ADVANCES IN BUSINESS-RELATED SCIENTIFIC RESEARCH JOURNAL (ABSRJ) Volume 10, Number 1 (2019) ISSN 1855-931X Motivating experts to stay Ivana Grabar, Ana Globočnik Žunac, Sanja Zlatic The effect of foreign direct investment in transition countries -case of Kosovo Nexhat Shkodra, Xhevat Sopi, Myrvete Badivuku-Pantina Measuring the level of quality maturity in organizations Vesna Sesar, Krešimir Buntak, Ivana Martinčevic Financial structure and profitability of innovative smes in Italy Valeria Vannoni an Bus¡„ I ABSR î I \ / geacollege Faculty of Entrepreneurship MOTIVATING EXPERTS TO STAY Ivana Grabar University North, Department of business and management, Croatia ivana.grabar@unin.hr Ana Globocnik Zunac* University North, Department of business and management, Croatia ana.globocnik.zunac@unin.hr Sanja Zlatic University North, Department of business and management, Croatia sanja.zlatic@unin.hr Abstract Keeping an expert satisfied is becoming a primary managerial task since more and more people decide to become independent employees or freelancers. Therefore, the question arises: What are organizations ready to do in order to keep them? The purpose of this paper is to explore what employers are willing to do in order to keep an employee who has been working in a key position in the company and has decided to quit and start working as a freelancer. The aim is to investigate whether the company's attitude depends on the size of the company, the area in which it operates, the county where its headquarters are, or their previous experience in hiring a freelancer. The research was conducted in Croatia in June 2018. The results show that employers are aware of the problem. They are to some extent ready to motivate experts with various motivation factors. Key Words HRM; managing experts; motivating experts; motivating talents. 'Corresponding Author Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 INTRODUCTION AND THEORY Human resource market has changed in the past decades by increasing externalization of employment staff for various jobs. More and more employees decide to design their own work environment and conditions and thus choose to be independent employees, freelancers, or employees of their own small business as a one-man band. A new problem emerges for organizations: experts, as people with very specific knowledge of core business of the organization, tend to leave. Globalization, due to its global competitive possibilities, is only one of the causes that enable experts to move across the large HR market. Competitive advantage of an organization rests on knowledge and, according to Teece (2015), on the ability to motivate experts to create knowledge, help build organizational capabilities and shape strategies. Teece, therefore, emphasizes the importance of intellectual property and of controlling specialized assets. Intellectual property as an aspect of property highlights the importance of knowledge. According to Davenport and Prusak (1997, p. 5) knowledge is a fluid mix of framed experience, values, contextual information and expert insight that provide a framework for evaluation and incorporation of new experiences and information. Knowledge is not shared around, nor it is free of charge. Teece (1998) talks of knowledge as of intangible assets and says that productive knowledge is typically embodied and thus not possible to be accomplished only by transmitting information, i.e. it is difficult to replicate it. According to him, imitation is nothing else than replication performed by a competitor. From this standpoint, it is not possible to imitate the productive knowledge of an expert. This emphasizes the value of an employee with a specific know-how of a core business activity of an organization. Teece (2015) talks about three important categories of an expert with regard to knowledge creation: the first two are literati and numerati, both marked by high levels of education and experience, and the third very important category is the category of integrators, who synthesize the work of the others. Once an organization recruits an expert with specific knowledge, it is expected to manage their knowledge in a special manner since productive knowledge needs further deployment and use of it. Fleming and Marx (2006), when rethinking the status of technical professionals who span organizational boundaries and, as they say, accelerate the process of invention by contributing to and capitalizing on interfirm 'spillovers' of technical knowledge, claim that managerial attention should focus on identifying, retaining, and enabling gatekeepers, as they named technical experts. Special focus in managing experts should be given to developing creativity. By discussing the impact on creativity of an expert within the organization (Fleming and Marx, 2006), it could be concluded that clustering inventors as experts, for example, will less likely result in new ideas. Though, if a new idea arises, it will be more likely adopted by other inventors. Therefore, they find that cohesion of employees has a negative impact on generating creative ideas, but a positive one when it comes to their development and diffusion. 2 Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 According to the study of 301 geniuses that had been conducted almost a hundred years ago, Cox (1926) discovered that intelligence alone did not make distinction and it had to be accompanied by tenacity of purpose. Creative thinking has its purpose and is highly asked for in contemporary human resource management since it is the foundation needed for creative problem solving. This requires persistence and intensity connected with strong motivation. Motivation is not a stable dimension of an employee. Therefore, permanent monitoring of managerial motivating processes within HRM is even more prominent. Competitiveness leads to the departure of key experts and benefits for competitors, which Teece (2003) sees as the start of negative processes in which reputation and quality decline. In case experts are unsatisfied, according to Sturman and Trevor (2001), first to quit are those with most education, training and abilities. Motivation of the highest quality experts could be both tangible (financial) and intangible. Teece (2015) says that higher financial motivation will not make up for an unsatisfactory work environment. According to him, dimensions of job environment that matter, or 'quality of work life', include: organization culture, quality of management, challenge of work, and autonomy-afforded employees. METHODS Given that the main purpose of this research is to explore what the employers are willing to do in order to keep the employee who has been working in a key position in the company and has decided to quit and work as a freelancer, the main hypothesis is the following: "In order to retain the employee who has been working in a key position, employers are willing to make concessions regarding the independence of the employee in deciding about the time and place of work." It is followed by an additional hypothesis: "In order to retain the employee who has been working in a key position in the company, employers are willing to give them share in the company." In order to examine which independent variable the attitude of the employer depends on, several additional hypotheses were set: • Employer's attitudes about the concessions which they are willing to make, in order to retain the employee who has been working in a key position, depend on whether they have already hired a freelancer for a job or not. • Employer's attitudes about the concessions which they are willing to make, in order to retain the employee who has been working in a key position, depend on the area in which the company operates. • Employer's attitudes about the concessions which they are willing to make, in order to retain the employee who has been working in a key position, depend on the size of the company. • Employer's attitudes about the concessions which they are willing to make, in order to retain the employee who has been working in a key 3 Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 position, depend on the county where the headquarters of the company are. Primary data were collected using a questionnaire. The survey was conducted online through the survey tool esurveycreator.com. The target population were small, medium and large companies based in Croatia. An email with the link to the web-based questionnaire was sent to the companies in Croatia by the Croatian Chamber of Commerce. From the 4th to the 25th of June 2018, the survey was completed by 158 respondents. The 70 of the participants were male, 77 females, 9 participants did not want to state their gender, and two of them did not answer the question. One of them was between 18 and 25 years old, 32 of them between 26 and 35 years old, 46 between 36 and 45 years old, 46 between 46 and 55 years old, and 33 of them were older than 55. Respondents were generally familiar with all organizational processes in their company. 