Electronic Library of Scientific Literature - © Academic Electronic Press

Volume 49 / No. 3 / 2001

• LONG-TERM PROGNOSES OF THE SLOVAK REPUBLIC’S MACRO-ECONOMIC DEVELOPMENT
• ECONOMY TRANSFORMATION AND ADAPTATION OF ENTERPRISE SPHERE TO MARKET CONDITIONS
• DOES THE TRANSFORMATION PROCESS BRING THE SLOVAK ECONOMY NEARER TO THE EUROPEAN UNION?
• TOWARDS THE THEORETICAL QUESTIONS OF THE STRUCTURAL POLICY
• VIEW AT THE PROCESS OF ENTERPRISING SPHERE RESTRUCTURING IN THE SLOVAK REPUBLIC UP TO NOW
• STATE BUDGET AND THE ENTERPRISING SPHERE
• COMPETITIVE ADVANTAGE OF LOW COSTS
• THE FORMATION OF THE BUSINESS ENVIRONMENT, ITS PROBLEMS AND OUTLOOKS
• TRANSFORMATION AND CRISIS MANAGEMENT AS TWO APPROACHES TO CORPORATE REFORM: AN EXAMPLE OF STEEL INDUSTRY COMPANIES IN THE SLOVAK REPUBLIC AND REPUBLIC OF KOREA
• OBJECTIVE AND SUBJECTIVE FACTORS OF MEASURING INVESTMENT RISK

LONG-TERM PROGNOSES OF THE SLOVAK REPUBLIC’S MACRO-ECONOMIC DEVELOPMENT

Ivan ŠUJAN – Milota ŠUJANOVÁ

The paper summarises long-term prognoses developed in 2000 in the Institute of Slovak and World Economics of the Slovak Academy of Sciences for the Government Office of the Slovak Republic. These prognoses were discussed in the Economic Council of the Slovak Government and then utilised also for the Ministry for Labour, Social Affairs and Family of the Slovak Republic to prepare employment prognosis up to the year 2006.

Prognoses start from the presumption that after the completion of the period of macroeconomic stabilization of the Slovak economy in the years 1999– 2000 (e.g. the reduction of the balance of payments deficit as well as the reduction of the public finance deficit, yet at the expense of real wages reduction and increased unemployment) macro-economic policy of the government and central bank will cross over towards the support of the economic growth acceleration. One anticipates above all the increased inflow of foreign capital, enterprising sphere restructuring and legislation measures aimed mainly at the preparation of the Slovak Republic’s entry into the European Union. At quantifying the scenario one takes into the account also the expected development of the world (above all European) economy as well as expected costs and benefits of the Slovak entry into the European Union.

GDP growth rate after the deceleration from 4.1 % in the year 1998 down to 1.9– 2.2 % during the years 1999– 2000, could accelerate already in the year 2001 up to 2.7– 3.2 %, which is expected in the prognoses of foreign institutions too. Towards the year 2005 GDP growth rate should further increase annually up to 4.2– 5.2 %.

In the following parts of the paper authors present consequential prognoses of the foreign trade, labour productivity, average wages, internal and external equilibrium as well as employment and unemployment rate. These prognoses are comprehensively presented in the following table.

Quantification of the Actualised Macro-economic Scenario of the Slovak Republic

Priority aim for the period 2001– 2006 should be the acceleration of the economic growth. There are several reasons for this aim. Above all it is necessary to recover the growth of living standard of the population (which kept decreasing during the last two years), and that not only by the non-inflationary increase of average wages but also by the reduction of unemployment. The acceleration of the GDP growth can further increase the formation of resources needed to solve urgent problems in the health service, in the education system, in security and defence etc.

Last but not least one must take into account the process of approximation the economic level of the Slovak Republic towards the average of the 15 EU countries from the current approximately 47 % up to some 50 % in the year 2005, or to some 58 % of the new EU average after taking into account the entry of candidate countries.

ECONOMY TRANSFORMATION AND ADAPTATION OF ENTERPRISE SPHERE TO MARKET CONDITIONS

Vilma JURÍČKOVÁ

During the hitherto implemented course of transformation many new problems have been opened in the enterprising sphere. These problems deserve due attention. Scientific circles at the beginning of the transformation process already anticipated many of those problems. That anticipation emerged from the neo-classic theory.

