Volume 5
ISSN 1581-6311
Global
EDITOR
^^	V f * V + J
journal
Managing Global Transitions
International Research Journal
EDITOR
Boštjan Antončič, University of Primorska,
Slovenia
ASSOCIATE EDITORS
Egon Žižmond, University of Primorska,
Slovenia
Dušan Lesjak, University of Primorska,
Slovenia
Anita Trnavcevic, University of Primorska,
Slovenia
Roberto Biloslavo, University of Primorska,
Slovenia
EDITORIAL BOARD
Zoran Avramovič, University of Novi Sad,
Serbia
Terrice Bassler Koga, Open Society Institute,
Slovenia
Cene Bavec, University of Primorska, Slovenia
Jani Bekö, University of Maribor, Slovenia
Vito Bobek, University of Maribor, Slovenia
Štefan Bojnec, University of Primorska,
Slovenia
Suzanne Catana, State University of New York,
Plattsburgh, usa
David L. Deeds, University of Texas at Dallas,
USA
David Dibbon, Memorial University
of Newfoundland, Canada
Jeffrey Ford, The Ohio State University, usa
William C. Gartner, University of Minnesota,
USA
Tim Goddard, University of Calgary, Canada
Noel Gough, La Trobe University, Australia
George Hickman, Memorial University
of Newfoundland, Canada
Robert D. Hisrich, Thunderbird School of
Global Management, usa
Andras Inotai, Institute for World Economics
of the Hungarian Academy of Sciences,
Hungary
Hun Joon Park, Yonsei University, South Korea
Štefan Kajzer, University of Maribor, Slovenia
Jaroslav Kalous, Charles University,
Czech Republic
Maja Konecnik, University of Ljubljana,
Slovenia
Leonard H. Lynn, Case Western Reserve
University, usa
Monty Lynn, Abilene Christian University, usa
Neva Maher, Ministry of Labour, Family and
Social Affairs, Slovenia
Massimiliano Marzo, University of Bologna,
Italy
Luigi Menghini, University of Trieste, Italy
Marjana Merkac, College of Entrepreneurship,
Slovenia
Kevin O'Neill, State University of New York,
Plattsburgh, usA
David Oldroyd, Independent Educational
Management Development Consultant,
Poland
Susan Printy, Michigan State University, usA
Jim Ryan, University of Toronto, Canada
Mitja Ruzzier, University of Primorska,
Slovenia
Hazbo Skoko, Charles Sturt University,
Australia
David Starr-Glass, State University of New
York, usA
Ian Stronach, Manchester Metropolitan
University, uk
Ciaran Sugrue, Dublin City University, Ireland
Zlatko Šabic, University of Ljubljana, Slovenia
Mitja I. Tavcar, University of Primorska,
Slovenia
Nada Trunk Širca, University of Primorska,
Slovenia
Irena Vida, University of Ljubljana, Slovenia
Zvone Vodovnik, University of Ljubljana,
Slovenia
Manfred Weiss, Johan Wolfgang Goethe
University, Germany
Min-Bong Yoo, Sungkyunkwan University,
South Korea
Pavel Zgaga, University of Ljubljana, Slovenia
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Managing Global Transitions
International Research Journal
VOLUME 5 • NUMBER 4 • WINTER 2007 • ISSN I58I-63II
Table of Contents
306 The Editor's Corner
307 Theoretical Aspects of the Economic Transition:
The Case of Romania
Cezar Scarlat
Eugen I. Scarlat
333 Management Mistakes as Causes of Corporate Crises:
Countries in Transition
Drago Dubrovski
355 The Exchange Rate Regime and International Trade
Romulus-Catalin Damaceanu
371 Trust and Commitment in Professional Service Marketing
Relationships in Business-to-Business Markets
Barbara (Cater
391 Intercultural Competence in Work: A Case Study
in Eastern Finnish Enterprises
Pirkko Pitkänen
The Editor's Corner
The journal continues focusing on the transition research and emphasiz-
ing the openness to different research areas, topics, and methods, as well
as international and interdisciplinary research nature of scholarly arti-
cles published in the journal. The current issue covers topics of transition
process, corporate crises, exchange rates regime, trust and commitment,
and intercultural interaction.
In the first paper of this issue Cezar Scarlat and Eugen I. Scarlat have
developed the bi-dimensional matrix model of the transition process. In
the second paper, Drago Dubrovski examined management mistakes and
presented them as a cause of corporate crises, a thing which can be of an
importance in the countries in transition. The focus of the third study by
Romulus-Catalin Damaceanu is the relation between the exchange rates
regime and international trade. In the fourth paper, Barbara (Cater exam-
ines trust and commitment in professional service marketing relation-
ships in business-to-business markets and finds a positive relationship
between trust and affective commitment and a weak negative relation-
ship between trust and calculative commitment. In the last - fifth paper,
Pirkko Pitkänen presents research findings based on a case study that fo-
cuses on intercultural interaction issues in private sector workplaces in
Finland.
Boštjan Antoncic
Editor
Managing Global Transitions 5 (4): 306
Theoretical Aspects of the Economic Transition:
The Case of Romania
Cezar Scarlat
Eugen I. Scarlat
For Romania, as for all other ex-communist countries from Eastern Eu-
rope, the transition from the rigid centrally planned economic system
to the free-market economy, fair competition based, was an amazing
experience. From the academic standpoint, the economic reform was a
huge research opportunity, as well as having extremely important prac-
tical consequences. Based on the case of Romania, the authors have
developed an original, bi-dimensional matrix model of this transition
process (Scarlat Model), emphasizing the typology of four basic eco-
nomic systems. Managerial aspects are underlined - both for economic
systems and transition process - as well as some stability considera-
tions. Two features of the transition strategy are presented: the tran-
sition path and duration of the process. Special attention was paid to
assessing the moment by when the economic transition ends. Analy-
sis of the transition path - based on the theory of deterministic chaos
(i. e. short-run predictability) - has led to interesting results: a compre-
hensive research on the evolution of the Romanian currency exchange
over a period of sixteen years (1990-2005) revealed three intervals in
the Romanian recent history of economic transition and confirmed the
diagnostic of transition end. The general model is applied in the case of
Romania and some interesting findings are presented, but it is also fully
applicable to all Eastern European countries and not only Romania.
The eu accessing process is a different type of transition - rigorously
planned, regulated and monitored.
Key Words: economy model, economic transition, transition path,
deterministic chaos, Eu accession
jel Classification: p21
Introduction
In 1989, the seemingly solid system of centrally planned economy col-
lapsed. The revolutionary changes that started in Poland demolished the
Dr Cezar Scarlat is a Professor in the Management Department,
University 'Politehnica' of Bucharest, Romania.
Dr Eugen I. Scarlat is an Associate Professor in the Department
of Physics, University 'Politehnica' of Bucharest, Romania.
Managing Global Transitions 5 (4): 307-331
whole Soviet-style command economic system of Eastern Europe and
the Soviet Union itself. Dramatic changes in the economic systems of
these countries followed, but the scientists were not prepared for such a
moment: there was no valid theory of economic reform to rely on - as
there was no such precedent. Within the empty space of the economic
theory in this respect, the fall of communism has given way to a variety
of strange, archaic, alternate and even 'informal' and 'parallel' forms of
management and enterprise - as the entrepreneurial energy existed but
it was not properly channelled (Dana and Dana 2003).
As Aligica describes (2006), the raise of the new institutionalism is one
of the most significant reactions of the economic reform experience.
A comprehensive World Bank report (World Bank 2004) evaluates the
World Bank assistance in 26 countries in Europe and Central Asia. Af-
ter 1989, the transition countries 'have undertaken massive reforms of
their economic systems, transforming institutions, processes, attitudes,
and fundamental concepts of individual and organisational behaviour'.
Considering its complexity, the development of an 'easy-to-understand'
but working model of economic transition is a considerable challenge.
The economic reforms have had significant impact in all sectors and
important research efforts have been made to clarify, explain or solve
problems related to the transition processes. Even gender issues were
such a subject (Homlong and Springler 2006) - in order to identify the
quality and quantity of female labour participation in such processes.
Based on the authors' experience and research during more than fif-
teen years of transition from a centrally planned economy toward a free-
market economic system, an original model of the economic systems and
transition was developed.
More or less authorised voices speak knowingly about 'privatisation',
'economic reform' or 'transition toward market economy' and - more
recently - the European Union. In spite of their actuality, they often gen-
erate questions and are even confusing.
The proposed model allows for clear definitions, and possible transi-
tion strategies are analyzed. The role of government is emphasized, as
well as the key-role of the public administration in the process of acces-
sion to the European Union.
The economic and transition model, which is proposed by the au-
thors as a conceptual framework, is bi-dimensional. Types of ownership
(state/private) and management (centralized/decentralized) are consid-
ered. Consequently, the resulting 'two by two matrix' reveals four types
of economic systems - among them the centrally-planned economy and
the free-market economic system. The major advantage of this model is
its analytical potential. The different transition strategies are presented
and the position of a certain economic system, on its path toward the
free-market economy, at a certain moment, can be easily identified. The
topic of this paper is very actual, extremely important and relevant to the
current state of knowledge for - at least - two reasons:
•	The proposed transition model is both theoretical and practical (ex-
planatory) as well as being an investigation tool (Ardelea and Scarlat
1991; Scarlat 1994; 1999; 2001; 2003a; Scarlat and Curaj 2004).
•	The research conducted in Romania, the analysis of time series of
certain macroeconomic indicators (such as the exchange rate) dur-
ing the transition period or the transition path, from the standpoint
of deterministic chaos (i. e. short-term predictability), has revealed
interesting characteristics (Scarlat 2005; Scarlat, Stan, and Cristescu
2007a; 2007b) and was in accordance with the other estimations
about the end of transition.
Some of the conclusions of the research might be applicable to other tran-
sition economies as important decision support tools.