99 of them were directors of the company, 12 were members of the board of directors, 18 managers of the company, 12 employees in human resources, and 17 of others. Regarding their educational level, two participants completed their elementary education, 38 participants completed their secondary education, 18 of them completed undergraduate studies, 73 graduate studies, 17 had master's degrees, 7 were university specialists, and 3 of them had doctorates. As it regards the headquarters of the company, only the capital city of the country stands out with 51 (32.3%) head offices of the companies. The seats of other companies are located in other counties, with each county having at least one company having a head office, and none of the counties has more than 10% of the total headquarters of the company. Regarding the size of the company (division according to the Accounting Act (NN 78/15, 134/15)), 111 (70.7%) of the companies were micro (assets up to HRK 2.6 m, revenues up to HRK 5.2 m, average number of employees during the year is 10); 24 (15.3%) small (assets amount up to HRK 30 m, revenues up to HRK 60 m, average number of employees during the business year is 50); 11 (7.0%) medium (assets up to HRK 150 m, income up to HRK 300 m, average number of employees during the year is 250); and 11 (7.0%) were large (crossing the indicators for medium entrepreneurs in two of the three criteria, and regardless of these criteria large entrepreneurs are also banks, savings banks, housing savings banks, electronic money institutions, insurance and reinsurance companies, UCITS management companies, alternative investment fund management companies, factoring companies, investment firms, stock exchanges and even smaller number of other entrepreneurs). The data was analyzed using the SPSS version 22. FINDINGS AND DISCUSSION In order to examine what concessions the employers are willing to make to keep the employee working in a key position who has decided to quit and 4 Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 work as a freelancer, the 5-point Likert scale was used. The question was: "If a key position employee decides to quit and work as a freelancer, what concessions are you willing to make to keep the employee and to what extent?". Eight statements were offered to respondents: "I would not offer anything"; "I would allow the employee to decide independently of their working hours"; "I would allow the employee to decide independently of their place of work"; "I would allow the employee additional education"; "I would allow the employee additional days off"; "I would allow the employee share in the company"; "I would allow the employee to participate in the company's management"; "I would provide the employee with additional financial bonuses". Each of the respondents had to indicate the extent to which they agreed with the statement. The offered answers were as follows: 1 = strongly disagree, 2 = disagree, 3 = neither agree nor disagree, 4 = agree, 5 = strongly agree. Table 1. Descriptive statistics for the Likert scale of the employers' attitudes about the concessions they are willing to make in order to keep the employee nol oner anylhlnj allow e-rnjiEnye-i 10 10.0 may indicate a collinearity problem - The heteroskedasticity test does not apply because is used the Heteroskedasticity-corrected model (part of Gretl package). 16 Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 As far as functional forms are concerned, a form that will give better results will be used. We will consider the following functional forms: lin-lin; lin-log; log-lin and log-log. The Data Since the economic development and the effect of FDI is dynamic, for this type of research, it is mainly based on time series data. The study uses secondary data provided by the Kosovo Agency of Statistics and the World Bank database. Because the reasons we mentioned above regarding the specifics of Kosovo, there is a lack of sufficient data to build series for a long period of time. This will make it impossible for us to develop models that could include many independent variables. Official FDI recording in Kosovo starts in 2004 (ASK 2018), so it limits the number of time periods that can be taken into consideration. Under these constraints, we take a 14-year period, thus 20042017. RESULTS AND DISCUSSIONS Descriptive statistics From the statistical analysis of the description presented in Table 1 we see that Kosovo over the period observed has had a solid economic growth of 3.85% on average, with the largest growth being 7.29% in 2007 and smaller by 1.2% in the year 2014. The second below shows also the inflow of FDI averages 267 million euros annually, with a figure of 440 million in 2007 and 43 million in 2004. It is characteristic that both Kosovo's economic growth and the inflow of FDI and other macroeconomic indicators were not affected by the global financial crisis 2009. Table 1 presented the description of all variables used in econometric models for hypothesis testing. It can be seen that all variables have normal distribution where value of the p-value for the Jarque-Bera pointer is p> 0.05. Table 1. Descriptive statistics of variables GDPGR GDPCAP FDI CAP EMPR EX Mean 3.854443 3249.340 267.2548 1293.950 27.09171 232.4349 Median 3.565615 3428.693 283.8172 1442.750 27.09200 284.9710 Maximum 7.286083 4054.721 440.7381 1819.700 29.80000 378.0000 Minimum 1.198071 2135.333 43.00000 701.2000 24.10000 35.60000 Std. Dev. 1.512139 637.4643 111.1592 373.1706 1.561304 109.6336 Skewness 0.652120 -0.671321 -0.464580 -0.471239 -0.193787 -0.556674 Kurtosis 3.447574 2.102640 2.536418 1.854238 2.357484 1.976375 Jarque-Bera 1.109129 1.521299 0.628977 1.283937 0.328441 1.334289 Probability 0.574322 0.467363 0.730162 0.526255 0.848555 0.513172 Sum 53.96220 45490.75 3741.568 18115.30 379.2840 3254.088 Sum Sq. Dev. 29.72533 5282689. 160632.7 1810332. 31.68970 156253.8 Observations 14 14 14 14 14 14 Source: ASK (2018) - Eviews processing. 17 Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 Results of econometric models Initially, the variables test showed that there was nonstationarity (the presence of unit root), and it was found that only the GDP growth (GDPgr) was a stationary variable (there was no unit root), so to the other variables used the firs difference. Further, the model estimation that tests the impact of FDI on Kosovo's economic growth was further explored. After applying some tests using or removing the lag, the model estimated that had the best results is presented in Table 2. It's functional form is linear - linear (lin-lin). Here we see that FDI has a positive impact on economic growth in the current year for 99% confidence level. Gross capital formation (cap) is statistically significant at confidence level of 95% of one lag. Table 2. FDI impact assessment model in the economic growth of Kosovo Model 1: Heteroskedasticity-corrected, using observations 2006-2017 (T = 12) Dependent variable: GDPgr Coefficient Std. Error t-ratio p-value const 3.11057 0.298344 10.43 <0.0001 *** d_FDI 0.0116151 0.00276957 4.194 0.0023 *** d_Cap_1 0.00664895 0.00242955 2.737 0.0230 ** d_ - first difference; _1 lag; R-squared: 0.68; Adjusted R-squared : 0.61; P-value(F) = 0.005754 Test for normality of residual: p=0.416818>0.05;Variance Inflation Factors (VIF): 1.313< 10.0 Source: ASK (2018) - Gretl processing. This implies that Gross capital formation has a positive impact on economic growth in the next year whereas FDI has a positive impact in the current year. As shown in Table 2, the econometric model has a satisfactory coefficient of determination, where variations in GDPgr are explained by variations in independent variables of 68% (R-squared) or 61% by adjusted-R-squared. Based on the F-test, the estimated model is statistically significant for the 1% significance level (P-value (F) = 0.005754). Also, the model meets the condition about residuals distribution where H0 cannot be rejected, which means that residuals have normal distribution. The risk of multicollinearity is irrelevant because the value of VIF for the two independent variables is much smaller than 10. The second estimated model tests the impact of FDI on revenue growth where as a dependent variables is used GDP per capita. As shown in Table 3, the best model for testing the link has log-log functional form. There is a poor influence of FDI in GDP per capita, which is statistically significant at the 90% confidence level of one lag. On the other side, the impact of Gross capital formation is statistically significant (99% confidence level). 