In spite of the fact that many premises really came true, while confronting the whole course of transformation one arrived to the conclusion that neo-classic theory is insufficient not only for the theory of enterprising sphere transformation, but comes short of the theoretic generalisation of the economic transformation as well. Neo-classic theory is limited also in its practical contribution, and its availability at the formation of the economic policy concept. The cause of this limitation is above all the fact, that neo-classic theory is oriented rather at partial questions and transformation process demands complex analysis. Neo-classic economy, however, can serve as a certain impulse, or a starting point for the theory of enterprising sphere transformation and its adjustment to market conditions. Besides, transformation of the enterprising sphere has not only economic aspects, yet is accompanied by radical changes of political system and its institutions.

The relation ”government v. market” belongs to basic theoretical questions of the transformation. Their mutual relation as well as their influence on the enterprising sphere naturally changes during the transformation process.

Even though neo-liberal theories reject any state interference into the enterprising sphere it is undisputable that such an assumption cannot be applied during the whole transformation period. As the adaptability of transitional economies is limited, and their approximation towards the developed economies is restricted, the need of government intervention into the formation of market economy is beyond dispute. The government should above all set the rules and create attractive environment for domestic and foreign investors.

The second, not less important question is the implementation of the transformation model, e.g. the question of the rate of reform: shock therapy or gradual approach. The answer to this question is not unequivocal either. Actually some even suggest that the rate is unimportant. The change of the economic system into a market one is by no means one-shot act leading immediately to the western prosperity. On the other side gradual approach has its limits too. This discussion results into the conclusion, that relations between cited polarities should not enter extreme standpoints.

This, however, happens quite often, as one has seen at the process of enterprise sphere transformation. At the transformation the state did not play its role as game rules producer and co-ordinator of individual policies, the companies did not seize the opportunity to restructure themselves into viable entities, not even after their privatisation. On the contrary, after being privatised most of the enterprises started gradually to decline and became insolvent. This fact, however, cannot be generalised. Many formerly state enterprises after being privatised manifested themselves as more efficient and with higher productivity.

Insolvency, as one of the most serious results of enterprising sphere transformation was caused in fact also in the pre-transformation period. The causes of insolvency resulting from transformation itself had different origin too. Some arrived from the outer environment, others originated from within the enterprises themselves. The enterprises did not adopt any radical steps to increase their viability and drop their financial burden, such as insolvency.

The government carried out some attempts to eliminate this phenomenon, most of them, however, remained in the stage of intent. The same fate met the bankruptcy law, which one considered as one of the possible solutions. Even its multiple revisions were inadequate to make the law efficient. Main mistake however is not in the law itself, but in the overall economic and political climate.

The solution of this problem is therefore possible only then, when all interested subjects participate: government, enterprises and banks.

DOES THE TRANSFORMATION PROCESS BRING THE SLOVAK ECONOMY NEARER TO THE EUROPEAN UNION?

Juraj BOROVSKÝ

Transformation of the Slovak economy into the competitive market economy has lasted more than 10 years already. The expectations of citizen, politicians and most of experts expressed at the beginning of the process were not fulfilled so far. The paper tries to analyse the starting point situation and the reasons why the transformation process is much slower than originally expected. The author considers as relevant the underestimation of people’s ability to adapt their thinking and dealing to the market economy principles. Inadequate existence of the competitive environment, low adaptation of legislative and institutional conditions corresponding to those of the market economy led to many social and economic deformations – high insolvency, corruption, embezzlements (tunne-lling) etc.

The paper characterises individual transformation phases and tries to define the relation of implemented measures towards selected economic occurrences. Insufficient professionalism of politicians and absence of experienced economists in the government executive are, in the author’s opinion, some of the major causes of failing efficiency of the economic measures.

Preferring the installation of the macro-economic equilibrium without respecting the abilities of balanced development in the micro-economic sphere has led to the current dominant economic disorders such as inability and the whole series of unsolved and retrograde problems of latent insolvencies (for instance property depreciation, depreciation of resources of social welfare and health care).

The cause of the dissatisfactory economic development is in disrespecting the marginal adaptability limits of people and economic subjects. These economic subjects originated mostly in market – incompatible conditions with no development of the internal economic resources.

The paper briefly compares the development of economies in the Visegrad group (V4), which uncovers Slovakia’s lagging behind the others as a result of non-systemic transformation development.

Significant part of the paper is dedicated to the privatisation. Implementation rate of the privatisation, which from the point of view of the author lies predominantly in the ideological sphere (without any rational economic plan), was accompanied by ownership switchover into the hands of unprepared owners. Part of these new owners understood this opportunity only as the means for personal enrichment and not as a chance to exercise multiplication of the property of privatised enterprises. The author suggests that a significant shortcoming of privatisation has been the lack of restructuring in privatised enterprises. This led to the delay of the natural selection of viable enterprises and to the prolongation of unviable companies representing long-time infection of the whole eco-nomy.