Economy Model
Using a political economy approach, and based on different criteria (po-
litical structures, 'What is a good society?' and the pace of implementing
the transition policies), Marangos (2005; 2006) has identified and devel-
oped five alternative models of transition: Shock Therapy, the Neoclas-
sical Gradualist model, the Post-Keynesian model of transition, the Plu-
ralistic Market Socialist, and the Non-Pluralistic Market Socialist model
of transition (the Chinese model). These models are associated with al-
ternative institutional development processes - i. e. the decision depends
on what institutions are considered to be more efficient: institutions pro-
duced by state intervention or market-generated. The neoclassical gradu-
alist model maximizes the social welfare under the given internal and ex-
ternal constraints (Marangos 2006). Unfortunately, this meritorious and
complex typology presents definition elements of both economic transi-
tion (as shock therapy) and economic system (others), which might be
confusing.
Definitely, an economic system is described by a certain number of
features: more features, more information and - finally - the system is
better described. The issue is to investigate the possibility of character-
ising (any) economic system by a minimum number of parameters, in
order to simplify the analysis as much as possible (but they still describe
the system completely). The point is to find the most important features.
The basic assumption is that any economic system can be characterised
by two major features, considered as determining features:
•	The type of ownership that could be, basically, state ownership
or private ownership (the intermediate or mixed ownership is ac-
cepted).
•	The type of management adopted by businesses/organisations ac-
tive within the economic system.
We agree to define the management type as centralised if all the vital
decisions are made at the macroeconomic level (government), and the
decentralised management, where decisions are made at the microeco-
nomic (organisation) level (intermediate forms of management are also
accepted).
The result of these assumptions is the two-dimension (matrix) model
presented in figure 1. Validity of the model's assumptions is proved by the
fact that all the important types of economic systems are described fairly
completely. While the association 'private ownership' & 'decentralised
management' is typical of the democratic countries' 'market economy'
(quarter i), the association 'state ownership' & 'centralised management'
defines 'the command economy' or centrally planned economy of the
communist/socialist countries (quarter 111). Analysing the model with
combinatorial techniques, two more associations are shown: 'private
ownership' & 'centralised management' (quarter 11), defining the econ-
omy of monopoly and 'state ownership' & 'decentralised management'
(quarter iv), introducing the so-called 'social-market' economy.
It is important to avoid the confusion between 'centrally planned
economy' and 'planned business activity' - core of the modern free-
market economy. Unfortunately, such confusions were frequently pre-
sented in Romanian newspapers and mass media, right after 1990. An-
other trap to be avoided: the modern free-market economy is not the
old 'market' economy dominated by powerful monopolies (economy of
monopoly).
The free-market economic system is superior to the centrally planned
economy for two reasons, at least: motivation (as a result of private own-
ership) and flexibility (as a result of decentralized management).
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STABILITY AND MANAGEMENT CONSIDERATIONS
From the management standpoint, the description of the proposed
model (Scarlat's Model) starts from two basic prerequisites:
•	private ownership, opposed to the public one, generates motivation;
•	decentralisation, determines the flexibility of management systems
and processes.
On the other hand, the basic management principle states that the
owner makes the decisions (regardless of who are the owners - individu-
als, businesses or the government). This situation is met in quarters i and
Iii, which corresponds to relatively stable systems. Any other situation
means conflicts or potential conflicts between the owner and decision
maker (quarters ii and iv). This explains the relatively short life of eco-
nomic (and political) systems corresponding to quarters ii and iv. The
failure of centrally planned economies (quarter iii) is not because of
management conflicts but mostly due to rigidity, poor motivation and
low efficiency. It is interesting to underline the unstable character of the
economic models belonging to quarters ii and iv. Contradiction be-
tween the private ownership and centralised management (quarter ii)
will have serious effects like economic and social unbalance, excessive
and immoral revenue sharing and, finally, the danger of significant un-
employment.
The opposition between state ownership and decentralised manage-
ment (as much as it is possible) leads to the property's depreciation
through poor efficiency, as a result of the back interest, with a major
negative consequence, inflation (quarter iv).
Type of business management
Centralised <-- Decentralised
II Economy of monopoly	I Free-market economy
Economy of command III	'Social-market' economy IV
1 The matrix model of four basic types of economic systems
A different situation, wherein the frames of private ownership and
free competition principles are broken and/or replaced by the centralised
command mechanisms, is that of the war economy (Germany, Italy, and
Romania, during World War 11). By laws and/or decrees, the economy's
direction is accomplished by the state both at macro and, somehow, mi-
croeconomic levels. The state targets all the nation's resources in order to
sustain the war efforts. During the crisis this strategy can lead to results
that are superior to those from quarter i. But in normal times it hinders
initiative and dynamism, placing the economy behind the free markets.
It is also important to analyze the relation between company manage-
ment and ownership, by quarters.
•	Quarter i. Interest aroused by private ownership and managerial
flexibility results in elastic and efficient management. Under the ne-
cessity of free-market circumstances, governed by the principles of
the demand-supply balance and fair competition, the necessity of
a fast market information transfer appears. Extensive and intensive
use of information technology becomes a management tool.
•	Quarter ii. There is private ownership motivation, but also cen-
tralised leadership that creates over-sized structures with slow reac-
tion time and a long information circuit. Quite rigid and disadvan-
tageous management is the result. This can be improved by using
information systems.
•	Quarter iii. Management is imposed from outside the system.
The economy is of 'command' type but the company is deprived
of a basic managerial function: 'decision-making'. That is ultra-
centralised, the communication channel is long, and information
is distorted and weakened through a bureaucratic chain with non-
existent feedback. In the few situations where it appears, it does not
contribute to the decision making. The lack of motivation increases
the system's immobility.
•	Quarter iv. Accepting that a company is allowed to make decision:
state ownership rejects that kind of motivation. The result is a for-
mal management. The information systems are used in an ineffi-
cient way, as well.
TRANSiTiON PROCESS
A successful transition process from communism to democracy and/or
market economy may be a tool for the economic development of a coun-
try (Bitzenis 2007). The free market economy's superiority (through mo-
tivation, adaptability and flexibility, and progress, and finally through
productivity and efficiency) is practically proved as well, confirmed by
the social and historical dynamics of economic systems. At least for eco-
nomic reasons, as the free-market economic system is more efficient than
the centrally planned one, the transition to free-market economy is a
must.
Since the late 1990s, a rich literature has been developed, screen-
ing the various aspects of the transition. The prestigious journal Post-
Communist Economies (formerly Communist Economies and Economic
Transformation) has published, systematically, interesting articles on
various economic sectors, in different transition countries such as:
Azerbaijan (Sabi 1997), Bulgaria (Mihaylova and Howe 1998), Croatia
(Cengic 1996), (East) Germany (Hölscher 1997), Hungary (Mihalyi 1996),
Poland (Kaminski 1998), Romania (Hunya 1998), Russia (Magomedov
1998),	Kazakhstan and Uzbekistan (Abazov 1997), Ukraine (Ishaq 1997;
Hirschhausen 1998). The critical issue of economic development is im-
portant for each individual country as well as for an entire region - it
could be either Central Asia or Eastern Europe (Brzeski and Colombatto
1999).
Over the last decade, comparative and multi-country studies were
conducted. Such a research completed in four countries from Central
and Eastern Europe (Romania, Bulgaria, Czech Republic, Hungary)
has identified several areas of concern for the very dynamic sector of
small and medium-sized enterprises (smes), active internationally: lack
of appropriate financial instruments, difficult access to market intelli-
gence, lack of professionalism within the business support infrastructure
(Lloyd-Reason et al. 2005). At the other extreme, there are numerous
examples of successful economic development, sMEs-based. Analysing
the Vietnamese economy, Harvie (2004) concludes that smes are job
creators, which contribute to sustainable economic development by ef-
ficient allocation of resources, expand the exports, achieve a more equal
distribution of incomes, and assist the rural and regional development.
Actually, the 'Scarlat Model' demonstrates that smes are the ideal ac-
tors to play on the stage of free-market economy: smes are totally private
and decentralized decision makers.
The Scarlat Model can be used to analyze the economic transition as
well. The transition process - from centrally planned economy to the
free-market economy - means simultaneous privatisation and decentral-
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isation of the business management (figure 2). The adopted legal acts in
Romania (the Reorganisation of the State Owned Enterprises Act, the
Corporations Act, the Act of Land) target all the transition aspects men-
tioned before.
The fundamental problem is choosing and justifying the optimal strat-
egy, defined by:
•	Duration and speed of transition ('shock' or 'gradual' transition).
•	Transition path (trajectory).
•	Privatisation techniques - as an essential component of the transi-
tion and economic reform.
•	Transition management and strategy - as a result of all the above.
As far as duration/pace of transition is concerned - either 'shock ther-
apy' or 'gradual transition' - the champions of each of them might have
their arguments. However, ten years of transition offer enough hard evi-
dences - as some countries have opted for 'shock' while most of them (as
Romania) have decided to follow the 'gradual' path (Giannaros 2000).
The proposed model allows for analysing all these aspects. For exam-
ple, regarding the transition path, the model's analysis reveals three types
of trajectories, at least:
1.	Direct transition (quarters Iii —> i); theoretically the most advan-
tageous but requires an outstanding managerial effort.
2.	Transition through quarter 2 (quarters Iii —> 11 —> i), which is
potentially high unemployment generative.
Type of business management
Centralised--------------► Decentralised
II Economy of monopoly	I s Free-market economy / / / /
/ / / / / Economy of command III	'Social-market' economy IV
2 The transition model: From centrally planned economy
to the free-market economy
Theoretical Aspects of the Economic Transition 315
Economy of monopoly	Free-market economy
Economy of command	'Social-market' economy
Degree of business management decentralisation
figure 3 The model of the transition path of the Romanian Economy
3. Transition through quarter iv, threatened by inflation (quarters Iii
—> iv —> i).
It is important to mention that these three types are just basic tra-
jectories. Bitzenis (2007) has introduced nine general reform paths of
transition.