18 Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 Table 3. FDI impact assessment model in GDP per capita Model 2: Heteroskedasticity-corrected, using observations 2006-2017 (T Dependent variable: d l GDPcap = 12) Coefficient Std. Error t-ratio p-value const 0.0147870 0.0168993 0.8750 0.4043 d_l_FDI_1 0.0751089 0.0369936 2.030 0.0729 * d_l_Cap 0.373289 0.0972645 3.838 0.0040 *** d_ - first difference; _1 lag; l_ -log; R-squared: 0.74; Adjusted R-squared : 0.68; P-value(F) = 0.002248 Test for normality of residual: p=0.147137>0.05; Variance Inflation Factors (VIF): 1.026< 10.0 Source: ASK (2018) - Gretl processing. Unlike the first model, the second model has a positive impact on GDP growth per capita in next year, while Gross capital formation has a positive impact in the current year. Even in this model, the conditions of the econometric test of the model are met with a determination level of 74% or 68% by Adjusted R-squared. As far as the impact of FDI on employment growth is concerned, after testing some models and using different functional forms, in either case does not result in any statistically significant model at least for the 90% confidence level. Consequently it is concluded that FDI does not have any positive impact on the increase of the rate of employment. The last model is the one that tests the impact of FDI on export growth. In this case, the dependent variable is used the total export value in euro, according to the years investigated. The best rated model is the one with the log-log functional form. As shown in Table 4, the model shows that FDI has a positive impact on export growth, which is statistically significant for the 95% confidence level. With the same level of confidence, statistically significant is also the impact of Gross capital formation. Table 4. FDI impact assessment model in export Model 135: Heteroskedasticity-corrected, using observations 2005-2017 (T = 13) Dependent variable: d l Ex Coefficient Std. Error t-ratio p-value const 0.0647592 0.0365043 1.774 0.1065 d_l_FDI 0.293053 0.0932764 3.142 0.0105 ** d_l_Cap 0.614616 0.206040 2.983 0.0137 ** d_ -first difference; _1 lag; l_ -log; R-squared: 0.77; Adjusted R-squared : 0.72; P-value(F) = 0.000645 Test for normality of residual: p=0.677228>0.05; Variance Inflation Factors (VIF): 1.084< 10.0 Source: ASK (2018) - Gretl processing. The impact of both variables is evidenced by statistical significance in the current year. The model (Table 4) fulfills the conditions of econometric tests of normality and multicollinearity and has a solid ability to explain variations dependent on independent variables to 77% according to R-squared or 72% by Adjusted R-squared. 19 Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 CONCLUSIONS The results of this research suggest that FDI has a major impact on Kosovo's macroeconomic indicators. The results are in line with the OECD (2002) ascertainment finding that the mayor studies consider that foreign direct investment generates economic growth in the host country. In particular, the impact is evidenced by economic growth and exports, while the share of GDP per capita is lower. Economic growth and exports are evidenced in the actual year, which shows that FDI has not yet reached a long-term impact that will be attributed to the effects that are highlighted from many authors. Also, the results do not support hypothesis that FDI has an impact on the growth of employment. These results have significant implications for further research, which is focused on the impact of FDI spillover across Kosovo, in the sector or in different economic areas. it is important to have focused research related to the impact of FDI on employment. This will enable us to understand that the failure to accept the alternative hypothesis has to do with another alternative hypothesis that would be technological improvement, either this is due to the fact that in Kosovo still it is expressed the fiscal evasion which may be related to undeclared work in the responsible institutions. The paper also has its own limitations, especially for the fact that we have a short period of time (14 years) which for the econometric models, does not allow the inclusion of many factors in the model. However, since Kosovo is a small country and with a long period of transition due to the specifics of its past, the results lead us towards favorable policies for attracting FDI. REFERENCES ASK. (2018). Statistical Yearbook of Republic of Kosovo (Statistical Yearbook of Republic of Kosovo, 2018). Pristina: Kosovo Agency of Statistics. Berthelemy, J-C. and Demurger, S. (2000). Foreign direct investment and economic growth: theory and application to China. Review of Development Economics, 4(2), 140-155. Blomstrom, M. Kokko, A. (1998). Multinational corporations and spillovers. Journal of Economic Surveys, 12(3). Christie, E. (2003). Foreign direct investment in Southeast Europe. WIIW Working Paper No. 24, Vienna, The Vienna Institute for International Economic Studies (WIIW), March. Cohen, B. (1975). Multinational Firms and Asian Exports. Yale University Press, New Haven, United States. De Mello, L.R. (1999). 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Review of World Economies, vol. 140(2), 211-229. Lipsey, R. (2002), Home and Host Country Effects of FDI, No 9293, NBER Working Papers, National Bureau of Economic Research, Inc., Cambridge, 1-78. Moosa I. A. (2002). Foreign direct investment theory, evidence and practice, New York. Nayyar, D. (1978). Transnational Corporations and Manufactured Exports from Poor Countries. The Economic Journal, 88(349). OECD. (2002). Foreign direct investment for development: maximising benefits, minimizing costs. OECD, Paris. Osmani, M. (2013). Econometric Methods with Eviews (Econometric Methods with Eviews).Maluka, Tirane. Pessoa, A. (2007). FDI and host country productivity. Working Paper da Faculdade de Economia da Universidade do Porto. Solow, R. (1956). A contribution to the theory of economic growth. Quarterly Journal of Economics, 70(1). Studenmund, A. H. (2017). A Practical Guide to Using Econometrics (7 ed. Global edition). Pearson Education Limited Uvalic, M. (2003). Economic Transition in Southeast Europe, Southeast European and Black Sea Studies, 3(1). Bhalla, V. K., Ramu, S. (2005). International Business. 7th Revised and Enlarged Edition. Varamini, H., Vu, A. (2007). Foreign direct investment in Vietnam and its impact on economic growth. International Journal of Business Research, 7(6), 132-139. Vissak, T. and Roolaht, T.(2005). The negative impact of foreign direct investment on the Estonian economy. Problems of Economic Transition, 48(2). Wang, M. (2009). Manufacturing FDI and Economic Growth: Evidence from Asian economies, Applied Economics, 132-139. World Investment Report . (2018 ). Investment and New Industrial Policies. 14. WTO. (1996). Annual Report: Trade and FDI. WTO, Geneva. Zhang, K. H. (2001). Does Foreign Direct Investment Promote Economic Growth? Evidence From East Asia and Latin America. Contemporary Economic Policy. 19(2), 175-185. 21 an Bus¡„ I ABSR î I \ / geacollege Faculty of Entrepreneurship MEASURING THE LEVEL OF QUALITY MATURITY IN ORGANIZATIONS Vesna Sesar* University North, Department of business and management, Croatia vesna.sesar@unin.hr Kresimir Buntak University North, Department of business and management, Croatia kresimir.bun tak@unin .hr Ivana Martincevic University North, Department of business and management, Croatia ivana.martincevic@unin.hr Abstract Due to the growing importance for achieving better quality in products and services, many organisations have adopted quality Standards into their everyday practice. Some authors stated decades ago that quality is free, and today many organizations are trying to sustain competitiveness by raising quality in every aspect of their organizations. The paper presents a literature review on quality maturity and how it can be measured. Key Words Quality maturity; total quality management. 'Corresponding Author Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 INTRODUCTION The first results of the introduction of the quality system in Japan are beginning to appear in the 1950s and the next twenty years the Japanese economy is experiencing flourishing, while the American economy, which was "the leading" in quality, increasingly understands that it loses a large market share because of its low quality of products and then Deming at the beginning of the 80s introduced quality to American organizations by educating management. Many US organizations introduced quality management in 1985, and in 1987 the US Senate introduced the Malcolm Baldrige national quality award. All these steps have led to today's degree of quality development that can and must be measured in companies through specific indicators if organizations want to be efficient and effective and thus achieve sustainable success. ABOUT THE QUALITY AND MANAGING IT Vallin Feingebaum is the key person in quality development because he has created a concept of total quality control (TQC) and contributed to the development of production processes. His contribution is that a low level of quality should be prevented and observed in time before the production itself. The goal is to avoid the preventive. He defines full quality control as an efficient system for integrating various groups within organizations, responsible for developing, maintaining and improving quality. To effectively manage quality, it is necessary to: set quality standards, assess compliance with these standards, act when standards are not met, and plan improvements to these standards (Feigenbaum 1960). According to Goetsch and Davis (2010), the underlying philosophy of total quality is to