent of respondents states that some improvement of performance was already achieved (improvement in product quality, higher flexibility in responding to customer requirements) due to radical changes in particular processes. However, the reliability of this information can be problematic, because – as some respondents acknowledge – a satisfying feedback from customers does not exist.

Because the prevailing organisation culture is regarded by managers as a main barrier to improving performance, it could be interesting to find out how managers evaluate intra-firm communication. According to 80 per cent of respondents, deficiencies in communication (mainly in horizontal communication) are an important barrier to strategy implementation. What regards communication with customers, 65.7 per cent of respondents think it is satisfactory. However, the share of enterprises that have no systematic feedback from customers is still high.

Innovation activity of most Slovak enterprises is still insufficient. Large companies usually have got their own R&D department (62.8 per cent of respondents), but a significantly reduced one in comparison with the situation in the beginning of 1990s. Commercial effect of this research is still low. The number of new patents is declining. Research and Development expenditures of most companies are lower than 1 per cent of their sales (some companies did not answer this question). New products introduced are mainly incremental innovation.

Companies in the sample are aware of the importance of the quality of their products and services to improving their competitiveness; 77.14 per cent of respondents states that they have already established a quality system in the firm and they plan to further improve it. However, in reality significant deficiencies in quality management and quality systems exist (as described in the concluding part of the paper).

From results of the questionnaire research it is not quite clear whether Slovak mana-gers understand what reengineering actually means and how the business process (according to this concept) is to be defined. Often they identify reengineering with any form of a radical change in the company and its activities. Of course, reengineering can’t be a panacea to solving all problems of Slovak firms. Other approaches to improving performance can be also valuable.

The value of research results is, of course, limited by the relatively small number of enterprises in the sample. However, most important Slovak manufacturing firms, without a foreign capital majority stake, were included in the sample and problems identified on the basis of this research can be regarded as topical for all Slovak manufacturing firms.

In the following parts of the paper some “soft” barriers to radically improving business performance in Slovakia are analysed – areas where the role of the human factor is crucial.

Special attention is devoted to problems of forming and implementing company’s strategy. Following main problems in this area are outlined: lack of systemic approach, prevailing short-term orientation of Slovak firms, insufficient customer orientation, organisational barriers to strategy implementation. As one of the tools that can be used to manage the transformation from the existing to a desired (target) state of the company (that also can help to decide whether a “starting from scratch” is necessary) the matrix of change is described.

Next part of the paper deals with the role of organisation culture in business pro-cesses reengineering. Managers of responding companies understand that “culture matters”. However, they usually don’t know what is the actual value system and beliefs of their employees and how to use or modify this system (to overcome the resistance to planned changes) in order to improve company’s performance. In many firms, a coexistence of different subcultures exists that makes more difficult horizontal communication. If managers themselves are members of a special (sub)cultural community, they are not able to effectively perform the integrating function.

The last part of the paper is dealing with quality systems building in Slovak firms. Problems that are not sufficiently solved in ISO 9000 standards and some mistakes that often occur while introducing quality systems in enterprises are outlined. Special attention is given to the interrelation between quality management and human resources mana-gement and to the role and responsibility of the top management in forming the organisation culture and environment supportive to total quality management.

Following failures in the practice of quality systems building are mentioned:

· underestimating the role of a supportive climate in the organisation;
· delegating responsibility for quality management from top management to quality control department;
· opinion that ISO standards 9000 are a sufficient device how to create an effective quality system in a firm;
· adequate motivation strategy with respect to effective communication, individual workers’ motivation and attitudes, has not been developed;
· some companies think that awarded quality certificate will automatically solve the sales problems of the firm and assure its permanently successful position at the market.

Overcoming all the mentioned barriers and co-ordinating the interactions between individual measures is important and can lead not only to improvements in quality mana-gement but also to creating an environment supportive to radical and desirable changes in all crucial dimensions of company’s performance.



Supply-side economics (also as the economy of a supply-side, or the economic theory of a supply side) was created as a criticism of the economic policy excessively oriented to the aggregate demand regulation. According to this criticism an exaggerated importance of short term measures in the fiscal policy jeopardizes a long term sustainability of a sound economy. A part of representatives forming the supply-side economics called for a return of the traditional policy offsetting the state budget incomes and spendings, and discharging inflation out of the economy.

This theory concept, which found its reflection also in real life economy represented one of the theoretical backgrounds of the neo-conservative economic policy, had started to develop from the end of 70-ties of the twenties century mainly in the USA and the Great Britain.

The circumstances which called the supply-side economics forth were closely connected with a slow down in the economic growth in the USA economy and in several other developed countries, and were also related to the occurrence of rather high inflation and unemployment. This phenomenon was named as a stagflation (i.e. a coexistence of a stagnation and inflation) and as a slumpflation (i.e. a coexistence of the economy decline and inflation).