Government’s economic policy is evaluated critically, as it supports insufficiently the growth factors of economy and thus complicates the increase of competitiveness that should bring the Slovak economy nearer to the conditions of the European Union.

TOWARDS THE THEORETICAL QUESTIONS OF THE STRUCTURAL POLICY

František MELIŠEK

Structural policy is an integral part of the economic policy, which can not be affected without it. Economic policy must form and operate all economical processes in the national economy, including promotion of the structural changes. In accordance with the existence of the structural changes should be worked also structural policy.

Structural policy is complex of the processes, activities, instruments and measures, which are oriented to the forming and influencing of the development of the structural economy and realization of the structural changes. By means of the structural policy there are stated basic targets, directions, forms and measures of the influence of state in the structural processes in the economy, in the development of the economic structure with the aim – achieving of the positive structural changes. It means that structural policy should be formed and realized in the way of supporting of the long economic growth and helping of the economic stability and increasing the resistance against the unfavorable external influences and assisting by overcoming of the long term unbalance. In the environment of the stronger international competition and globalization should be effectively increasing national competition, create tendencies not only to the exploitation of the classic comparative advantages, but also to the strengthen of the national competitive advantage.

The main task of the structural policy is to create economical conditions and to optimize sector, branch, regional and other structures the way to be economic growth factors and structural changes factors utilized in the most effective way and costs connected with inevitable structural changes should be the lowest.

In the theoretical concepts there are two main ways of the structural policy.

Conservative, neoclassic and liberal way to come out with the presumption that the market mechanism co-ordinates and solves basic economic problems and is able to realize resource and requirements allocation in the most effective way.

Keynesians and neo-keynesians way accepts coordination of the economic activities by the market mechanism, but simultaneously accepts economical spheres and branches where this mechanism does not work, or fails. In connection with this fact it develop space for economic and structural policy, creates aims and measures. Therefore supporters of this tendency have the opinion, that state should have influence on the economy and interfere to the resource and requirements allocation.

Accesses to the structural policy and recommendation to the influenced process of the structural adaptation can be different. There are liberal, supporting, active and strategic accesses.

Competition is considered as one of the main parts of the structural changes in the economy. National economy can be competitive only if it will adapt everlasting permanent structural changes. On the base of that it can transplant innovated products with requested parameters on the foreign markets. In this adaptation process market forces and market signals play very important role. Their effective functioning can make a difficulties and retard different market failures and non-accomplished as well as some barriers, e.g. specific assets. Therefore structural policy should be effected by selective impacts in the direction of liquidation and limitation of the markets failures. The speech is about the practising of the structural policy mainly in the period of transformation process. In the transformation era it is necessary to develop system of the economical-political measurements of the state till standard market mechanism will be created together with the fully function market environment.

Structural policy in the market economy supports national economical priorities, by utilizing mainly systems management measures. To be possible to have an influence on the structural changes it is necessary to create stabile economic conditions. In the frame of this conditions the market forces and other economic subjects should receive – by means of market -non-deformation signals which are necessary for effective exploitation of the production factors and on their base should change or influenced on the changes of the branch or other structures in the economy.

With regard to the determined economical and political targets in the frame of market oriented structural policy it is acceptable possibility of the application of the supporting measures, connected to the state. These measures should have market basis, e.g. their application should be dependant on the market and not on the administration.

In connection of the research of the questions of the structural policy there are several kinds of the structural policy. For successfully realization of the structural policy it is very important to determine suitable form of the structural policy, which will be in a cer-tain period in the national economy exploited. On the choosing of the suitable structural policy and on the base of the rational and effectively exploited, can be this policy either successful or not.

In the recent evolution there were clarified many kinds of the structural policy. These are in the article divided according the different criteria.

Economical policy should secure equable and homogenize development. But the changes in the national economy are dynamic and are non-equable. This is the result of the non-equable evolution of the technical progress, non-equable evolution of the needs of the society and economy and also other influences. That is the reason, why the structure of the economy is getting change. The process of evolution of the national economy is the process of the permanent structural changes. Structural policy has targets in the harmony with economical policy and this is the reason why it is forced to promote systematic progressive changes in the proportionality and in the frame of the national economy and its individual parts.