continually improve processes, people and products. For this it may also be necessary to mention the concept of continuous improvement. Continuous improvement (CI) or kaizen for decades has its beginnings in quality and lean management. Study from Alie (2014) shows that over a certain time this concept stagnates or disappears in organizations due to numerous reasons. However, a harsh market rivalry and economic crisis where cycles of crisis periods are shorter than in the past have led to a growing interest in the field of CI (Singh and Singh, 2015). Quality management is defined as "an integrated approach to achieving and maintaining high-quality results aimed at maintaining and continually improving the process and preventing disadvantages at all levels and in all functions of the organization in order to meet or exceed customer expectations (Flynn et al 1994: 342)." According to Iso Norm 9001: 2008, the quality management of a company is defined as a "management system that a company establishes, documents, implements and maintains in order to continuously improve the company's efficiency in accordance with the requirements of the prescribed standard (ISO 9001: 2008, p.10)". The best can be described through the ten principles of Armand Feigenbaum, which he set out in his 1990 book "Full Quality Control". Feigenbaum, already in 23 Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 the first principle, "Quality is a Comprehensive Process in the Company" emphasizes that achieving quality is not the responsibility of a single function, department or project, but it is "a way of thinking and practice implemented in all the pores and processes of company's life that require constant support, analysis and improvement" (Injac, 2001, p. 102). In 1979, Philip Crosby defined a framework for measuring the success of company's quality management in his book, "Quality is Free," using the framework called "maturity grid". The idea of a network or frame for measuring maturity consisted of the specific behavior of a company that it shows at different levels of so- called "maturity" levels that are analyzed or measured for one or more areas in the company (Fraser et al., 2002). Crosyby's maturity network consists of six key areas that were scaled and evaluated according to Likert's scale. Each area was benchmarked through five levels, each level representing the specific behavior of the company and how many company employees successfully adopted these specific behaviors and their application. The areas included: understanding and attitude of management, quality position in the company, problem solving, cost of quality as a percentage of sales, quality improvement procedures, the general attitude of the company on quality (Crosby, 1979, p. 23). The company managed the mentioned categories to achieve different degree of development of individual categories by measuring them from 1 to 5, with category one being insecurity in knowing, for example, how manager's attitude about quality is unknown or it is unknown what is the cost of quality measured in percentages of sales. While on the other hand, level 5 is a complete knowledge of information about the cost of quality in total sales or the attitude of quality management. According to Injac (2001, p.169), Crosby, unlike his predecessors, differed by "dropping the entire issue from the general level of philosophy and certain activities into a rounded recipe". That is why Crosby contributed to quality management from the aspect of the whole organization and the need to involve all levels of a company in improving overall quality. In addition, Injac argues that this approach has "indicated the need for an unification and standardization that will emerge eight years later in 1987 in the form of the ISO 9000ff Series" (Injac, 2001, p. 169). The ISO 9000ff standard series emphasized the importance of quality management at all levels of the company, not just the quality upgrading of production processes that were an imperative in the companies by that point. The fact is that maturity models are now widespread and applied in quality management, software development, supplier relationships, product development, innovation, product design, collaboration, product reliability and knowledge management (Frase et al., 2002). The success of quality management should certainly be explored from the aspect of implementation and sustainability of the continuous improvement system as a quality management success generator. MEASURING QUALITY MATURITY IN ORGANIZATIONS 24 Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 At the end of the 80's of the last century, in practice, the quality management of the company, according to Saraph et al. (1989) was not possible due to the lack of measures to determine the success of the company's quality management. Therefore, the authors have defined eight areas of importance in terms of quality of management and the operational measures that managers can use to "evaluate quality management status and to manage improvements in all areas of quality" (Saraph et al., 1989, p. 810). Hammer (2007) in his article published at the Harvard Business Review describes two models of maturity, on the one hand, the process of maturity and on the other hand, the maturity model of companies that are key to achieving business excellence. He further argues that the company must be mature enough for processes to increase efficiency over time. Hammer defines the maturity of the process as the ability of a process to ensure greater efficiency through time (Hammer 2007: 3). For processes to generate success and maturity through time, the company needs to provide leadership, culture, expertise and good management (Hammer 2007). Ravichandran and Rai (2000) proposed a model for measuring quality improvements in system development. This model consists of five theoretical constructs that can be seen in Table 1 with its literature background. Table 1. Litera ture background Theoretical Constructs Saraph et al. (1989) Flynn et al. (1994) Ahire et al. (1996) Authors Study Top Management Leadership Top management leadership and quality policy Top management support Top management commitment IS management support for quality Quality policy not explicitly considered Not considered Quality policy and goals Management Infrastructure Training Included under work force management Employee training Commitment to skill development Sophistication Nature of reward schemes included under employee relations Considered under top management support Considered under employee involvement but dropped from the validated scale Quality orientation of reward schemes Process Management Efficacy Product/service design Product design SPC usage Formalization of reusability in systems development Process management Process management Internal quality information usage Process control 25 Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 Quality data and reporting Quality information Benchmarking Fact based management Employee relations Work force management Employee empowerment and involvement Empowermen t of programmer/a nalyst Stakeholder Participation Supplier quality management Supplier involvement Supplier performance Vendor/consul tant participation Customer involvement not explicitly considered Customer involvement Customer focus User participation Quality Performance Not explicitly considered Product quality in terms of scrap rate Product quality Product quality Process quality not explicitly considered as a performance measure Process quality not explicitly considered as a performance measure Process quality not explicitly considered as a performance measure Process efficiency Source: Ravichandran and Rai, 2000, p. 389. Laosirihongthong et al. (2013) investigated the relationship between companies quality management and the impact on the performance of 149 companies in the car industry. Research findings show that top management is not sufficiently committed to managing people in the company, which is evident through inadequate employee involvement in enterprise management processes. They further argue that these "soft" factors of quality management are key to the application of best quality practices and the achievement of a developed company quality system. Tang (2013) published an extensive research on the performance of companies quality management on a sample of 1490 companies in Shanghai. The results of the research showed that the overall maturity index of the quality management of the Shanghai companies at the level of development was 3.30 out of the possible 5 degrees. The author emphasizes the importance of top management responsibility through the "leadership through quality" strategy in promoting accountability and quality assurance, socially responsible business, increasing service quality, and further investment in the development of "soft" skills. According to Tang (2013) five constructs need to be investigated to determine the state of quality management in companies (Table 2). In the latest construct called quality performance, and it consists of variables: physical quality, market