If the economic criterion (inflation avoidance) is overwhelming, vari-
ant (2) will be chosen meaning prioritising the privatisation. If the social
criterion (lowest possible unemployment) prevails, (3) will be followed
and companies will become fully autonomous.
From the theoretical, managerial standpoint, transition should be as
short and straight as possible. Prolonging the transition through unsta-
ble statuses (quarters 11 and iv) induces stresses and leads to a drop in
economic efficiency, or else a decrease in the speed of the economic re-
form process.
As mentioned before, the split between private/state or centralized/de-
centralized is pretty rigid. The model can be improved, considering both
ownership and decentralisation as having continuous variation: owner-
ship percentage and degree of decentralisation. The proposed model -
slightly modified (figure 3) - allows for investigating the real path fol-
lowed by Romania on its way to a free-market economy.
The overall survey on the Romanian economy and business environ-
ment allows us to conclude that most of the legal framework is in place
and the business is very active. According to a detailed survey conducted
and published back in 2004: 'Romania does not request a transition pe-
riod or impairment of law and states that it will be possible to fully en-
force the acquis after the accession' (Fuerea et al. 2004,29).
Type of business management
Centralised --► Decentralised
Economy of monopoly	— Anti-trust laws ■ Fair competition laws j Free-market economy t Consumer protection laws ' Property laws .
Economy of command	1 'Social-market' economy
figure 4 The role of government: The legal environment development
and protection
role of the government
As we have seen, the match between ownership and management in
quarter i is only the background for an efficient economic system. For
countries in transition - as Romania - the government is less and less
an economic actor but a crucial rule maker. After the transition manage-
ment role, the government must play another essential role: the guard
and the guarantor of the free-market economic system. In order to main-
tain the viability of the free-market economy system, its borders should
be safely defended by (figure 4):
•	'anti-trust' regulations (antimonopoly) in order to discourage the
movement back to quarter ii,
•	laws for property protection and limitation of nationalisation pro-
cesses that should not allow access towards quarter iv,
as well as measures of stability within the system:
•	fair competition legislation, and
•	laws for consumers' protection.
To all these, the legal framework for environment protection is a sine-
qua-non condition for sustainable development.
During its eu accession process, Romania had to pay attention to all
these aspects as follows (Fuerea et al. 2004):
•	Fair competition: 'In this field [...] legislation is harmonized with
similar European legislation. There is a high proportion of com-
patibility with eu legislation regarding the regulation of corporate
agreements, dominant position abuse and the control of economic
concentrations.'
•	Consumer protection: 'In conclusion, the degree of concordance be-
tween the Romanian legislation and acquis [...] is estimated to be
relatively high since all measures taken by Romania are fully com-
patible.'
•	Environment protection: in this area, Romania still has 'to pro-
mote a normative measure to support the local budgets in creat-
ing/improving the environment infrastructure.'
Justification of those measures lies in the fundamental principles of
the free-market economy: open competition, balance between the de-
mand and supply, and company autonomy.
As far as the private sector is concerned, the government plays an im-
portant role, too. The 'privatization' process is only one of the ways to
create a significant private sector in the economy:
•	privatisation of the former state-owned enterprises,
•	creation of new private firms - small business start-ups, mostly
(which started right after December 1989),
•	restitution of the properties confiscated by the communist regime
between 1945 and 1985.
This is why the 'creation of the private sector' syntagm - which is
strongly recommended to be used - reflects the real-life processes bet-
ter than the word 'privatization'.
The Romanian government took action in all the above directions.
Only the pace was different. As an example, the major steps for prop-
erty restitutions are chronologically displayed in table 1. Similar investi-
gations can be performed for other means to create the private sector.
The Romanian Statistics Authority periodically provides data in this re-
spect.
It has to be emphasized that the government has to be the referee of
the economy game, not a player. But its role and implication are some-
times rather difficult to assess, mainly in transition economies. For ex-
ample, in Czech Republic, the influence of the government in the econ-
omy was higher than what the government officially conceded during the
1990s (Kreuzbergova 2006). So-called 'banking socialism' has meant the
indirect control of the recently privatized companies by the government-
controlled banks.
table 1 Property restitution acts in Romania
Act number/year Restitution object
18/1991
82/1992
1/2000
10/2001
247/2005
Land for agriculture (less than 10 ha)
Urban pieces of land
Forests, land larger than 10 ha
Buildings (restrictive)
Most of the properties
Too much involvement of the government in the economy means less
economic freedom. The Heritage Foundation and Dow Jones & Com-
pany, Inc. is annually publishing - since 1995 - the world ranking of eco-
nomic freedom, according to the 'index of economic freedom', which is
based on some tens ofindependent variables, grouped in 10 broad factors
of economic freedom, strongly influenced by the government policy.
The economic freedom 'encompasses all liberties and rights of pro-
duction, distribution, or consumption of goods and services. The highest
form of economic freedom provides an absolute right of property owner-
ship, fully realized freedoms of movement for labour, capital, and goods,
and an absolute absence of coercion or constraint of economic liberty
beyond the extent necessary for citizens to protect and maintain liberty
itself. In other words, individuals are free to work, produce, consume,
and invest in any way they please, and that freedom is both protected by
the state and unconstrained by the state' (Beach and Kane 2007, 38). It
should be noted that the absence of government coercion or constraint
must also include a sense of liberty as distinct from anarchy.
The 2007 Index of Economic Freedom ranks Romania on 67th place
(compared to 92nd place in 2006) in a global list of 161 countries (Kane,
Holmes, and O'Grady 2007). The position corresponds to the consid-
erably large group of 'moderately free-countries' - where the majority
of former communist countries are ranked. The lower the position, the
greater the level of government interference in the economy, and the less
economic freedom the respective country enjoys.
END of transition
The question of'when the transition process ends' (Scarlat 1999) is dou-
bly important: not only for the sake of theory, but for practical reasons as
well (just think about the status of 'functional market economy' accord-
ing to which the candidate countries for eu accession were assessed).
On the other hand, Kumar (2006) finds that there is a strong correla-
tion between world trade and a well-established market economy such as
in the usa, Japan and countries in eu, while there is a small correlation
between the world trade and a transitional economy such as Russia. In
other words, the 'functional market economies' have better established
import and export transactions and, consequently, economic welfare.
The Scarlat model is able to offer a reliable answer to the sensitive
question of 'when the transition process ends'. In theory, by the time
when the private ownership is prevailing and the business management
is dominantly decentralized, then the free-market economy system is in
place (figure 2). In practice, during the transition process, it is necessary
to measure both the private ownership percentage and degree of business
management decentralisation (figure 3). When more than 50% in both of
them (or a different but higher than 50% privatisation and/or decentral-
isation target) is reached, then the process of economic transition towards
the free-market economy is considered over.
While the percentage of private ownership is relatively easy to calcu-
late, based on regular statistics (see, for example, figure 5, which depicts
the Romanian case for its privatization target), the degree of business
management decentralisation is rather difficult to assess.
In any case, a coherent set of criteria for assessing the degree of de-
centralisation has to be developed. Such a set of criteria should include
vital decisions at the company level - such as decisions on: company mis-
sion and strategy, budget, company suppliers and clients, pricing policy,
personnel policy (number, structure, salaries, hiring and firing), invest-
ments, acquisitions and mergers, insolvency and bankruptcy. Further re-
search on this issue is to be completed and eventually published.
There are also other standpoints, methods and/or information sources
that could be used to assess, conventionally, the point in time when the
economic transition gets - conventionally - to its end. The question is,
somehow, rhetorical - because . . . the transition never ends: the eco-
nomic system - even after reaching the 'free-market economy' quad-
rant - is not rigid, it is continuously evolving (within the same quadrant,
hopefully). Several approaches mostly used to diagnose and identify that
moment when the economic transition is conventionally over are men-
tioned below.
• The political approach (altough it also considers a complex of ele-
ments): the transition is over when the eu sentences it - in Country
Report - and considers the economic system as a 'functional mar-
ket economy'. For Romania, this happened by the end of 2003: 'Ro-
mania can be considered as a functional market economy once the
good progress made has continued decisively' (European Commis-
sion 2003,7).
•	The economic approach: the economic transition is over when the
country's yearly gdp reaches the pre-transition maximum level.
The Romanian economy has reached this value in the years 2002-
2003, according to wb and un estimates, respectively, at mar-
ket prices, current prices, in usd (see United Nations Common
Database at http://unstats.un.org/unsd/cdb). It is significant that
countries, which were forced to follow reform paths in belligerent
and/or violent forms, have reported limited economic growth and
'not only lag behind the other transition countries in the region, but
also, as of today, have not even reached the levels they had attained
in 1989' (Bitzenis 2007).
•	The management approach: the economic transition is completed
at that point in time when the strategic objectives are reached (in
terms of gdp, private sector dimension, etc). For example: the pri-
vatisation target was achieved by 2003 (figure 5).
•	The econo-statistics approach: based on time-frequency series anal-
ysis, which will be further discussed.
As all the above may present cross - influences, a correlated approach
is recommended. In the case of Romania, the different approaches con-
figure 6 Time evolution ofthe rol/usd exchange rate, at logarithm scale (based on
the data published on the National Bank of Romania web site, www.bnr.ro)
verge to indicate that economic transition reached its end by 2002-2003.
This conclusion will be supported by the conclusions of the next section.
Analysis Tools for the Transition Path
The transition process was not linear. Besides its trajectory and duration,
it is interesting to assess when the transition ends and identify if other
elements have occurred on the transition path. There are also more so-
phisticated tools to analyze the transition path, behavioural patterns and
specific features. For example, from the point of view of the determinis-
tic chaos (i. e. short-run predictability), the analysis of time series might
lead to interesting results. A time series might be anything between ran-
domness and determinism; in turn, the determinism might be chaotic
(i. e. sensitive to initial conditions) or classic (non sensitive).
The research methodology is based on the analysis of the time series of
macroeconomic indicators, by statistical methods; the macroeconomic
indicator chosen: the us dollar (usd) exchange rate. The figures were
collected based on the daily values reported by the Romanian central
bank (Banca Nationala a Romaniei) over a period of sixteen years of Ro-
manian recent history: 1990-2005.