As for significant circumstances which gave rise to the supply-side economics the following should be considered: a growing dissatisfaction with the expanding state administration, with acquiring more powers (opposition to the so called big keynesian state) and still higher interference of state into the economy (a fight for the so called deregulation). Further on, there was also a resistence of these circles against a “welfare state”, and paralelly, also growing discontent with some questionable outcomes of certain social welfare measures.

Finally, it was a growing resistence of a considerable part of the population against increasing tax burden, i.e. revolution against taxes.

Supply-side economics economic program, or the program which it accepted, highlighted the importance of taxes as an incentive to work, savings and investments, promoted the use of paid services and explained how paid services instigate attempts to avoid taxes. This is where we can see certain links between the supply-side economics and the theory of instigation (motivation, stimulation).

The core from which the whole concept of the supply-side economics has gradually evolved is a so called Laffer’ s curve. This curve, named by his author, an operating ma-nager of a counsel company and a professor at the University of the South Carolina, A. B. Laffer, has further developed an old premise that too high taxes can negatively hit the economy. They may dump an interest to increase incomes from, discourage from new investment, stimulate self-assisting activities following the slogan “Make it yourself, it will be cheaper” to instigate an expansion of the non-official, non-reported, and thus, non-taxed economic activities (so called informal or shadow economy) and to encourage avoiding taxes.

According to the supply-side economics, the demand cannot exist without the supply, which at the same time reshapes and structure the supply. A doubtful pre-eminence of the production over the supply can be explained in the following way:

· The supply-side economics completely neglects a feedback between the supply (production) and the demand (consumption).

· It ignores a fundamental issue where the supply, or the production, is determining the demand, or the consumption, basically because the GDP distribution is defined by the ownership of capital.

· It understands that the demand cannot exist without the supply and also understands that it is structuring the production (according to the simplified Say’ s market law.)

If taxes are too high, according to the supply-side economics, people favour their spare time to working in the official economy. To avoid taxes they prefer their own work to purchasing services and tend to seek ways how to avoid taxes. The value of tax rates is influential in households’ decisions when available income is to be divided for consumption and for savings. If the savings interest yields are excessively taxed, households tend to lower their savings.

It there is an excessive tax burden on the profit, it leads to a decline in investments.



Macroeconomic imbalance at different levels is significantly influenced also by a complex system of re-distribution processes through incomes and expenditures of the state budget. Amongst traditional goals of fiscal governmental policies there was also found a balanced state budget. Despite of that since 30-ties, mainly under the influence of the Keynes’ s macroeconomy, but also due to the II World War and the Cold War, the state budgets were mostly running deficits.

The appearance of the budgetary deficit indicates that spendings of the state were higher than its incomes during the budgetary period which the state expected or really gained. An interest from the public debt which governments inherited from the previous period is a significant exogenous factor which may cause or aggravate the deficit of go-vernment’ s budget. Quite frequently the interest form the public debt services plays a de-cisive role in creating a budgetary deficit.

The fiscal equilibrium is one of the pre-requisites of an overall macroeconomic balan-ce. At one hand, we consider the processes which are influenced by the total value of incomes and spendings of the state budget, on the other hand, we consider the processes which determine the source of financing a its use for re-financing of the budgetary deficit of the government.

The opinions on macroeconomic impacts of a budgetary deficit and thus also on the overall macroeconomic equilibrium are the most contradictory questions within the macroeconomic theory. Basically, single economic schools vindicate every possible standard position of a government’ s budgetary deficit. Principally, there are three basic theoretical approaches we can distinguish: neoclasical, keynesian and neoricardian. The neoclasical approach evaluates negative macroeconomic impact of the budgetary deficit and that is why it rejects it, the keynesian evaluates macroeconomical impacts of the budgetary deficit positively and in certain conditions it recommends it, the neoricardian approach refuses macroeconomic impacts of a budgetary deficit which are different from taxation impacts.

These three principally different attitudes to the government budgetary deficit issue have been presented quite a long time ago and none of them was final, empirically confirmed or rejected.

These different conclusions evaluating macroeconomic impacts of a budgetary deficit may appear due to the fact that the budget deficit is extremely complex issue and it value can be very often influenced by different methodology, but also different macroeconomic impacts of the budgetary deficit are related to the way it originated and to the way of its coverage.

Macroeconomic impacts of the government budgetary deficit change upon the character of financial transactions which caused the deficit and also change according to the characted of transactions covering the deficit. While the significance of a budgetary deficit regarding evaluation of the financial management of the government is still the same, no matter its origin or coverage, the macroeconomic impacts, especially impacts to aggregate demand and also other indirect impacts regarding interest rate, prices and the trade balance situation differ according to the type of a budgetary deficit. Viewing it through the condition of fulfilling the fiscal equilibrium the budgetary deficit exists only in one of various forms to which it was transformed, i.e. in what forms is the deficit cove-red.