success and financial performance, another variable is added: "Innovation and Learning". Innovation and learning today are key to achieving business 26 Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 differentiation in a competitive market. In the quality management of a company variables of "innovation and learning" is important for achieving business excellence. Kuratko et al. (2014) in their research claim that successful implementation of the innovation strategy in many companies is unattainable, although everyone is aware of how it represents a competitive advantage. Without innovation and learning, there is no added value to a company, and if the company does not apply its business policy to continuous improvement, which is crucial in collecting new knowledge, then there is no innovation. Authors Santos-Vijande and A'varvar-Gonza'lez (2007) point out that innovation has the role of mediator between quality management and achievement of technical innovation. Lee at al. (2015) explore the mediating role of organizational learning between quality management and innovation. The task of management is to recognize the need for innovation, to provide the necessary resources, and to establish and maintain the effectiveness and efficiency of the innovation process (ISO 9001: 2009, point 9). Therefore, as a result of good quality management of enterprises, the aspect of innovation and learning has to be analyzed, and it can be examined through the number of new or improved products in relation to the average activity of the company (Soto-Acosta et al., 2016). Table 2. Constructs for measuring organization quality Construct Variables 1 leadership leadership role and quality culture 2 design, process development and supplier management design, process development, supplier management 3 production process and marketing process control, system process control, management system, standardization, product testing, sales and services 4 Knowledge management measurement, analysis and improvement, tools and methods of quality 5 quality performance physical quality, market success, innovation and learning, financial success Source: Authors according to Tang (2013). CONCLUSION Today, compared to 20 years ago, literature on quality provides many measures that are validated in practice and can be used to measure quality in organization. Every organization has to determine which set of measures fits their strategies. Once the measures are set managers can use the model to evaluate quality maturity and have a "feeling" about where they stand in the market from the aspect of 5 defined constructs. Introducing quality 27 Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 principles and quality Standards just to have certificate in today's business environment is not the way to remain competitive advantage. Organizations have to evolve as market, people and needs evolve. In this context organization has to be dynamic and be aware where they stand on quality maturity from the aspect of every mentioned variable to be able to evolve, to grow and constantly improve. For future research it would be interesting to investigate what level of quality maturity organizations in Croatia have. REFERENCES Crosby, P. B. (1979). Quality is free. 1979. The Art of Making Quality Free, New American Library. Feigenbaum, A. V. (1960) Total Quality Control, McGraw-Hill, New York, USA. Flynn B. B., Schroederb R. G., Sakakibara S. (1994). A framework for quality management research and an associated measurement instrument. Journal of Operations Management 11, 339-366. Goetsch D, Stanley D. (2010). Quality management for organizational excellence: introduction to total quality, 6 th.ed. Upper Sadle Rier: Pearson Education International. Hammer, M. (2007). The Process Audit, Havard Business Review, April 2007. Retrieved on https://hbr.org/2007/04/the-process-audit. Injac, N. (2001). Mala enciklopedija kvalitete, III., Moderna povijest kvalitete, Oskar, Zagreb. Injac, N. (2002). Mala enciklopedija kvalitete, I., Upoznajmo Normu ISO 9000, Oskar, Zagreb. Laosirihongthong, T., Adebanjo, D., Choon Tan, K. (2013). Green supply chain management practices and performance. Industrial Management & Data Systems, 113(8), 1088-1109. Ravichandran, T., Rai, A. (2000). Quality management in systems development: an organizational system perspective. MIS quarterly, 381-415. Saraph, J. V., Benson, P. G., & Schroeder, R. G. (1989). An instrument for measuring the critical factors of quality management. Decision sciences, 20(4), 810-829. Soto-Acosta, P., Popa, S., & Palacios-Marqués, D. (2016). E-business, organizational innovation and firm performance in manufacturing SMEs: an empirical study in Spain. Technological and Economic Development of Economy, 22(6), 885-904. Standard ISO 9001:2008. Standard ISO 9001:2015. Tang, X. (2013). Investigation on quality management maturity of Shanghai enterprises, The TQM Journal, 25(4), 417-430. Zhang, Z. (2000). Developing a model of quality management methods and evaluating their effects on business performance. Total Quality Management, 11(1), 129-137. 28 an Busin I ABSR î I \ / geacollege Faculty of Entrepreneurship FINANCIAL STRUCTURE AND PROFITABILITY OF INNOVATIVE SMES IN ITALY Valeria Vannoni University of Perugia, Italy valeria. vannoni@unipg.it Abstract The size and degree of innovation of a company strongly affect its profitability and financial structure: literature has extensively investigated the causal links between innovation and profitability of firms; moreover, many authors have studied the peculiarities of the financial structure of innovative companies. In both topics, however, the conclusions are not unambiguous. The paper aims to make a contribution to reducing the literature gap providing further evidence on these issues by evaluating Italian small and medium-sized innovative enterprises. The case of Italy was considered as an example of the introduction into the legal system of a country of a specific entity for innovative companies. The study presents the main structural data referring to these firms, based on last updated statistics by the Italian Innovative Business Register. This verification was furthermore deepened using the tools of balance sheet and profit and loss account analysis of innovative SMEs, with available data for the period 2010-2017 on Orbis database by Bureau Van Dijk. The results confirm the reversal of the traditional hierarchy of funding sources for innovative firms, as firstly theorized by Berger and Udell; profitability is negative, according to literature underlining that innovation is positively associated with turnover and employment growth, but not necessarily with higher profitability. This also confirms that the benefits of innovation can be appreciated in a medium-long term period. Key Words Innovative firms; capital structure; firm performance. Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 INTRODUCTION The first results of the introduction of the quality system in Japan are beginning to appear in the 1950s and the next twenty years the Japanese economy is experiencing flourishing, while the American economy, which was "the leading" in quality, increasingly understands that it loses a large market share because of its low quality of products and then Deming at the beginning of the 80s introduced quality to American organizations by educating management. Many US organizations introduced quality management in 1985, and in 1987 the US Senate introduced the Malcolm Baldrige national quality award. All these steps have led to today's degree of quality development that can and must be measured in companies through specific indicators if organizations want to be efficient and effective and thus achieve sustainable success. Innovative companies represent a crucial resource for the development of modern industrial economies: the liveliness and performance of these companies strongly affect the innovative capacity and competitiveness of the economic system (Nadotti, 2014). The birth and survival of these companies is influenced by many factors that can be summarized in the two main themes of the knowledge gap and the funding gap. In particular, some characteristics of innovative companies, such as information asymmetries, the absence of guarantees and the high costs related to the estimate of creditworthiness, can become strong impediments to the provision of capital in the form of debt, with impacts on the financial structure and profitability of these companies. These aspects are particularly stressed in countries whose economy is typically characterized by small and medium-sized enterprises: among these, for example, there is Italy, where SMEs represent about 99% of total enterprises (ISTAT, 2018). The ability of companies to innovate can become a critical factor for success, able to facilitate the development of the business; however, difficulties for potential financiers in attributing a representative and reliable value to innovations represents an important brake on the possibility for firms of finding the financial resources to support investments in