This period includes the interval used previously for presenting the
privatisation process: 1992-2004 (figure 5). A comprehensive research
was conducted on the evolution of the Romanian currency exchange rate
(rol) with respect to the us dollar (usd). Figure 6 depicts the overall
evolution. The logarithm scale was used because of large variations of
the indicator (up to 104).
The analysis was performed taking into consideration three criteria:
•	System complexity (this is not necessarily the whole economy, but
part of it, as monetary system).
•	Sensitivity to initial conditions (as a pointer of the predictability).
•	Persistence of the evolutionary trend (indicating the similitude
with the random-walk behaviour, i. e. the lack of deterministic pre-
dictability in favour of probabilistic predictability).
In the nonlinear dynamics theory, the corresponding quantities for
the above mentioned criteria are the correlation dimension, the largest
Lyapunov exponent (Bask 1996) and the Hurst coefficient (Tsonnis et al.
2001).
The degree of complexity of the underlying system is quantitatively
given by the correlation dimension referring to the minimum number
of variables that is needed to replicate the dynamic system. The last one
is the same with the dimension of the (strange) attractor characterizing
whichever one of the topological-equivalent systems (Takens 1981). It is
worth noting that the number of variables that replicates the system is
fractional, according to the theory of the strange attractors (Kantz and
Schreiber 1997).
The sensitivity to initial conditions could explain the spreading diver-
sity of the present - day economic systems, even if they were starting
from quite similar prerequisites. This is a basic feature of the chaotic sys-
tems. Hence, one way of revealing the existence of deterministic chaos in
a time series is to measure the degree of divergence of nearby orbits in
the phase-space. Such divergence 6(t) can be measured by the Lyapunov
exponents A, and the presence of at least one positive exponent is taken
as indicating to what extent the evolution is predictable over a specific
time range (Rosenstein 1993):
As far as concerns the persistence of the evolutionary trend, the Hurst
exponent is an additional pointer for making the distinction between
randomness and causality; besides, its value of 0.5 separates the per-
sistent and anti-persistent evolutionary trends (Stanley and Mantegna
2004). It is defined by the time evolution of the root-mean-square fluc-
tuation of the averaged displacement over all possible positions to (the
bars indicate the average):
S(t) = 6(0) • eAt.
(1)
The values of the Hurst exponent (H) range between 0 and 1. A value
of 0.5 indicates a true random walk (a Brownian time series). In a ran-
dom walk there is no correlation between any element and a future ele-
ment. A Hurst exponent value 0.5 < H < 1 indicates 'persistent behaviour'
(e. g. a positive autocorrelation). If there is an increase from time step i -
1 to i, there will probably be an increase from i to i + 1. The same is true
for decreases: a decrease tends to follow a decrease. A Hurst exponent
value 0 < H < 0.5 indicates a time series with 'anti-persistent behaviour'
(or negative autocorrelation): an increase tends to be followed by a de-
crease, or conversely, a decrease will be followed by an increase. This be-
haviour is sometimes called 'mean reversion'.
Some results of the research conducted in Romania are further pre-
sented. The analysis of the transition path - using all the above criteria -
has revealed three intervals, as follows (figure 7):
i.	1990-1997
ii.	1998-2001
Iii. 2002-2005.
Obviously, the three intervals are splits of the diagram depicted in fig-
ure 6.
Interval i (1990-1997) is characterized by simple underlying dynam-
ics and low fractal dimension, weak sensitivity to initial conditions, and
a very aggressive, positive long-run trend. After the social and political
events that provoked the fall of the totalitarian regime, the inertia of
the total deterministic evolution of the economy of command that had
been legally operated until the end of 1989 prolonged the effect for sev-
eral more years, when the economy diminished to work as a 'national
holding', and both the lack of an adequate institutional feed-back and
the social pressure led to political decisions of maintaining the exchange
rate at artificial constant values. Thus, the accumulation of the demand
pressure upon the slow-developing supply led to an increased import of
goods; the insufficient feed-forward of a weak monetary system could
not balance the long response time of production, and explosive cor-
rections occurred in the form of stepped jumps of the exchange rate
ROL/usD (see figure 7a). The exchange rate is deterministic and 'very'
predictable from the long-run perspective (short-run understood), with
a lot of angular points. The main features of this time interval are sum-
marized in table 2.
Interval ii (1998-2001), as figure 7b shows, is characterized by in-
creased correlation dimension, i. e. more complex dynamics, and clear
positive values for the largest Lyapunov exponent. All the usual hypothe-
ses for chaotic dynamics are fulfilled, and this is the domain with sig-
nificant functional changes toward the open market economy. The pos-
itive long-run trend continues, but the averaged relative variation per
year of the exchange rate is a hundred times lower (72.27% compared
to 7264.29% for interval 1). The exchange rate remains predictable both
from the short- and long-run perspective (table 2), exhibiting a much
smoother curve.
The interval iii (2002-2005) - see figure 7c - is closer to the random
walk behaviour, as pointed out by the anti-persistence of the short run
trend. It might be a chaotic deterministic, with a higher volatility than
the previous one, or stochastic, or mixed; in order to decide in this mat-
ter, further analysis is necessary. To simplify, we only mention here that
the evolution remains of causal type. For the purpose of this paper, it
is important that there are arguments to state that the transition seems
to come to its end by the end of 2001 due to at least two reasons: the
first is the disappearance of the long-run trend and, consequently, the
beginning of the steady state regime, and the second is the complexity of
the structure revealed by the fractal dimension of interval iii. As stated
in the literature (Schwartz and Yousefi 2003), a free market economy in a
steady state regime contains a strange attractor with a correlation dimen-
sion around 4.5, and that is the case for Romania (table 2). The exchange
rate predictability is weak, with small deviations from the nearly hori-
zontal baseline (excepting a significant fall in March 2005 - see figure 7c).
This is the consequence of the new settled macroeconomic equilibriums,
very sensitive to the environmental stimuli, but also with high capacity
to recover the functional 'working points'.
Significantly low predictability is consistent with the long run be-
haviour, which in fact has no trend, and the curve approaches a random
walk appearance (figure 7c). In a steady-state-running economy, as men-
tioned by other authors, a positive real part of the largest Lyapunov coef-
ficient seems to be normal. Moreover, the greater the correlation dimen-
sion, the more complex the economic system (and the monetary policy
of the Central Bank).
The Romanian transition trajectory seems to be of the type iii —> iv
—> i. A smaller Lyapunov exponent is consistent with a higher degree
of short run predictability in an economic system; for the first period,
the exchange rate is predictable from the long run perspective (posi-
5.0
(A)
3.5-
1998	1999	2000	2001
4.6-
(C)
4.4 -
2002	2003	2004	2005
figure 7 The dynamics of the three intervals of the transition period (1990-2005) -
the evolution of the usd exchange rate against Romanian rol
tive trend). The smaller Lyapunov exponent characterizing the period
of structural changes indicates smaller sensitivity to the initial condition
together with a non-randoml evolution toward a more complex system
characterizing the steady-state-regime.
Overall, it is important to note that time series analysis indicates the
table 2 The three time intervals and their characteristics (based on the evolution
of usd exchange rate against Romanian rql)
Characteristics	Interval i	Interval ii	Interval iii
Time range	1 January 1990- 31 December 1997	1 January 1998- 31 December 2001	1 January 2002- 31 October 2005
Complexity (system dimension)	1.74	3.09	4.45
System sensitivity to initial conditions	Weak	Strong	Strong
Trend	Persistent	Persistent	Anti-persistent
Type of predictability	Long-run, deterministic	Long-run, chaotic deterministic	Short-run, chaotic deterministic
end of 2001 as the end of the transition process - which confirms the
previous conclusion (end of transition process in Romania: 2002-2003).
Open Closing: eu Accession Process -
A Different Type of Transition
As the eu accession is a transition process itself, Romania - like other
Eastern European countries - has been 'in transition process' twice.
Fortunately, the transition to the 'functional' free-market economy is
naturally connected to the eu accession process (Scarlat and Richevaux
2006). Several impact studies were conducted in Romania under pais
(Pre-Accession Impact Studies): pais i (2001-2002), pais ii (2003-
2004), pais iii (2005-2006). Overall, the pais studies were intended
to provide recommendations to the Romanian Government to support
negotiations with the European Commission.
Under pais i (Scarlat, Popescu, and Warner 2002) primary and sec-
ondary research (desk research and formal face-to-face interviews) was
conducted. The main objective of the study was to provide an overview
of the institutional requirements for implementing the acquis commu-
nautaire in Romania and to provide a set of recommendations.
Most of the above issues and recommendations were presented to the
ria International Conference in Sofia (Scarlat 2003b). As these recom-
mendations were acknowledged by the Conference participants coming
from ex-communist countries, it means that this set of recommendations
are applicable not only to Romania but to most of the ex-communist, eu
accession countries.
The studies conducted under pais ii (Fuerea et al. 2004) confirmed
that Romania - like other eu candidate countries in economic transition
- is aiming at a 'mobile target': harmonization of the Romanian legisla-
tion with the acquis communautaire is based on two processes (transpo-
sition of the Community legislation into the Romanian legislation and
rendering compatible the national normative measures which transpose
the acquis with the provisions of the Community legislation). The re-
search revealed that the concordance degree of the Romanian legislation
with the eu legislation (in force in 2002) was approximately 75%. The
problem is that the acquis covers more than 90,000 pages (out of which
about 20,000 are continuously being amended!)
The eu accession process was a different type of transition - not only
planned but rigorously regulated and monitored. Following the eu acces-
sion, the eu integration process is a different topic, both quantitatively and
qualitatively different.
Conclusions
•	The general economy model that was presented ('Scarlat Model')
is a useful analysis framework to discuss the transition features -
mainly its path but also transition duration, delays, priorities (pri-
vatisation vs. decentralisation) - ultimately the transition strategy.