In the recent conditions of the Slovak economy creation of the structural policy is difficult and complicated. It is dependent upon the specific features of the transformation period. Liberal tendencies in the structural policy and as a result in the realization of the structural changes cannot be realized in the full range. Restructuralization of our economy is getting late.

But in spite of some difficulties and problems structural changes in the economy are realized and structure of the economy is gradually changed.

VIEW AT THE PROCESS OF ENTERPRISING SPHERE RESTRUCTURING IN THE SLOVAK REPUBLIC UP TO NOW

Mária KAČÍRKOVÁ

Slovak Republic reached the end of the twentieth century with an unfinished reform of the national economy, which is witnessed by chronic problems of enterprising sector and significant banks. Volume of unsettled credits (insolvencies) as of the end of 1999 amounted to 135.7 billion Sk. The volume of arrears of taxes and outstanding payments to social welfare is large too. There are no reliable data on mutual inter-company liabilities, estimates of those, however, are significant too.

These big bank, tax and business arrears are caused in principle by meagre performance of the enterprising sector and affect many enterprises – the number of lossy enterprises as of the end of 1999 is estimated up to some 45 %. Liquidity of an average Slovak enterprise is very low and significantly exceeds the upper limit of the share of foreign resources, which is accepted in the EU countries (foreign sources share 2/3, own resources 1/3). Indicators of profitability too (cost profitability, net production profitability and revenue profitability) show the misbalance of enterprising sphere. During the monitored years 1995–1999 for instance net production profitability developed very unfavourably while decreasing by some 10.7 statistical points.

Main reasons for the dissatisfactory economic performance of the enterprising sphere consist in the weak internal and external mechanisms of corporate governance. Weak internal mechanisms of corporate governance originated in the mass coupon privatisation, which has taken place in the beginning of the nineties, and subsequently in the absence of the strong control of the capital market. These factors facilitated “tunnelling” of enterprise assets in significant number of enterprises, and as the banks were not yet privatised, these banks exerted no pressure at delinquent debtors. In spite of the fact that for the bad classified credits one created specialised banks and institutions, and then transferred these classified credits to them, original aims were not fulfilled, as the intents of restructuring and revitalisation were not linked with sophisticated strategy of the solution of questionable assets (treatment of bad credits granted by banks and solving financial problems of enterprises through various means such as settlement, capitalisation of liabilities, selling assets etc.).

Situation in the enterprising sphere is partially linked with a weak legal system, which unfavourably influences Slovak economy. This legal system contributed on the one side towards the deterioration of the problem of outstanding credits in the banks and towards the insufficient rate of enterprise restructuring, on the other side it increased the risk of creditors and thus influenced negatively granting new credits by the banks.

The volume of outstanding credits in banks and in specialised institutions is linked with the problem of debts recovery. Since creditors possess only limited rights relating to debtors and courts of justice work very slowly, one developed a casual culture of debts repayment, and delinquent debtors are subject to only minor risks when they do not pay back the credit. This results negatively at the banks portfolios; at the same time debtors are not forced to restructure their enterprises. Weak rights of creditors thus decrease bank motivation to grant new credits.

In an effort to solve substantial shortcomings of the insolvency system the Government approved on 22nd March 2000 new Amendment to the Act on Bankruptcy and Compensation which came into force on 1st August 2000. This act amendment strengthened the status of creditor, enabled to sustain the enterprise activity and shortened the period of bankruptcy procedure. Institutional framework for the settlement of bad credits represented so far by a specialised bank – Slovak Consolidation Bank, has been strengthened by the foundation of new institutions – Slovak Consolidation plc and Consolidation Agency. These institutions can sell outstanding debts of problem credits to third parties, which can contribute to more extensive restructuring programme. Third parties in such cases can be strategic investors, institutional investors, other enterprises trying to annul their debts etc.

STATE BUDGET AND THE ENTERPRISING SPHERE

Peter STANEK

When judging the relation between the state budget and the enterprising sphere in the medium-term horizon of 3– 5 years it is obvious that one cannot expect marked decrease in the sphere of direct taxes. One can rather expect the improvement of conditions for the entrepreneurial sphere by balancing the approach of individual parts of public finance towards the entrepreneurial sphere (the transfer of competencies, gradual decrease of direct taxation of corporate bodies, changes in the sphere of payments to the insurance systems which should operate in a balanced way and gradually aim at the improvement of the overall conditions of the entrepreneurial environment).