innovation. Even if it is possible to obtain financing, the cost could still be too burdensome compared to the profitability of the company. Aware of the contribution that small and medium-sized enterprises offer to the economy of the country, the Italian Government has therefore decided to introduce in its legal system a specific entity, that is the Innovative SME, to which recognize particular advantages to overcome the main difficulties just reported. This legislative intervention recognizes the peculiarities of innovative small and medium-sized enterprises and represents a virtuous example of measures that encourage innovation as a driver of economic growth. Among the facilitation for Innovative SMEs, particular attention must be paid to the available solutions for the collection of capital: as an exception to the ordinary corporate regulations, limited liabilities companies can create categories of shares with specific rights (for example, shares that do not attribute rights to vote or that attribute such rights in non-proportional terms to the participation); carry out operations on one's shares; issue participative financial instruments; offer capital shares to the public. These measures 30 Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 involve a radical change in the financial structure of limited liabilities companies, bringing it closer to that one of a joint stock company. Innovative SMEs can also use equity crowdfunding and, therefore, raise capital with special campaigns on authorized online portals. For the same companies, there is also a simplified, free and direct access to the Guarantee Fund for Small and Medium-Sized Enterprises, a public fund that facilitates bank financing by granting a guarantee on bank loans. This guarantee can cover up to 80% of the credit granted by the bank to innovative SMEs, within a maximum limit of 2.5 million euros, and can be granted through a simplified procedure. Innovative SMEs also benefit from some important facilitations and exemptions on terms for covering losses and on computation of a minimum income and taxable base for corporate taxation. Finally, to promote the investments in the equity of these companies, special tax incentives have been introduced, both for individuals and legal entities investors. These measures therefore contribute to creating a favorable scenario for the development of innovative companies in Italy. In the following paragraphs, an analysis of the main updated structural and accounting data of these companies will be proposed. Furthermore, the analysis of the main financial ratios of a sample of firms will be presented. LITERATURE REVIEW Literature on the subject is robust; for the purposes of this study, it is possible to distinguish two main strands: the first one focuses on issues relating to the financing of innovative firms; the second one deepen the relationship between the degree of innovation of the company and its profitability. About the first topic, it can be addressed into the most relevant theoretical frameworks that explain the financial structure of SMEs: the pecking order theory (Myers and Majluf, 1984); the trade-off theory (Jensen and Meckling, 1976; Myers, 1977; Jensen, 1986); the market timing theory (Baker and Wurgler, 2002). Even with their own specific hypotheses, all these main theories on the financial structure of companies are formulated on large companies, not enough deepening for small firms. Besides, for innovative companies the results of these main theories are compromised by some substantial elements (Berger and Udell, 1998): innovative companies have a financial need and a level of risk that depends on the degree of development of the project; the screening and monitoring activities are difficult, due to the high level of agency costs and the degree of information opacity of these companies (Huyghebaert and Van de Gucht, 2007; Hall and Lerner, 2010); innovative firms are often not able to provide adequate guarantees to the loan, because they are mostly made up of intangible and/or highly firm-specific assets. These constraints mean that access to traditional sources of financing is difficult for innovative companies and therefore the financing of innovation could represent a serious and real obstacle for them. Berger and Udell (1998) re-proposed the pecking order theory for this type of company, referring to their financial growth cycle: the traditional hierarchy of funding 31 Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 sources is modified not only according to the company size, but also for the degree of development of the project, to which different levels of information opacity and financial requirements correspond. For these companies, therefore, the traditional hierarchy is reversed. Following the financial growth cycle theory, a more recent literature on innovative SMEs' financing has been developed (Zoppa and McMahon, 2001; Sogorb-Mira and Lopez-Gracia, 2003; Hogan and Hutson, 2005; Hall and Lerner, 2009; Kuniy et al., 2010; Abraham and Schmukler, 2018). The results they achieve are not unequivocal: differences are mainly attributable to the type of innovation (product, process; incremental, disruptive; Cainelli et al., 2004; Koellinger, 2008; Czarnitzki and Hottenrott, 2010); to the business sector and firm market share (Schock, 2013; Mac an Bhaird and Lynn, 2015); to the attitude for innovation of the macroeconomic context (Arnone et al. 2015; Wilson 2015). Besides, the specific competitive and business strategy of firms should also affects these results (Miles and Snow, 1978). The second strand of literature refers to the relationship between the degree of innovation of the company and its profitability. As a proxy for the degree of innovation of the companies, the empirical literature largely refers to investments in research and development by firms (R&d). Main results, even in this case not unambiguous, confirm the relevance of some structural factors (inclination of the management to innovation and the macroeconomic context; type of innovation; dominant or marginal position of the company in its reference market; specific source of financing; R&D location) in determining the contribution of innovation to the profits of the firm. Koellinger (2008) found that innovation is positively associated with turnover and employment growth, even if innovative activity is not necessarily associated with higher profitability. Dibrell et al. (2008) investigate the mediating effects of information technology on the relationships among product and process innovations and firm performance, measured in multiple profitability and growth rate metrics, on a sample of 397 small and medium-sized enterprises (SMEs). They find, among others, that the impact of innovation (both product and process) on performance (both profitability and growth) is primarily indirect, felt via the mechanism of the importance managers place on IT and an increased emphasis on IT abets managers' perception of their firms' performance, as compared with that observed among other peer firms. Peters and Schmiele (2011) address the question whether international R&D activities boost profitability, using a large data set of about 1,300 firms from the German Community Innovation Survey (CIS). The empirical results demonstrate that R&D location matters for profitability. Firms with both domestic and foreign R&D activities make significantly higher profits than all other firms, including those that carry out solely domestic R&D. Tran and Santarelli (2013) investigate the determinants of innovative activities and the innovation-performance relationship for the firm population in Vietnam. Private innovative firms significantly outperform their peers whereas the combination of young, small, and innovative characteristics in young innovative companies does not bring the expected higher 32 Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 entrepreneurial performance as how it works in advanced countries; highly-leveraged firms, exporting firms, and diversified firms are more likely to be innovative than their counterparts, but the ability to transform innovative efforts into higher profitability and growth can only be witnessed among diversified firms; companies being endowed with larger asset pool have more favorable conditions to engage in innovation activities, but do not necessarily produce better performance relatively to their smaller counterparts. Adewale et al. (2015) consider the relationship between competitive advantage, innovation strategy and profitability level of firms in Nigeria. The authors deduce that competitive advantage and innovation strategy are both statistically significant to achieving high and persistent profitability level. Baussola and Bartoloni (2016) deepen complementarities between technological and non-technological innovation as crucial determinants of firm performance. This topic was not stressed by previous studies, as the focus has been primarily placed on technological innovation alone or on innovation efforts as measured by R&D or patent activities. They underline that capacities