•	The sophisticated research tools applied for transition path analysis,
based on the theory of deterministic chaos, lead to revealing results:
in the case of Romania, three neatly distinct intervals were identified
and described. According to its transition policy and development
strategy, the Romanian transition trajectory seems to be of the type
Iii (centrally planned economy) —> iv ('social market' economy)
—> i (free-market economy).
•	Despite several improvements still expected to be made, the basic
structural changes towards a functional market economy in Roma-
nia were implemented up to the end of 2001. It is important to note
that time series analysis indicates the end of 2001 as the end of the
transition process - which confirms the previous conclusion (end
of transition process in Romania: 2002-2003).
•	This model was applied in the case of Romania but it is fully appli-
cable to all Eastern European countries and not only Romania. In
this case, interesting comparative analyses might be performed.
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Management Mistakes as Causes of Corporate
Crises: Countries in Transition
Drago Dubrovski
A corporate crisis can be defined as a short-term, undesired, un-
favourable and critical state in a company which has derived from both
internal and external causes and which directly endangers the further
existence and growth of the company. Although the state of crisis in
the company can be affected by various interrelated external and in-
ternal causes, which as to intensity and appearance vary by company,
the essence of the causes surely lies in the management of the company.
During the period of transition all types of explained management mis-
takes could be found in Slovene corporate systems. Despite the fact that
the hypothesis of an existing pattern of management mistakes which
follows the changes in political and economic environment cannot be
completely reliably confirmed, some outlines of such a pattern are in
spite of all to be seen. If there is really a more or less valid pattern of
management mistakes in corporate crises, and these mistakes appear
differently with regard to changes in the political and economical envi-
ronment in countries in transition, this could help decision makers to
form a more grounded choice in the process of appointing new crisis or
restructuring managers, every time according to their most appropriate
competencies.
Key Words: crisis, internal causes, management mistakes,
restructuring, transition, Slovenia
jEL Classification: M10
Introduction
From business practice and academic literature it is well known that
management mistakes can be a prevailing internal cause of corporate
crisis. However, the management mistakes are usually treated as a homo-
geneous group, neglecting that they are actually deriving from different
bases, circumstances and periods. A classification of management mis-
takes is sometimes recommended, especially when crisis solving or radi-
cal changes are needed in a company in order to improve the chances for
further existence and faster development.
Dr Drago Dubrovski is an Assistant Professor at the Faculty
of Management Koper, University of Primorska, Slovenia.
Managing Global Transitions 5 (4): 333-354
In this empirical and comparative article we tried to find and form a
pattern of management mistakes characteristic for a country in transi-
tion. Based on several empirical researches and the author's own strate-
gic management and restructuring consultancy practice in 55 companies
from various branches in Slovenia from 1994-2006, working also as crisis
management, some managerial implications are formed as a conclusion
to the paper. Despite the fact that the hypothesis of an existing pattern
of management mistakes which follows the changes in the political and
economic environment cannot be completely reliably confirmed, some
outlines of such a pattern are in spite of all to be seen.
This article starts with an explanation of definitions of some individ-
ual categories needed, which follows in the empirical part. A connection
between management mistakes and corporate crisis is explained. On the
basis of theoretical background and summaries from empirical findings,
the concluding remarks are formed, together with applicable recommen-
dations for business practice and further theoretical researches by using
the case of Slovenia, which could also be applied in many related coun-
tries in transition.
Crisis and its Characteristics
In everyday reports, various professional studies, entrepreneurial and
corporate papers one can often encounter quotes about natural disasters,
various conflicts, business difficulties of larger and smaller proportions
affecting companies, particular industries and even countries, which are,
in one way or another, linked to crises. A crisis is an often used term
for difficult, dangerous and future decisive situations and refers to an
extremely wide area of natural, social, economic and mental processes
(e. g., political crisis, economic crisis, financial crisis, oil crisis, environ-
mental crisis, moral crisis, crisis of art, crisis of values, health crisis,
middle-age crisis, etc.). In colloquial language the term crisis most of-
ten has a predominantly negative connotation, since it is connected to
most varied unpleasant situations, and difficulties.
In regard to our debate we are interested in a company crisis (i. e. cor-
porate or organisational crisis), referring to business or non-profitable
and manufacturing or service organisations.
A crisis is inseparably connected to contemporary companies (organi-
sations). With the rise of complexity of companies, which is interactively
connected to various social spheres, the possibilities for the emergence
of a crisis rise again, while the range of causes that can lead to a crisis
also rises. If all other crises are added to this domain, we may consent
that a crisis is as 'inevitable as death and taxes' (Fink 1986, 67) in today's
business. 'Sooner or later, every business will be confronted with a crisis
of some type. Its ability to manage the crisis successfully can mean the
difference between survival and disaster.' (Spillan 2003).
When talking about a company crisis, a crisis can be defined as a short-
term, undesired, unfavourable and critical state in the company which
has derived from both internal and external causes and which directly
endangers the further existence and growth of the company (Dubrovski
2004b; cf. Barnett and Pratt 2000; Barton 1993, 2; Buchalik 2004, 30;
Fink 1986, 15; Heath 1998, 13; Kraus and Becker-Kolle 2004; Lerbinger
1997,4; Mitroff, Pauchant, and Shrivastava 2006,51; Moore and Seymour
2005,	31; Neubauer 1999, 8; Roux-Dufort 2003, 51; Slatter 1987, 61; Smith
2006,	7).
It is exactly from the indicated characteristics of critical circumstances,
in which the management might find itself, that particularities of manag-
ing a company in crisis differ from the 'classical' strategic management.
Crisis management is of short-term nature, by all means, when the sur-
vival of the company must be given priority in comparison to develop-
mental objectives. Crisis management, therefore, is a particular part of
the contemporary strategic management, characteristic of a company in
serious difficulties, when the afore - mentioned characteristics of emer-
gency circumstances are to be accounted for. Due to ever rising turbu-
lences in the internal and external environment, the 'classical' manage-
ment actually acquires a rising number of characteristics of crisis man-
agement.
Hart, Heyse, and Boin (2001) point out that the practice of crisis man-
agement has significantly changed during the recent period, which is in-
dicated by the following characteristics (cf. Boin and Lagadec 2000): the
society has transitioned from the industrial into a more risky one, glob-
alisation enables a more rapid and simplified movement of products,
services, technology, people and information, therefore, in the environ-
ment of such a complex network of links the level of risk increases; if
the level of safety in the society increases, the people and institutions be-
come more vulnerable when something unpleasant, dangerous happens;
instead of a heroic answer to a crisis, multi-domain and cross-border
measures are required (a crisis affects both the local and the regional as
well as the national level, occasionally the multinational as well); instead
of episodic measures during a crisis, a continuous crisis management is
to be developed (preventive and curative treatment and learning from
the crisis).
A crisis, therefore, is an initiator and orienteer of rebuilding a com-
pany. Most often, a prior solution of an acute crisis, which could lead
a company not only backwards but even into a downfall, is a precondi-
tion for the achievement of renewal of a company. Successful renewal of
a company is often a consequence of a previous severe crisis, since re-
constructing the corporate processes and structures that enable efficient
and successful operation would not have taken place if the company had
not been forced to change the (less successful) methods of operation and
strategic orientations.
Here, referring to the supplied and stated definition of a crisis, a crisis
usually emerges due to an intertwined impact of external and internal
causes, and an analysis of these and of their connectivity is of key signif-
icance for healing, i. e. for overcoming crisis.
Symptoms are to be Detected and Causes of Crisis Resolved
symptoms of crisis
Symptoms are signals which point to or predict a crisis. Their timely de-
tection and response by the company, with proper actions and activities,
can abate consequences the of an already present crisis or even prevent it.
It is, therefore, of extreme importance not to overlook, disregard or un-
derestimate these signals, although they are not to be substituted with the
actual causes of the crisis. Symptoms of the crisis, one may say, simulta-
neously permit various causes of the crisis; they signal - at the same time
- the crisis, yet without being the cause of its origin.
Symptoms occur in different areas and often appear to be combined
and linked together. It is very important to take into account that there
is a time gap between their emergence and occurrence (process, appear-
ance) towards which these signals point. Due to this, it is all the more
more dangerous if the company does not perceive these warning signals
or disregards them. When the signals are perceived, they are to be ana-
lyzed and interpreted in order to determine causes for the emergence of
the events which indicate them, and to do away with or abate the causes
by using proper measures and approaches.
In real life situations, many unsuccessful attempts are made to solve a
crisis due to an inappropriate approach at the very beginning (Augustine
2000, 3; Platt 1998, 133). Numerous assessments of crisis presence and
the measures required to solve it are based solely on various analyses of
accounting reports (balance sheet, statement of condition, statement of
financial flows and consequently derived indicators), while overlooking
the fact that the accounting reports be a solely recorded consequences
of past decisions and it is not necessary that the accounting reports are
trustworthy reflection of the present state of conditions in the company.
The accounting reports are absolutely necessary for the analysis of the
present position of the company, however, they are not sufficient to reach
the decisions for solving a potential state of crisis.
Perception of clear and underscored symptoms of a crisis cannot, in
principle, represent a problematic task in case of a thorough and suffi-
ciently well skilled management (Roux-Dufort (2003, 23) indicates the
following equation of a crisis: 'crisis = accumulation of ruined equilib-
riums + ignorance of management', pointing out the insufficient 'vig-
ilance' of management). Most often, even continuous and direct com-
munication with personnel and with the representatives of organisations
from the environment and repeated presence in the key locations of the
corporate process (visits to consumers and suppliers, warehouse inspec-
tions, inspections of the manufacturing process, etc.) should be sufficient
and can have a beneficial impact, among other factors, on the motiva-
tion of the employees (the so called management by walking-around).
An accurate interpretation of the causes for the emergence of a crisis and
possibilities for its removal is, indeed, a more complex task.