On the other hand apparently the manoeuvring area (irrespective of all possible further political changes that could happen as a result of regular or premature general elections) is relatively narrow as most of the problems in individual parts of the state budget (in the sphere of retirement system or in the Social Insurance Co.) is of a long-term character. At least in the medium-term horizon this narrow manoeuvring area will significantly influence the general situation of individual parts of public finance, and in principle one cannot compensate it without utilising means obtained by privatisation. While considering the total possible revenue from privatisation (estimated today as some 100 billion Sk) one expects obviously to utilise these means for a wide variety of purposes.

When including the fact that probably in the election year populist suggestions of how to solve numerous problems will emerge (these actually will not be solutions, yet rather postponements of problems), One can then in the medium-term horizon anticipate rather gradual and very slow improvement of the overall situation in the entrepreneurial environment for most of the entrepreneurial subjects.

From this point of view the concentration of attention of small and medium enterprises to the solution of unemployment problem, or expanding co-operation of medium and big companies with supranational corporations will lead to gradual and evolutionary improvement of conditions for the enterprising sphere and thereafter also for the whole population. One cannot expect marked and more radical changes for instance in the sphere of living standard, real income etc. Besides, one of the significant factors that will influence further development will also be demographic development and its impact on the overall relation between real wages development and the development of retirement payments. One can assume rather the continuation of the decrease in retirement payments and real wages. Naturally such development will lead to some relaxation in real internal effective demand, thus reducing possibilities of the expansion of small and medium enterprises and trade sector in regional and local areas.

One adopted hitherto the sets of measures (for instance in the area of direct or indirect taxes or in the sphere of insurance funds) rather separately and without paying attention to positive or negative multiplicative effects. This way of solving the problems is unwarrantable. It is necessary to start adopting only such measures, which will be consistently analysed from the point of view of their positive and negative effects, taking into account multiplicative effect on the whole sphere of public finance, or even on the state budget.

The linkage of public finance, enterprising environment and single entrepreneurial subjects becomes determining and key factor for future development of the overwhelming majority of entrepreneurial subjects. Development of this linkage can act either directly (at such entrepreneurs that are directly dependent solely on the Slovak economic conditions), or also indirectly (in case of co-operation of the Slovak subjects with foreign partners in the sphere of exports).

It is therefore necessary to solve not only public finance problems congested in the years 1990– 2000 (even at the cost of draconian measures), one must also change the total scope of financial flows in public finance. The result of such process could then be the change of internal and external conditions for enterprising subjects and finally this could result into further decrease of the income tax for legal entities, into the extension of deductible items of the tax base, change of depreciation policy, change of the income and tax range structure for natural persons, and also into the change of flows in the sphere of educational system, health service, municipalities, statutory funds etc. Respecting the position of foreign investors as well as the total real time and material dimension of the solution one cannot expect radical improvement in the medium-term horizon. One can rather expect evolutionary process of the gradual development of entrepreneurial sphere.

All the more one sees the urgency to link the privatisation effects with sensible solution of key neuralgic problems of public finance and on that basis create the space for more radical (eventually even faster) process of positive changes in the enterprising environment.

This, however, is the process internally knitted and interconnected. Therefore one can no longer adopt individual partial measures that could act counter-productively from the medium-term point of view.

COMPETITIVE ADVANTAGE OF LOW COSTS

Jaroslav VOKOUN

In the adaptation period most powerful lobbies reassert themselves. These then can implement their strategies. The enterprises must keep competitive advantages for the sake of their competitiveness. At the same time business partners should apprehend this competitive advantage.

Michael A. Porter defines two basic types of competitive advantage – low cost advan-tage and differential advantage. Considering the past and current position of Slovak enterprises and global trends the pressure to reduce prices will be permanent. That opens the space to concentrate at the competitive advantage of low costs. The advantage of low costs will project itself into the over average profitability in the case when the company sells for prices nearing average prices of the compared product or service. The company, however, cannot ignore fundamentals of differentiation. Parity in differentiation enables the company with low costs to achieve high profit.

Within the framework of co-operative links where Slovak companies attend, there is a great pressure concerning quality, price and delivery dates. Preservation and improvement of competitiveness stimulates new activities, which are for the moment compensated by low wages, controlled prices, undercharged currency rate and various import barriers.