to develop market-oriented behaviour and introduce new organisational innovations are the drivers - together with technological innovation - of a firm's productivity and profitability. The authors also observe how the impact of such activities is larger when they persist over time, thus introducing a more general concept of innovation persistence. They present an empirical model based on a large panel of Italian manufacturing firms covering the period 2000-2012. About the relevance of persistence, also Othman and Ameer (2009). Hombert and Matray (2017) study whether R&D-intensive firms are more resilient to trade shocks. They provide evidence that R&D-intensive firms downsize considerably less. Curtis et al. (2018) provide evidence of an economically and statistically significant decline in the profitability associated with R&D expenditures. This result is consistent with diminishing marginal returns to R&D expenditures over time, in which spending has outpaced investment opportunities. However, despite the economic significance of the decline, analysts' long-term earnings growth forecast errors are systematically optimistic for firms with high R&D intensity. This evidence highlights the complexities associated with forecasting long-term earnings growth from innovation. Loukopoulos et al. (2017) examine whether a firm's business strategy is an underlying determinant of downside risk in accounting earnings and its components. Based on organizational theory, they predict that firms following an innovative "prospector" strategy exhibit lower profitability tendencies than firms following a cost-oriented "defender" strategy. Further, they anticipate that these strategies are asymmetrically positioned towards environmental uncertainty, with defenders focusing their efforts to efficiency, cost control, and minimizing exposure to downside risk, whereas prospectors direct their resources to flexibility, innovation, and maximizing the growth potential through aggressive expansion to new product markets. Successful innovative activity is a major contribution to the intangible capital of firms; although its importance is generally acknowledged, the 33 Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 contribution to companies' profits is a priori unclear. The literature review shortly summarized let us to underline how it is still difficult to affirm an absolute and direct relationship between innovation, financial structure and profitability for SMEs, as there are many other variables that strongly influence these links. EMPIRICAL ANALYSIS Methodology The empirical verification is on two levels: the first one, with the objective to delineate the demographics of Italian innovative SMEs; the second one, with the aim of deepening the previous analysis, on a significant sample of such firms. For the first verification, we use the data publicly available on the Italian Business Register, updated at March, 2019, referring to the entire population of registered innovative SMEs (1,024); for the second one, we consider firms with available financial data for the 2010-2017 period in Orbis database by Bureau Van Dijk (433). The coverage of the sample is 42.3%. The first analysis uses, substantially, a case study methodology, as an intensive analysis of an individual unit stressing developmental factors in relation to a broad definition of environment (Flyvbjerg, 2011). The unit is the whole innovative italian SMEs. The methodology used for the second level of investigation is the financial ratio analysis, that is broadly recognized as a vital tool in identifying the financial soundness and cost effectiveness of firms, by establishing relationship between the items of balance sheet and profit and loss account (Shivam and Probhakar, 2013; Khairi et al. 2014). The combination of qualitative and quantitive methodologies allows us a more adequate answer to the following research questions: a. does the hierarchy of firms' funding capital structure follow the trends firstly outlined by Berger and Udell?; b. does innovation improve firms' profitability? Results The Italian Innovative SMEs In this section, it is proposed the demographics Italian innovative SMEs. The definition of innovative SME was introduced in Italy in 2015, whit the Decree-Law 3/2015 (known as "Investment Compact"), converted into Law 33/2015, which has extended most of the benefits envisaged for innovative startups to a broader range of companies, Innovative SMEs. This regulatory intervention acknowledges established principles of the contemporary economic doctrine, which unanimously ascribes to technological innovation a decisive impact on the levels of competitiveness and growth and on the processes of job creation. The aim of the legislator was thus to foster with greater effort and reach the propagation of technological innovation within the domestic entrepreneurial system. According to this legislation, this type of enterprise enjoys a vast and diversified package of measures that touch every aspect 34 Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 of a company's lifecycle, including the introduction of more flexible corporate management tools, the liberalisation of remuneration schemes, the facilitation of the access to credit - for example by facilitating the investment in equity, and the support in the process of internalisation of innovative enterprises. Innovative SMEs are companies that comply with the definition of the European Commission Recommendation 361/2003 about small and medium enterprises and meet the following requirements: be incorporated as companies with shared capital (i.e. limited companies), including cooperatives; have their headquarter in Italy or in another EU country, but with at least one production site or branch in Italy; have the last balance sheet certified by an auditor or by a company of auditors registered in the auditors' register; have the shares of the company not listed in a regulated market; be not registered as innovative startup or certified incubator in the special section of the Business Register; do not distribute profits; be of innovative character, as identified by at least two of the following criteria: at least 3% of either the company's expenses or its turnover (the largest value is considered) can be attributed to R&D activities; at least 1/5 of the total workforce are PhD students, PhD holders or researchers; alternatively, 1/3 of the total workforce must hold a Master's degree; the enterprise is the holder, depositary or licensee of a registered patent (industrial property) or the owner of a program for original registered computers. According to last available data1, the innovative SMEs enrolled in the Italian Business Register are 1,024 (whole population). To deepen the demography of the sample, we have considered the following specifications: sectoral distribution; territorial reference area; legal form; female, foreign and youth prevalence in the corporate structure. By the sectoral distribution, 66.02% of these ones is in the service sector, 26.37% in industry and 6.54% in trade. From a geographical point of view, 61.62% is in the North area, with the Lombardy region which, alone, accounts for 28.03% of the total; among the regions of central Italy (20.11% as a whole), Lazio is the one with the largest number of innovative SMEs (9.28%), while in the South (18.27%) the most relevant one is Campania, with 6.25% of the total. By juridical nature, the most widespread type is the limited liability company (77.83%), followed by the joint-stock company (19.63%). Simplified limited liability company counts for 1.17%; only 1.16% of the total is represented by cooperative companies. Looking at the composition of corporate groups, the innovative SMEs with a female prevalence are just 7.91% of the total, those with a youth prevalence 8.50% and those with a foreign prevalence 0.98%. The analysis can be deepened on the basis of the intensity of the three phenomena (exclusive, strong or majority presence, respecting the qualifications of the Italian Business Register about female, youth and foreign presence), as defined by the Italian Business Register. Overall, the three phenomena are therefore not significant for the innovative SMEs in Italy. 1 Last available data is March 25, 2019. 