The basic forms of covering the budgetary deficit, its transformation shapes can be theoretically derived from three status changes into which the budgetary deficit can be reflected. Those are: debt service cover, monetary cover and assets cover.

When evaluating the effects of a budgetary deficit towards the overall macroeconomic equilibrium we cannot ignore the circumstances under which if was created and also means of it cover. It is important that a comparison of macroeconomic impacts of the budgetary deficit can be made only with deficit of the same type.

However, the real life is mostly encountered with a combination of various forms of governments’ deficit cover. Foreign funds sources are most frequently limited (this is typical mainly for transitive economies), they are likely less flexible for adjustment to the need of a government budgetary deficit, and subsequently the funds are obtained through domestic loans granted to the government. Domestic loan sources limitations is given by the difference between savings and investments in the private sector and the deficit on the payment balance current account. The lack of funds in the public sector must be covered by that portion of the private sector savings which was not used for net imports financing. Such approach leads to residual funding of the business sector appearing as one of the forms of “crowding-out“ effect. However, the savings can be used in general only for two main purposes: for investment financing or for state budget deficit financing. Under ba-lanced situation the difference between savings and investments equals the volume of the state budget deficit, if growing it increases the budget deficit, the total sum of government’ s and private investors’ demand for loans raises, and as a result, the interest rate goes up (assuming that there is no chance to use foreign savings to cover the deficit). Higher interest rates, however, decline the willingness of private investors to invest their money. The interest rate would not go up only if increase in the deficit is accompanied by the increase of savings. Assuming that the deficit can raise total savings within the economy (business entities may decide to save more to be able to pay higher taxes in the future), but most probably this increase will not follow 1:1 ratio pattern. The discharge problem is one of the negative aspects the growing state budget deficit and state debt may bring forward. After the World War II the opinion that the state debt does not represent any burden for future generations was popular. In this consideration, the state debt is the amount we owe to ourselves and that is no burden. An analogy between the private and public debt taken in the same way was incorrect because private debtors owe money to another person. The current deficit increase has decreased the consumption of future generations. This is also true if the state debt is kept by the majority of the population in the country.

A sound management of public finance should be manifested in the budgetary equilibrium at least from the long term horizon. In reality, almost all countries are running budgetary deficits and thus the state debt have been raising all the time, considering its nominal value. The bigger problem is how to ensure the finance to cover the deficit.

Evaluations of the efficiency of the fiscal policy regarding domestic demand for funds and their effective allocation are very important components when evaluating a total effect of the fiscal policy upon the macroeconomic balance. The criteria for evaluation the fiscal position of the government and its sustainability for a longer period of time influenced the set up of convergence criteria limits (state budget deficit to GDP ratio at 3% level and the state debt to GDP ratio at 60% level) within the European integration process.

However, some economist have objected that the traditional understanding of the state budget balance as a difference between incomes and expenditures of the state budget is not sufficient because it is rather narrow and hiding the depth of the processes the volume of the solde is calling forth (in this case they recommend to use the notion “monetary solde“ of the state budget).

In a real economy the question on what is the appropriate volume of government expenditures at a certain incomes’ level is solved by the mechanism of a political decision making. In 50-ties and 60-ties the rules and traditions of the fiscal policy influenced by the government’ s policy supporting the idea of full employment and broader social goals. In 80-ties and 90-ties it has been shown that the regulation of state budget deficits in a long term is inevitable for maintaining the macroeconomic equilibrium and a stable and sustainable economic growth.


Jaroslav KITA

An internationalization of the Slovak economy and related restructuring of Slovak companies is often a discussion issue whether the presence of foreign investors leads towards a new modern management style profitable for our country.

Current definitions on management underline the competences of managers operating internationally on purchase or sale markets.

The internationalization of economy involves all companies in Slovakia, which cannot do, running their production, with traditional management methods and are forces to develop their activities in a wider space which is more or less open.

Such development has brought about many problems for our companies, especially of technical, financial, accounting, taxation or legal etc. nature, where their complexity requires a fundamental analysis.

A basic issue is the quality of managers who control a network of companies with a foreign capital participation, or a French capital. Out of numerous aspects on the international management and according to many publications dealing e.g. with marketing issues, a human aspect analysis has been relatively meager. The objective of the article is at one side, to deal with the circumstances of companies’ management with a French capital stake, and on the other side, to analyse problems between the mother company and units performing in Slovakia. The results of the research which was running during 1998 provided a plenty of facts to illustrate the above mentioned issues, and at the same time they create an outcome for contemplating the restructuring under the condition of international integration.