In the period of emergence of a crisis the management plays a vital
significant role in regard to timely and sufficiently watchful perception
of the symptoms indicating a potential crisis. If the management does
not react to these symptoms or reacts incorrectly, the crisis is almost in-
evitable.
causes of crisis
In comparison with symptoms, on the other hand, which only point to
the state of crisis, the causes are actually 'responsible' for the present po-
sition. When talking about crisis solving, one must consequently analyze
and do away with its causes without focusing on its symptoms. The anal-
ysis of proper causes of occurrence of a certain state is of extreme impor-
tance since it identifies those areas (processes, appearances, events) the
effects of which must be restrained and reduced. Addressing the wrong
causes means further useless waste of time, money and effort, which only
intensifies the state of crisis.
In spite of the fact that the literature states various classifications of the
causes of crises (some sources are e. g. Bellinger (1962,58), Buth and Her-
manns (2004), Kraus and Becker-Kolle (2004,15-16), Mitroff, Pauchant,
and Shrivastava (2006, 51), Müller (1986), Pate (1999, 55), Richardson
(1994), Slatter (1987, 25-55), Turner and Pidgeon (1997), Wildemann
(2004,193)), it is nevertheless possible to say that the definitions of the
causes are, more or less, similar but differ in their terminology, time
when they were drafted, the domain that they refer to and the type of
business which is predominant.
The causes of emergence of crises may be divided into: external, and
internal.
The external causes of crises are usually those that have emerged in the
environment of a company, while the latter had no significant influence
on their emergence. Therefore, they are frequently denominated as ob-
jective or exogenous. The internal causes, on the other hand, are those
that have emerged within a company and, hence, are denominated as
subjective and endogenous.
The external causes, therefore, are certain changes in the environment
of a company that have not been timely recognised by the latter and have
not been timely and appropriately reacted to. The same change in the
environment can have an unfavourable and retarding symbol for one
company, while having a favourable and accelerative indication for an-
other. Since the change is the only constant in today's life and business,
crises actually continuously emerge.
Even state aids can be classified among the external causes, in spite of
the fact that the budgetary funds were particularly intended for resolving
or preventing crises, if the management of a company does not prepare
or accept appropriate measures due to the external funds received, but
seems satisfied with cosmetic corrections, which can only postpone the
emergence of a crisis (more on this in the last section).
Examples of the internal causes can be found in the following domains
(Dubrovski 2004a, 37-38):
•	improper competences of the management,
•	retarding organisation,
•	uncompetitive market position,
•	problems in the personnel management domain,
•	over-expensive production,
•	neglected financial function,
•	inefficient informational system, etc.
The listed causes are to be treated as a helping-tool in analysing the
position of a company, since it must accounted for that each company,
along with its processes, products, history and the involved participants,
represents a peculiar corporate system and, therefore, must also be stud-
ied as such.
For the emergence of a crisis the management frequently 'blames'
a particular individual, i. e. the last event (actually the trigger) that is
merely the last drop over the brim; the reasons for the crisis are to be
sought in all other drops that have filled the glass to the top. The motive
is the direct effective cause, while the crisis actually emerges on its basis.
The motive can be lesser, in principle a less significant event that trig-
gers a chain reaction of all other impacts, whereas their roots (causes)
might extend for many years back into the past. As well as in regard to
symptoms, it must be pointed out that the motive is not the fundamen-
tal cause for the crisis but the cause is still to be discovered. Resolving
the crisis, therefore, must not be orientated exclusively towards the mo-
tives, since these would not have been fatal if the factual causes that had
brought about the culmination of problems, i. e. the crisis itself, had not
been previously present.
An analysis of the true causes for the emergence of a certain state
is of extreme significance, since those domains (processes, phenomena,
events), regarding which the effects are to be limited or done away with,
are identified by utilising the analysis. Dealing with erroneous causes
represents a further useless loss of time, money and efforts, which only
makes the critical situation even more acute.
Although the external causes play the key role for the emergence of a
corporate crisis in many cases, those that emerge within a company it-
self nevertheless predominate. The external environment, in principle,
represents the aggregate of uncontrollable variables that have to be ad-
justed to by the company, along with its internal processes, structures,
strategies and the marketing mix, which represent the aggregate of con-
trollable variables. If a company does not adjust to the external variables,
then it may be possible that the internal causes exist for this reason. Or to
put it differently: potential external causes of a crisis can be successfully
eliminated by internal changes (adjustments) in the company.
It was already pointed out in defining a crisis that, in principle, both
internal as well as external causes, when intertwined, brought about
a critical situation (the so called multi-causability of a crisis or also
'polymorphous phenomenon' according to Hensen, Desouza, and Kraft
(2003)). Mellahi and Wilkinson (2004) state that the organizational fail-
ure is connectively influenced by environmental factors (technological
uncertainty, regulatory changes, economic changes), ecological factors
(density, size, age, industry life-cycle), organizational factors (manage-
ment tenure, homogeneity and successions, past performance) and psy-
chological factors (managerial perceptions). According to Hamilton and
Micklethwait (2006,1) the main causes of failure can be grouped into six
categories: poor strategic decisions; overexpansion and ill-judged acqui-
sitions; dominant ceos; greed, hubris and the desire for power; failure
of internal controls at all levels from the top downwards; and ineffectual
or ineffective boards.
When the management merely analyzes the causes it, almost without
exception, overestimates the external causes while underestimating the
internal ones, which is reasonable since the latter are a direct criticism
of the same management up to the point in time in question. Therefore,
in the case of a detailed analysis of the causes, an objective and neu-
tral, - with regard to the implementer -, overview of the causes must be
certainly prepared, which may be most effectively carried out by skilled
consultants, owners, debtors, industrial experts and others, and not be
left to the existing management.
Researches also show that people tend to overestimate their own in-
fluence on successes while they blame failure on external uncontrollable
factors (Mellahi and Wilkinson 2004).
The key cognition in this part of the debate is that the analysis of the
causes of a crisis must not be left solely to the views of the (existing) man-
agement, since its selection of causes can lead to a wrongful resolution of
the crisis, which only deepens the latter.
Management Behaviour in the Crisis Evolution Process
In regard to a company, the consequences of a crisis are visible both in-
ternally as externally. Generally they can be classified into two groups:
•	worsening of the indicators of the business performance (profitabil-
ity),
•	altered behaviour of the involved participants.
Decline causes managers to dislike and avoid one another, conceal in-
formation, and deny responsibility. Secrecy, blame, isolation, avoidance,
lack of respect, and feelings of helplessness create a culture that makes
an already bad situation even worse. Once a company is caught in this
spiral, it is hard to simply stop and reverse direction (Kanter 2003). In a
stressful situation managerial inflexibility usually increases (Slatter 1987,
67) and shortens the time horizon (short-term values become more im-
portant).
When a company faces a critical state, in most cases the behaviour of
internal (employees, the management, unions) and external participants
(owners, debtors, suppliers, competitors, consumers, state institutions)
alters, representing different reactions (even serious conflicts) to such a
state of the company.
Even in a normally operational company natural contradictions in
expressed interests (e. g. employees and owners, insured and uninsured
creditors) exist and are balanced (counter-weighted) in normal circum-
stances. Thus the company actualises the interests of all participants. In
an acute crisis the balances are lost, since each participant attempts to
secure its own interests that can only be achieved by the way of violat-
ing the interest domain of another participant. Contradictions, there-
fore, extremely strengthen during an acute crisis, and the divergence of
interests is more intensified. Regarding their role and position, not all
participants of a company have the same interest nor the same power or
influence. Since individual participants attempt to achieve different ben-
efits, their interest behaviour is also different, both inside the company
as well as outside it, or generally in regard to it.
This cognition is of key importance for crisis healing projects and
must not be neglected nor underestimated by the crisis management in
any case. The emphasised divergence of interest, which is characteristic
of the period when a severe (acute) crisis emerges, even further compli-
cates the already demanding internal and external relations of the com-
pany. Besides this, it must be accounted for that each interest group has
its own indicators, criteria and time frames for judging the successful-
ness of the crisis healing project, which is particulary significant in the
crisis healing phase.
Since the management cannot be directly blamed for the emergence of
a crisis, in connection to the mentioned guidelines for operating in crit-
ical circumstances, the focus must be two key problems that are directly
connected to the level of successfulness, both of preventing crises as well
as healing crises:
• measures are starting to be carried out too late when the possibilities
of a favourable outcome are very limited;
table 1 A pattern of management contribution in different phases
of crisis development
Phases of crisis	Contribution of management
development	Positive	Negative
Successful leadership
Facing real causes of serious prob-
lems and taking actions to sup-
press these causes
Immediate, deep and radical use
of the right combination of crisis
management measures
Crisis emergence
Crisis identification
Crisis healing
Crisis resolution
Performing revolutionary meth-
ods of changes to reach a com-
pany renewal (restructuring,
reengineering)
Unsuccessful leadership
Overlooked or neglected
symptoms, self-deception
Lack of realism, passive-
ness, dealing with inappro-
priate causes or failure to
take right measures
Erroneous, untimely or
insufficiently integral or
radical measures
•	measures are begun to be carried out insufficiently generally and
radically, thus not relieving an acute crisis which even indicates the
down-fall of a company.
If the new management is successful at healing the crisis, the prior
management - which personally often experiences this success as a fail-
ure - attempts to devaluate the latter, so that the prior state of affairs is
represented as non-problematic or the possible achievement of the com-
pany as a consequence of its efforts in the previous period.
The management, therefore, may actually aggravate to the develop-
ment of crisis in:
•	the phase of emergence (unsuccessful leadership),
•	the phase of crisis identification (overlooked or neglected symp-
toms, erroneous causes),
•	the phase of stopping the negative trends (lack of realism, passive-
ness, dealing with inappropriate causes or failure to take measures),
•	the phase of crisis resolution (erroneous, untimely or insufficiently
integral or radical measures).
The emergence and development of a crisis can be significantly influ-
enced by the management, regardless of whether the critical period had
been strated predominantly by the internal or external causes (table 1).