35 Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 From the list of innovative SMEs available on the website of Italian Business Register, it is also possible to have three main values that define the size and the economic and financial capacity of innovative SMEs: these ones are class of capital, class of production value and class of employee, last year. Referring to the class of capital (Figure 1), approximately 77% of the companies have a capital between 1 and 250 th. Euros. Figure 1. Class of capital, percentages ■ Fr. 1 up 5th euros ■ Fr. 5 to 10th euros ■ Fr. 10 to 50th euros ■ Fr. 50 to 100th euros 16,02% Source: Author's elaboration on Italian Business Register, March 25, 2019. According to the class of Value of Production (Figure 2), approximately 82% of the companies have a value between 0 and 5 million euros, with a fairly uniform distribution among the classes, except for the "100 to 500 thousand euro" class, which has the greatest weight (about 27% of the total). Figure 2. Class of Production Value, percentages 6,64% 13,67% 7,81% 3,52% 13,18% m 26,95% 13,09% 15,14% 10 - 100th euros Fr. 100 to 500th euros Ft 500 to 1 mln euros i Ft. 1 to 2 mln euros Source: Author's elaboration on Italian Business Register, March 25, 2019. Finally, about the class of employees2, 82% of companies has up to 49 employees, with about half of the companies having a maximum of 9 employees (49.18%) and just 9.48% of firms employing over 50 human resources. Overall, these analyzes underline a low capitalization of firms, which also corresponds in the value of production. Financial analysis of Innovative SMEs in Italy The analysis focus on firms in the special section of the Italian Innovative SMEs Register, with financial available data for the period 2010-2017.Data are from Orbis database by Bureau van Dijk, that offers comprehensive and detailed business data and financials across countries. 2 Firms are categorized into the following six classes according the number of employees: from 0 to 4; from 5 to 9; from 10 to 19; from 20 to 49; from 50 to 249; over 250. 36 Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 The number of Innovative SMEs companies with available unconsolidated data is 433 in 2017, last available year. Financial data are organised in main indicators of performance with the aim to analyse firms' profitability and financial structure, on their average values, in the period 2010-2017. The average Operating revenue (turnover) in 2017 is equal to 5'947 th euros; the average number of employees is 30. These values substantially follow the trend outlined with the analysis on the population as a whole. There is no high heterogeneity among firms in the sample. To analyze the financial dynamics of the firms, we use the following ratios: current ratio; liquidity ratio, gearing; interest cover. Current and liquidity ratios are calculated on the values of the short-term assets and liabilities, respectively including and excluding the value of inventories; gearing is obtained as the ratio between the sum of non-current liabilities and loans and shareholder funds. Interest cover is calculated as the ratio between EBIT (Earnings Before Interest and Tax) and interest paid. For the profitability analysis, we use the following two ratios: ROA using Net Income; ROE using Net Income. The value of ROA (Return On Assets) is calculated as the ratio between the firm's Net Income and its Total Asset; ROE is equal to the ratio of Net Income and Equity. For the same purpose, we also consider the following two margins: EBITDA Margin; EBIT Margin. EBITDA Margin is the ratio between EBIT plus Depreciation and Operating revenue (turnover); EBIT Margin is the ratio between Operating P/L (that is EBIT) and Operating revenue. Finally, we include also the ratio Cash flow/Operating revenue to focus on the financial relevance of economic values. Cash flow is calculated as the sum of Net Income and Depreciation. The table in Figure 3 presents the main results of our analysis. Figure 3. Ratios, percentages Ratio, Percentages, average/year 2017 2016 2015 2014 2013 2012 2011 2010 Current ratio 2,01 1,97 1,81 1,98 1,93 1,91 2,11 2,26 Liquidity ratio 1,81 1,75 1,64 1,80 1,74 1,69 1,94 2,01 Gearing 142,63 136,99 144,13 153,37 142,18 140,62 153,08 157,14 ROE using Net Income (7,46) (11,13) (18,44) (13,97) (20,93) (8,38) (3,73) 0,16 ROA using Net Income 0,41 (1,95) (1,30) (2,41) (2,68) (1,88) 0,10 (0,31) EBITDA Margin 8,13 6,50 6,62 5,80 7,66 8,18 11,50 10,11 EBIT Margin 1,61 0,62 1,21 0,24 2,43 2,94 6,14 2,92 Cash flow/Operating Revenue 6,40 4,34 4,85 2,54 4,79 5,90 7,51 7,05 Interest cover 37,01 24,68 29,32 20,07 24,14 35,35 40,51 34,37 Source: Author's elaboration on Orbis by Bureau van Dijk data. Companies present a satisfactory profile in terms of liquidity: the value of current and liquidity ratios are positive in all of the period 2010-2017, demonstrating the ability of firms to efficiently manage their short-term financials, as to be able to face their short-term commitments. The 37 Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 analysis of liquidity can be appreciated also considering the average credit and collection period of firms: Credit period is the ratio between Creditors and Operating revenue; Collection period is the ratio between Debtors and Turnover. The first one is equal to 72 days on average in 2017, considerably reduced compared to the average value at the beginning of the period (102 days); the second one is equal to 103 days on average in 2017, even falling down by the initial value (122 days). These results could be interpreted in an ambivalent and contrasting way, respectively as a sign of the growing contractual strength of firms or as tensions in the management of payments. Considering the values of liquidity ratios, the first interpretation is suitable for the case. Gearing ratio is high in all the years, highlighting an unbalanced financial structure of firms' debt. This result is consistent with the empirical evidence relating to the financial structure of Italian companies, typically undercapitalized and strongly dependent on bank loans. However, the ratio has quite mixed values: it goes from the maximum value of 157.14 at the beginning of the period to the average value of 142.63 in 2017, rising compared to 2016. This dynamic can also be explained by considering exogenous factors, in particular referring to the willingness of banks to grant credit, influenced by supervisory regulations, central bank's monetary policy and interbank market. Despite the weight of bank loans on the financial structure of firms, the level of financial charges is sustainable, as represented by the Interest cover values in the period. This result is also attributable to the favorable dynamic of market interest rates. About profitability, ROA has negative values in six of the eight years analyzed; in the last year, the value is positive. These results can be interpreted taking into account the difficulties of small and medium-sized enterprises in closing their balance sheets with a net profit, due to the economic relevance of the financial and extraordinary costs. Such values also highlight an important issue related to an uneffective use of assets by firms. Even the value of ROE is negative; the values confirm the critical aspects already represented in the ROA results, mainly due to the dynamics of net income of companies. This result has very significant strategic implications, since it indicates a negative return on equity; values are primarily influenced by the net income dynamics of firms: 30.25% of the sample has a negative net income, with a negative average of 55,594 th. Euros. Instead, net income calculated only for firms with positive values is equal to 2,854 th Euros. Furthermore, the high values of negative ROE are due to the low level of firms' capitalization. Discrepancies in the signs of ROA and ROE in three of the years (2010, 2011 e 2017) can be attributed to the fact that the ROE is calculated just for companies with a positive shareholder value, reducing the number of firms for which the average value of ROE is finally calculated. EBITDA and EBIT margin are rising, after the fall in the previous years. CONCLUSIONS 38 Advances in Business-Related Scientific Research Journal, Volume 10, No. 1, 2019 Issues related to innovation financing, including the difficulty of attributing a reliable value to innovation itself, can be amplified by the size of the company: small and medium-sized innovative companies can heavily suffer from raising capital, and this is a brake on the development of the company. Problems related to the financing of innovative companies should be mitigated by specific regulatory measures aimed at favouring investments in these companies: in Italy, in 2015, it was introduced a specific entity that is the innovative SME, which benefit from particular facilitations, also about their access to financing and credit market. The paper intended to study the Italian innovative SMEs, starting from main available statistics by the Italian Innovative Business Register. Data show that these companies are mainly limited liability companies, active in the service sector, based in Northern Italy. Firms are characterized by a low level of capitalization and value of production. This evidence have been deepened through the financial ratio analysis of firms with available data in Orbis database by Bureau van Dijk for the period 2010-2017. The focus was on the financial structure and profitability of these companies. The results show a high level of indebtedness, confirming the literature that has long highlighted the strong dependence on credit from small and medium sized enterprises. This result is therefore explained by the dimensional factor not by the innovativeness of the company. Liquidity ratios are satisfactory, while profitability is not good. 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