Enterprise management must understand the factors influencing costs in a way that will enable to discover and exploit sustainable advantage of low costs. Only then can the management formulate and enforce its own competition strategy. Complexity of this process lies in the fact that every merit creation process has its own cost structure. One must analyse relations inside as well as in the outside of the enterprise. It is important to pay more attention to the strategic questions of the costs rather than to the accuracy of their allocation. Primary source of the competitive advantage are differences among value chains of the rivals. The enterprise can get competitive advantage by implementing strategically important activities in a cheaper and better way compared to the rival. These are not the factors primarily listed on the cost side in the profit-and-loss statement, where one implicitly assumes mechanisms providing a certain optimum condition. The enterprise must identify its own resources of low cost advantage such as appropriate enterprise size, information received, capacity exploitation, institutional factors, mutual links, geographic position etc.

Weak bargaining power of our enterprises manifests itself in the contracts for hired labour and in the low sale prices. Often is a period of such a policy necessary for the company to get a new experience and contacts. To achieve the advantage of low costs one should predict changes and respond efficiently to them. The enterprise enjoys an advantage of low costs when controlling cost factors or when changing the shape of value chain.

Strategic value of low cost advantage depends on its sustainability. It will be sustain-able, when rivals will find it difficult to copy the source of low cost advantage or to imitate them.

THE FORMATION OF THE BUSINESS ENVIRONMENT, ITS PROBLEMS AND OUTLOOKS

Borislav PETRÍK

One defines business environment as economic conditions and prerequisites of activities, which depend on economic and political measures of the state. These to a various extent and intensity affect the firms from the outside environment. Such conditions include phases of economic cycle, GDP growth rate, inflation rate, balance of payments level, the results of state budget management, interest rate, and unemployment level. These indicators reflect individual types of the economic policy of the state.

The first prerequisite of the ample business environment is the stabilisation of economic conditions, which is reflected by the relative growth of GDP at the retention of inflation rate within one digit range.

The second prerequisite of suitable business environment is the functional system of supporting institutions. The decision-making sphere together with specialised organisations forms this system.

Global situation of the business environment in Slovakia is a standard one and comparable with advanced countries. The Constitution of the Slovak Republic and the following legislation safeguard the freedom of property, privacy rights implementation, liberty of a contract, respecting of a priority will of participants in business relations, standard norms of public law, tax laws, law on banks, law on economic competition, law on bankruptcy and compensation, contracts on the support and protection of investments etc.

The scope of legislation changes is, however, enormous and is characterised by a non-conceptual approach. Large quantity of new laws, direct and indirect amendments, decrees and governmental regulations represent non-transparent system, where even professional lawyers hardly orient themselves. The changes are hardly predictable and thus strategic and scheduling decisions by individual subjects are difficult to be made.

Financial burden of the entrepreneurs in the Slovak Republic compared to that in advanced countries is unfairly high. According to the analysis prepared by the Institute of Slovak and World Economics (1999), total burden amounted in Slovakia 58 %, in the EU countries (average) 39.5 %.

In a medium-term horizon it is inevitable to stimulate by legislation the business environment for small and medium entrepreneurs and for tradesmen. As a starting point to do this there should be a definition of possible changes in business environment in a medium-term horizon. Significant contribution to that could be the preparation of the medium-term financial outlook, definition of some priorities of the economic policy and preparation of the medium-term currency and budgetary policy.

Economic potential of Slovakia continues its orientation mostly at big enterprises. The decision-making sphere does not pay an adequate attention to the small and medium enterprises in spite of some verbal manifestos. Business environment in Slovakia is more favourable for big enterprises. This has been motivated by the aim to retain employment and solvency.

One of the tasks of the policy of the government is to create business environment. The result of co-ordinated activities of the government and its specialised organisations are such social and economic conditions that enable permanent stimulation and revitalisation, formation and expiration of small, medium and big subjects. The function and responsibility of the decision-making sphere at optimising the business environment is motivated by the following demands:

• fast innovative adaptation of individual subjects,
• efficiency and competitiveness of individual subjects,
• retention and gradual employment increase.