Types of Management Mistakes
The emergence of a crisis is influenced jointly, i. e. parallel and in an in-
tertwined manner by both the internal and external causes (events, phe-
nomena and processes). Very few critical circumstances exist that are an
exclusive consequence of the first or the second type of causes.
Although the state of crisis in the company can be affected by vari-
ous interrelated external and internal causes, which as to intensity and
appearance vary by company, the essence of the causes surely lies in the
management of the company (Clarke, Dean, and Oliver 2003; DiNapoli
and Fuhr 1999, 6; Hamilton and Micklethwait 2006, 1; Kraus and Gless
2004,116; Müller 1986,376; Platt 1998,16-17).
The above assertion is confirmed by various researches and even more
by empirical data deriving from analyses of individual cases. Accord-
ing to Bibeault's studies (1982, 35), in 70% of cases the problems can be
attributed to internal causes and, among the latter, the management
predominates. Platt (1998, 16-17) mentions the analysis of causes of
1,335 companies, based on opinions of crisis managers, official receivers,
bankers and other creditors, according to which 87% of causes for the
failure of companies are attributed to internal causes, with 'inefficient
management' in the first place (lack of capital and over-extensive in-
debtedness follow). Such a cause was also indicated in the first place by
the research of the consulting house PriceWaterhouseCoopers (DiNapoli
and Fuhr 1999, 6). Similar findings are mentioned by Müller (1986, 367)
and the Australian study (Clarke, Dean, and Oliver 2003), which hold
that a corporate crisis is actually a 'crisis of the management', since, ac-
cording to them, the management is the most significant cause for the
crisis. Müller even quotes the German banker Hermann J. Abs that bad
sectors do not exist, but poorly led companies (Müller 1986, 617). In the
context of the same findings can be placed the analysis from 30 years ago
by Argenti (1976, 123), which stresses that the very 'bad management'
is the point of departure for all other causes that could have even been
prevented by a 'good management'. Otherwise, Argenti cites 12 different
causes of crises, while, as already mentioned, the inappropriate manage-
ment occupies the first position. Kraus and Gless (2004,116) point out
that at least 2/3 of corporate crises originate from mistakes of the man-
agement both at the operative level (internally) as well as in strategic
guidance (externally).
Management mistakes can be divided into three groups:
•	different acting of the management which proves to be inadequate
or less appropriate, regarding the perceived problem (wrong or bad
business decisions, mismanagement),
•	omission of the correct and timely acting when any decision is
made, despite the fact that actions are necessary (stoppage or redi-
rection of negative flows, lost opportunities, etc.),
•	immoral behaviour (unethical decisions, abuses, deceptions, ac-
counting scandals, criminal offences).
While the erroneous managerial decisions (e. g. unelaborated invest-
ments into new technologies, a takeover of a company), which can be
influenced by external causes, are visible, ascertainable and provable, the
omission to act, on the other hand - which was necessary in a particular
moment - is less ascertainable, although this very group can be consid-
ered as the most dangerous causer of crises. Hartley (2005, 2) divides
management mistakes into two main groups: mistakes of omission (no
action was taken) and mistakes of commission (bad decision, wrong ac-
tions taken, etc.). Evaluation of the successfulness of the management
will often be possible in a longer period by a comparison with the com-
petition or with the average of the industry, while actually one can never
ascertain whether a hypothetically different management would have
been more successful in the same circumstances. What does e. g. an over-
looked business opportunity taken by the competition mean? What does
developmental (technological and programme) passiveness mean? What
does unpreparedness for carrying out fundamental interventions into in-
efficient structures and processes mean? All these cases are not about er-
roneous business decisions, but about a lack of whatsoever decisions and
practices that can trigger a severe crisis as a consequence of their adop-
tion of an erroneous decision.
Sheppard and Chowdhury (2005) pointed out that there are four es-
sential points one needs to know in order to understand organizational
failure:
•	failure is not typically the fault of either the environment or the or-
ganization, but rather it must be attributed to both of these forces,
as failure is the misalignment of the organization to the environ-
ment's realities;
•	because failure involves the alignment - or misalignment - of the
organization and its environment; it is, by definition, about strat-
egy;
•	because failure deals with strategy, we can make choices to acceler-
ate it or avoid falling into its clutches;
•	because organizational failure can be avoided even after a decline -
rapid or prolonged - the ultimate failure of the organization really
stems from a failure to successfully execute a turnaround.
In business literature regarding mistakes of the management various
theoretical debates can be found on the question of how such mistakes
came about. On the one hand, classical industrial organization and or-
ganization ecology scholars have typically assumed a deterministic role
of the environment and argued that managers are constrained by exoge-
nous industrial and environmental constraints leaving them with little
real strategic choice, and hence the managers' role should be ignored.
Sometimes a change is hard to predict and it heightens uncertainty for
key organizational members. Criticism is related with the question of
why it is that firms in the same industry facing the same industry-level
constraints fail while others succeed. In addition, studies have demon-
strated that performance is determined by the firm strategy more than
by the industry.
On the other hand, the organization studies and organizational psy-
chology literature take a more voluntaristic perspective and argue that
managers are the principal decision makers of the firm and, conse-
quently, their actions and perceptions are the fundamental cause of or-
ganizational failure. Critical remarks of the latter are connected with
over-reliance on internal factors (Mellahi and Wilkinson 2004).
Mistakes are a constitutive element of the process of strategic man-
agement and, due to an unpredictable and turbulent environment, will
always exist. There is no 'right' or 'wrong' in making business decisions -
decision-making is not like mathematics where you can prove that some-
thing is 'right'. Business decision-making is far more situational - the
right decision today is really just the 'best decision' based on the cur-
rent situation, what is known, and what the options are' (Kow 2004).
Omissions of the correct and timely acting are of key importance for
further development of a company, when measures, activities, develop-
mental programmes and so on are not being carried out, which repre-
sents a loss of opportunities that would enable further existence, i. e. a
more rapid growth, while simultaneously the competition is taking ad-
vantage of the same opportunities and increasing its power at the cost
of the inactive company. 'Even the most successful organizations make
mistakes but survive as long as they maintain a good 'batting average' of
satisfactory decisions' (Hartley 2005,333).
Empirical Findings
the case of transition period in slovenia
The period of transition has caused similar macro-economic conse-
quences in all transitional countries. At the beginning of the transitional
period the countries lost markets in Eastern Europe and in the Balkans,
which initially led to a decline in gdp and a higher unemployment rate.
Such circumstances led to a decreased aggregate demand and supply, i. e.
to stagnating economies. The companies from transitional countries,
sometimes facing deep crises, were forced to refocus their operations
towards the markets of the eu, which required integral and drastic re-
structurings. A rapid and expansive privatisation of companies, in state
ownership, was the primary objective of all socialist countries, since it
was expected that the privatisation and autonomy of companies would
trigger an increased interest both on the part of the labour force and on
the part of the management for improvements in efficiency and success-
fulness of ventures.
Slovenia, according to numerous indicators, is completing the tran-
sitional period that began in 1991 with the formal emancipation from
the prior federal country of Yugoslavia and was followed by the formal
transition from the socialistic social order, by the transition from the
one-party party system to the pluralistic parliamentary system and the
transformation of the state (social, public) ownership into the private
(the process of privatisation).
The political changes had profound economic impacts, particularly
for those industries and companies that were entirely or predominantly
oriented to the relatively favourable Yugoslav market, which was practi-
cally completely closed in that period due to the events that followed the
disintegration of Yugoslavia. Therefore, the managements, which were
not accustomed to highly competitive environments typical of global
markets, were forced to seek substitutive markets actually 'over-night',
whereas superior quality, attractive prices and an appropriate marketing
approach had to be provided. It can be concluded from the stated excur-
sus that the position of an individual company within an industry must
be monitored from the perspective of the circumstances in the industry,
which can be identical to the economic conditions in the region or the
country; it may also be better or even much worse.
Profound revolutionary changes both on the domestic as well on the
world scale (globalisation) had brought tremendous pressures on the
existing management. At that time, extensive manufacturing orienta-
tion dominated, typical of all socialistic economies, a spontaneous (ad-
hoc) approach prevailed in comparison to a planned and systematic one.
There was a deficit in knowledge in other domains (primary marketing)
and a poor acquaintance with the international trade (varied among in-
dustries), since most of the transactions were carried out in the internal
(ex-Yugoslav) market.
Consequently, the first stage of the transition (1991-1996) was char-
acterised not so much by erroneous (bad) management decisions but
predominantly by omissions to act, i. e. preparations for and carrying
out measures for an integral strategic restructuring (programme-market,
developmental-technological, manufacturing, financial, personnel, or-
ganisational, informational, etc.). A lack of experience and knowledge
in the field, sometimes also a lack of political will, prevented a more suc-
cessful restructuring of numerous Slovene companies that either ceased
operating or underwent a perspectiveless agony with the help of state
aids.
According to the German model (Treuhandanstalt), the Fund for De-
velopment was established in Slovenia that became the owner of 98 com-
panies, employing 56,000 people, i. e. 10% of all employees. The aggre-
gate loss of these companies, which was defined as irresolvable without
state aids, amounted to approximately 1 billion eur. Until the end of
1993 new management replaced the prior ones in 70% of the cases. Since
the new temporary 'state' managers were insufficiently skilled, a series
of numerous erroneous strategic managerial decisions were taken in these
companies, while in certain instances even immoral deeds were not a rar-
ity. In the companies, which had been in one way or another taken under
the state umbrella, omissions of acting did not dominate, since the tempo-
rary managers were forced to carry out any measures available; however
an abundance of wrong or bad decisions followed as a consequence of
insufficient skilfulness and unorganised operation that could have been
avoided in many cases. Mistakes of the management were 'covered' by
the additional state aid.