The focus at the companies with a French capital participation was due to involvement of the Economic University in Bratislava in the sphere of economics and commercial management in Latin culture countries. Among them, France has become particularly active partner for Slovakia, mainly in the educational area where young Slovak managers are being prepared. France have also demonstrated its positive attitude as for incorporation of Slovakia into a group of potential new members of the European Union, and in this way they have created pre-requisites for broader mutual economic relationship of the two countries.

The ideas of current cooperation of the Slovak-and-French relationship frequently have resulted from personal contacts, from the initiatives of the Economy Ministry of the Slovak Republic, French counselling and consulting institutions, subsidiaries of big companies, activities of universities which prepare future francophonic managers for their work in entreprises’ sphere. From this point of view the development of cultural relationship with France may play an important role also for the economic cooperation between Slovak and French companies.

The knowledge of Europe, and from our standpoint, the knowledge of French mana-gement was taken as a base for analysing the conditions regarding the company management associated with French capital.

Recently, as soon as in 80-ties, the mistakes which occurred in the managing of Slovak companies did not have a direct impact internationally. In the current market econo-my the impediments or shortcomings our managers have to tackle are very tough and requirements for managers have considerably risen. Under such competitive environment, which is still more and more asking to employ the strongest sides of a company, an efficient organisation structure is of great importance. A company must be flexible in adap-ting to changes and to be able to utilize the organisation structure as a catalyser which canto accelerate the company’ s adjustment to new development criteria of the future, both within Slovakia or internationally. The efficiency of the organisation structure and of the quality of coordination between units based in Slovakia and the decision making center in abroad are dependent on judgement, logical reasoning and dynamic reactions of managers. The system of values these managers prefer, their professional qualities and competence, more or less harmonious relationship with their environment provide explanations about their commercial and financial results. That is why the nationality of mana-gers have become a significant quantity.

The research executed in companies associated with the Frech capital was divided into 4 sections:

· Basic characterictics of companies
· Issues related to the conditions for introduction of French companies on the Slovak Republic market and to the conditions of mutual cooperation
· Company management
· Communication in the companies with the French capital participation

The research indicated that in 1988-1993 21 companies were established and during 1993– 1997 the number raised to 29 companies, it means that the core of companies really performing on the Slovak area have been pushed to the present period. For these companies it is typical that many of them are found on the stage of studying their organisation structure, other have only been registered in a particular Registrar. We can assume that the number of these companies have a tendency to grow in their number.

The companies which are subject to the research (50 companies) can be divided into two categories: sale and services companies and manufacturing companies. In the first case (sale and services companies) those are companies which dispose with a small independence and usually are a component unit of distribution channels of the French partner. Their development strategy is limited. They perform within a certain area and their influence to the environment is rather low. As regards the manufacturing companies, those are typical for their higher independence to compare the above mentioned type of companies and their impact to the environment can be of great significance. Their use of labour is associated with its further education and authorised powers. Further on, there can exist assembling units the potential impact of which to the environment is hardly to be measu-red at present period. This type is related to tax and payroll benefits. These companies employ 1 or more than 2000 employees.

Considering the internationalization of companies it is important to state that a fragmenting approach controlling the units in Slovakia is more simple because the problems of coordination are less important and can provide better results for companies connected with the French capital stake. The results of our research showed that the experience of fragmenting approach is generally acceptable for companies, no matter what is their organisational structure like, i.e. there is a synergy effect between the mother company in abroad and the company on the Slovak region, and no strict unification of management is to be required.

The above described allows for a better understanding of the surprising results brought out by our research. That means, French companies assigned local managers for managerial positions in majority of companies based in Slovakia, or managers having other then French nationality. This tendency did not create any significant problems in coordinating of activities between the mother company and a unit based in Slovakia or in the know-how transfer. The fact that Slovaks are better disposed in the knowledge of a local environment is supportive for the adopted strategy.

The geographical and cultural aspects of cooperation between the two countries found their reflection in a specific French approach to making business combining the economic initiative with a cultural and educational aspect of foreign investments. France has become a particularly important partner of Slovakia as for education of Slovak managers. The Center of language cooperation and education of the French embassy in Slovakia and the Economic University in Bratislava allowed officially (non-official from 1994) established a francophonic study so that university student can attend lectures and seminars in French. The education mod, which was created ,is unique in the Central Europe and gives an example for creating other similar educational activities also for other universities in this region.

The management of Slovak companies is influenced by globalisation processes. Education of students and managers in French integrates the French approach towards mana-gement with the Slovak reality and allows companies to apply the fragmenting approach, and as a result, bringing companies closer in the sphere of company culture and economy.