TRANSFORMATION AND CRISIS MANAGEMENT AS TWO APPROACHES TO CORPORATE REFORM: AN EXAMPLE OF STEEL INDUSTRY COMPANIES IN THE SLOVAK REPUBLIC AND REPUBLIC OF KOREA

Daneš BRZICA

Restructuring of steel firms is a difficult task with respect to their size, capital requirements and often-existing state support for their activity. The steel industry is a specific capital intensive industry where restructuring is needed due to the over-capacity of production, increasing worldwide competition, strictness of ecological norms and growing customers needs. Besides this, in the analyzed period dynamic growth of steel product prices and financial crisis have been evidenced, contributing to already needed and expected changes. However, the paper does not cover technological aspects of the industry but focuses on restructuring and the role of state in this process. It describes economic and political issues related to the restructuring of large-scale enterprises in steel industry comparing situation in the Slovak republic and Republic of Korea. Its aim is to find whether some similarities and differences in corporate reforms in the two countries exist. Despite different size of their steel production capacities and size of main corporate players, the two countries had been forced to make similar necessary changes in their corporate structures to make their firms more competitive. Using as example the biggest steel-producers in each country (VSZ Košice and POSCO), the paper presents some common problems in historical perspective, institutional weaknesses affecting the companies and structural problems in the industry. Company comparison includes also basic statistical data but absent is detailed analysis of ownership, organization and technological issues. It is shown that the companies have common features due to similarities in environments where they operate but that there are also differences. Whereas as a factor forcing country to changes was in the Slovak case poorly functioning model of centrally planned economy, in the Korean case it was a weak system of bank lending, corporate governance and control and state interventions followed by financial crisis. Corporate sphere reforms belong to the difficult elements of reform programs because they are sensitive to the sequencing of steps and to the quality of institutional framework. The process of ownership changes was accompanied by institutional changes. Also business actors whose number, knowledge and degree of cooperation had changed over time had affected these changes. Despite the countries´ high economic status, during late 1990s they faced the problem how to increase competitiveness of their large-scale enterprises. As a consequence of the problems, both countries have decided to start improve corporate governance system. In the paper a short reference is given also to the theoretical background for regulation and corporate reforms.

Some “similarity content” hypotheses, based on estimation of institutional and reform characteristics of both countries, have been evaluated. Four levels of similarities have been analyzed with focus on national and corporate dimensions. Among possible similarities the following ones were selected: underdeveloped institutional structure, poorly functioning banking sector, intensive interventions of the state, previous corporate history, non-standard way of corporate financing, state support, non-market prices from suppliers, global market impact and level of competition. Besides this, also similarities of factor changes and policy measures have been analyzed. Therefore the analysis is based on qualitative data and description of processes. All assessments relate to the hypothesis that the countries have faced similar problems and applied similar policy steps and strategies in their corporate reforms. Policy of stabilization thus has, both for transition approach and crisis management approach, two key periods – macroeconomic stabilization and microeconomic adaptation, which had been accompanied by development of market-conformed institutions. Substantial part of problems can be attributed to the constitution of such institutions. Ownership changes made in the first transformation years have not only been generated by an attempt to reach allocation efficiency, but have been a result of existing economic and political conditions and interests. Despite differences in the size and structure of problems many similarities have been found. Another dimension of the paper is its hypothesis about “different causes - similar result” relations.

Steel industry in Slovakia represented a traditional industry in the socialist period. After 1989 there has been a need to restructure and modernize this industry and one of the crucial changes here was privatization. Past development has shown that transformation process here was not so easy and lead to substantial state intervention. Korean conglomerates have traditionally been supported by the state, which preferred them in its economic policy. In the first period when competition was low and the state was engaged in ownership of companies and banks, some key institutions changed slowly. As a result of privatization and deregulation so-me changes have occurred in regulatory framework but some weak points in the legal system have persisted making thus possible for active business players to reap transformation rent.

Both countries had not enough institutional density and stable rules. Banks privatized in Korea were subjected to at least ten different banking laws and regulations. Similar to this, in the Slovak republic the legal framework has only been created and frequent changes in laws belong to typical features of the business environment here. In the case of Korea some restructuring measures have been oriented especially towards the highest conglomerates. Reform policy lasts for a certain time and its principles have been accepted in two phases. In some cases the measures had been applied only for lower ranked chaebols, in other cases only for the biggest ones. Institutional changes towards companies have occurred especially in the area of financial market liberalization. Since the corporate law in Slovakia is applicable to the whole corporate sector, it is obligatory also for the steel industry. But financial support was channeled especially to so called "national flagships", where VSZ belonged because of its export share, employment share and political connections. Also steel industry was among the industries to which state provided support as part of its broadly conceived industrial policy. Whereas competitive pressure and growing losses of VSZ lead to the urgent need to make radical changes at corporate-level (some pressures came also from the state due to a threat of growing unemployment), the reform process in the Korean corporate sector had been caused, in its final stage, by the Asian financial crisis. Its result was a substantial institutional reform and targeted state intervention related to the measures.

Both countries have tried to create more efficient corporate governance system by stimulation of employees and managers to meet higher efficiency standards. Both countries had privati-zed part of their ownership stakes and in both cases the state maintained about 30% of shares. Incentives for employees had not been successful and Korea has limited such an activity. In the Republic of Korea important governance changes has been introduced only after the crisis. The main problem was in the case of conglomerates, when due to cross-ownership of shares could control shareholders control them with relatively low ownership stakes. A change has occurred with obligation to nominate external persons in statutory bodies or to liberalize hostile takeovers. In Slovakia some problems with control of managers occurred during the privatization. Korean experts were aware of the fact that ownership change is not a guarantee for efficient managerial behavior but that state behavior also matters. Substantial financial difficulties in the Korean steel industry during 1990s can be attributed to massive loans for financing huge capacities. These investments were supported by bank lending often affected by the state. Because corporate governance regulation affects various interest groups and particular regulations bring effects for some of them, the result is that regulation in this area is too complicated and long lasting process.

As has been shown both countries, from different reasons, have been forced to change their approach to industrial companies. Growing inefficiency and inability of the countries to provide support to steel producers and other firms have forced the countries to the reforms which had similar parameters and used similar measures. Whereas in Korea the last impulse for reforms was Asian financial crisis in the late 1990s, in the Slovak case the main reason was inability of the state to ensure economic efficiency and, later on, inability to continue in complex transformation of corporate sphere. The two biggest national steel producing companies existence of which has been affected by operations under non-standard economic environment with strong state interventions and by the need to restructure the whole industry. It seems that similarity between transformation and crisis management approaches exists, because also characteristics are similar. Despite some limits in arguments presented, it seems that most of them can be considered as valid. There are no detailed specifications for the reforms but it is evident that corporate reforms in the case studied show similar features despite differences in terms of historical development, traditions and location. The only difference can be the type of initial factors leading to changes (financial crisis vs. political changes), but even here some evidence of weak crisis had appeared in the Slovak case with mild impact on necessity for the central bank to intervene.

OBJECTIVE AND SUBJECTIVE FACTORS OF MEASURING INVESTMENT RISK

Rudolf SIVÁK

Risk can be generally characterized as a stage of uncertainty of an investment, while the result of this investment is known with a certain probability and its quantitative range is defined within a certain probability distribution.

From an objective point of view, the risk can be defined as a certain moment of time present in every decision-making process with ineffective information. It is rule that the more these information are ineffective, the higher the risk is. Primarily, the risk can be easily quantified as a ratio of ineffective information to correct decisions.

From subjective point of view, the risk can be considered as a certain psychological ability to decide on a base of non-traditional, other factors. According to this point of view, the risk is in psychology characterized as a product of a certain psychological positive stress, which appears as a result of a specific decision-making process. Primarily there are specific factors, like intuition, creativity, secondary there are the basic psychological factors, like knowledge.

Generally, two situations on the future investment can be defined: certainty and uncertainty.

The base for investing is a decision of an investor on capital allocation in order to maximize the profit while minimize the risk. The investor can decide where to allocate the capital, either to invest in risky assets, or unrisky assets. For the decisions, the investor should know some facts about future situations or their probabilities of happening.

There can be four types of decision situations, in which the investor can find himself:

Situation in certainty, situation in risk generally, situation in risk specifically, situation in theory of games.

In the situation of certainty, there is a complete information system and the investor is able to define exactly, which situation in the future will happen. In situation of risk, the investor can forecast the future situation with a certain rate of probability, while the information system is not complete. The situation, in which the investor cannot assume the probability of the future situation happening, is called a specific situation of risk. If an investor becomes a player and he uses his strategies to decide, the decision-making process is made on the base of theory of games.

In risk (hazard) quantification we come up from the opportunity or an accident, where the variability of return is known with a certain deviation from the expected return. Therefore, the probability distribution and the expected return are the basic factors for risk quantification as variability of an accident measure to its mean value (in the case of normal distribution, the mean is the average).

The bigger the variability, the bigger the variance as well as the standard deviation. The main variability rates, and so the main risk quantification risk factors are variance, standard deviation and variance coefficient.

Considering the subjective factors, the assumption arises from the fact, that every investor likes the possibility of high return from an investment, on the other hand, he does not like high risk connected with high-expected return.

According to the attitude of the investor, we can consider three situations of a decision of an investor: risk averse investor, risk-loving investor, and risk-neutral investor. The utility function of an investor is a function of his heritage.

After connecting the utility with the alternative results of an investment, we get a risk utility function.

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