After a relatively short period of independence many companies faced
a new shock when Slovenia became a member of the European Union
in 2004 (rules of the eu were actually effective even before, as of the
Stabilisation-Associational Agreement), once again differently experi-
enced among industries and individual companies. Likewise, the story
from the beginning of the transition was repeated once more when many
companies did not adjust their operations to the new circumstances
(omissions of management to act), although, due to the bitter experi-
ences from the past, there were considerably fewer such failures (the rea-
son can also be found in the private ownership of the companies). Those
industries which had been in a more or less healthy state due to the pro-
tectionisms - again having various origins regarding both the Slovene as
well as the former Yugoslav market space where these companies were
dominant (e. g. food-processing industry) - reacted worst. By the acces-
sion to the eu, Slovene companies lost their competitive advantages in
those markets in comparison to other eu countries.
Types of Mistakes - Is there a Distinctive Pattern?
During the period of transition all types of management mistakes could
be found in Slovene corporate systems, which is not surprising, or con-
tradictory to the other economic environments. The influence (extent)of
these errors differed during individual periods and with regard to the
characteristics of the external and the internal environment, where indi-
vidual companies operated, thus, fundamental typical patterns evolved.
One can ascertain that the omissions of the correct and timely acting
played the key role during the period of transition and erroneous deci-
sions; on the other hand they continued, to a lesser extent, while such
decisions predominated in cases when the company was receiving signif-
icant state aids. The mistakes, are, indubitably, a constitutive part of the
management process. Where the environment is more turbulent, as was
true for Slovenia, there were greater possibilities for mistakes that, in re-
gard to the dramatic changes in the environment, were generally not 'too
extensive' . If a company operates in an industry which is characterised
by a high, above average, growth rate, then the mistakes or troubles that
would represent a severe critical situation in a poorly positioned indus-
try would not have lethal impact. This means that the subjective deci-
sion (the internal cause) was directly connected to the events in the en-
vironment (the external cause). Simplified, it is still true that a company,
operating in a stagnating industry, must make more key decisions in a
short time period and often without an appropriate support, which, all
together, only increases the possibilities for mistakes.
In the second period of the economic part of the transition the ob-
jective for Slovene companies was to increase primarily their competi-
tiveness, i. e. the value productivity and to catch-up with the developed
countries. According to the value-added per-employee indicator (27,000
eur), the Slovene processing industry is lagging behind the average of
the EU-25 40% (2005), although this varies among industries. Regarding
the fact that Slovenia was the most developed accession country, accord-
ing to most indicators at the point of accession, a comparison with the
'older' members (the Eu-15) would show a lag of 2 to 4 times.
Slovene companies, therefore, will have to boost the development of
products incorporating a higher value added, which, once more, de-
mands complete commitment and skilfulness of the management. On
the average, an insufficient part of the developmental, innovative com-
ponent in products and services of producers is one of the key problems
of the Slovene economy.
International comparisons indicate that the intensity of restructuring
in the processing industry in Slovenia in the second half of the 1990s was
higher than in the eleven out of thirteen countries of the eu (for Ire-
land and Spain the data are missing) and slower compared to the three
transitional countries, for which the data (umar 2002, 24) are available
(Hungary, the Czech Republic, Slovakia). Although the value added per
employee has increased in real terms, the contribution deriving from fac-
tual successful restructuring of companies is far lower, since quite a few
large unsuccessful companies have disappeared in this period and their
absence from statistics had a significant influence on calculation of the
average. Since the value added in real terms is also rising in the eu, Slove-
nia's lagging according to this indicator is not decreasing, taking into ac-
count the afore - mentioned influence of the 'failed' companies. This
practically means that it cannot achieve the EU-25 average by an evolu-
tionary change. The solution, therefore, can be sought in a revolutionary
change of the economic structure that is ever more being characterised
by sophisticated services. Simultaneously this solution is to be sought
in abandoning and outsourcing the unprofitable mass non-sophisticated
production in individual industries, as well as in individual companies,
where transition into narrower market segments and market niches rep-
resents a real opportunity, likewise in a revolutionary manner. Exactly at
this point a danger lurks again that the restructurings are not sufficiently
rapid, integral and radical, i.e. the danger of omission of the correct and
timely acting appropriate and timely reactions by management, which,
due to a required compensation of the lagging regarding the developed
countries, is actually necessary.
table 2 A pattern of management contribution in the Slovene transition period
Period	1991-1996	1997-2003	2004-
Key features	Lost markets, stag-	Programme-market	eu integration,
	nation, deep crises	restructuring, state	higher value added
		aid	is needed
Prevailing manage-	Spontaneous, ad	Introduction of	Planned, systematic
ment approach	hoc approach, lack	planned approach	approach, further
	of strategic manage-	with basic elements	development of
	ment	of strategic manage-	strategic manage-
		ment	ment
Prevailing manage-	Crisis management	Restructuring	'Classical' strategic
ment methods		projects	management
Prevailing types	Omissions of the	Wrong or bad de-	Omissions of the
ofmanagement	correct and timely	cisions; immoral	correct and timely
mistakes	acting	behaviour	acting
When considering crisis management less critically, there are often
opinions to be heard that the latter is typical only of periods of the so-
called transition of the economy, when the weak companies that are al-
legedly in need of crisis management are presupposed to go bankrupt,
while only the successful companies, not operating according to the prin-
ciples of crisis management, are to survive, therefore, the significance of
the latter will diminish. Unfortunately, both the international and the
domestic experience indicate differently. If, presumably, Slovenia com-
pleted its 'period of transition' with the accession to the eu, then the
period of severe crises in companies has not ended, on the contrary, for
many the latter has just begun due to this very reason. A significant lag-
ging of the Slovene processing industry behind the average of the Eu-25
(even more of the Eu-15) indicates that the Slovene management will be
forced to make rapid and often radical and environmentally appropriate
moves in the future, when there will be increasingly less space for man-
agement mistakes that could have been kept secret during the period of
transition (table 2).
Because the environment for conducting business is becoming ever
more complex and turbulent, crises become ever more complex, inter-
related and interdependent as well (Boin and Lagadec 2000). Even small
deviations from the initial guidelines may lead to a rapid escalation of
the problems. Therefore, the measures for remedying the crises are be-
coming more demanding and extensive.
managerial implications
In the economic perspective of transition, the management in Slovenia
played one of the key roles, since they had to operate in circumstances
characterised by the domestic as well as the foreign environment, both
rapidly and drastically changing (globalisation). Beside numerous suc-
cessful restructurings of companies, all types of management mistakes
occurred, which were characterised by certain peculiarities in the transi-
tional period. While the extent of immoral behaviour can be suppressed
on the longer run by a greater assertion of moral codes, on the one hand:
'one natural way to facilitate moral outcomes is through organizational
cultures where certain principles, norms, and values are internalized and
fully motivating' (Smith 2005), and by a more efficient control, better ac-
counting standards and even penal policy on the other, the erroneous be-
haviours (wrong or bad decisions) by the management can be reduced by
their greater skilfulness regarding the complex processes of restructuring
and catching-up with the competition. The omissions of the correct and
timely acting of the management, on the other hand, can be prevented
by a decreased influence of the state.
The omissions of the management, as one of the groups of mistakes,
are otherwise problematic for identification (whether a different man-
agement would have been more successful during the same period),
therefore, strategic alternatives ought to be pointed out, where even the
supervisory body (board) can have a significant consulting role. This
body, however, needs to be properly qualified. If management mistakes
take place during a period of emergence of a crisis, then the mistakes
are not to be given opportunity during the period of crisis healing. The
greater the political influence, the less frequently are management mis-
takes are less frequent visible, since a wider consensus of the participating
sides is usually reached prior to making decisions, while the influence of
omissions of the management is greater. The state aid, therefore, must
not be an abetment to the management for the strategic decisions not to
take place. The lesser the political influence, the more activities will be
required, whereas the mistakes can be more frequent but still less fatal
than the potential passiveness (the failure to act).
Thus, the hypothesis, that the omissions of the correct and timely act-
ing of the management during the transitional period may be more dan-
gerous for a company - since they are more vital for the existence and the
development compared to the classical mistakes - is confirmed in basic
outlines, taking into consideration the related categories as they are ex-
plained and understood in this article. The omissions are only more visi-
ble in the longer run and often scientifically not possible to confirm. The
companies or industries, lagging behind the competition or the previ-
ously set developmental objectives, cannot afford omissions to act even
for the potential cost in the form of mistakes. If there is really a more
or less valid pattern of management mistakes in corporate crises, and if
these mistakes appear differently with regard to changes in the political
and economical environment in countries in transition, this could help
decision makers to adopt a more grounded choice in the process of ap-
pointing new crisis or restructuring managers, every time according to
their most appropriate competencies.
By taking into account many limitations of the mentioned confirmed
hypothesis there remains a lot of space for further and deeper researche.
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The Exchange Rate Regime
and International Trade
Romulus-Catalin Damaceanu
The study of the relation between the exchange rates regime and inter-
national trade is done using an inter-disciplinary vision that contains
knowledge from four different disciplines: economics, history, math-
ematics and computer sciences. In the case of pure theory of inter-
national trade, there is made an abstraction of the fact that interna-
tional trade is done using money. The theoretical analysis of interna-
tional trade including the monetary factor deals with static equilibrium
and linear models. We conceived a macroeconomic model of the world
economy and used this model to make three simulation experiments.
The conclusion of these experiments is that a broader exchange rate
band has a negative impact over the volume of world trade. This con-
clusion is confirmed by the historical analysis.
Key Words: historical analysis, macroeconomic modelling, simulation
of international trade, design of exchange rate regime experiments
jel Classification: F47, C99
Introduction
An important factor of the international trade volume is the level of ex-
ports and imports prices. These prices also depend on the value of ex-
change rates. As consequence, the exchange rates regime has a major in-
fluence over the international trade volume. The relation between the
exchange rate regime and international trade is bivalent. International
trade, in its turn, has a major influence over the exchange rates regime.
Under certain conditions, the international trade evolution can deter-
mine the changing of exchange rates regime by the central banks. This
happens, in the most cases, when the central bank has not enough re-
serves to maintain a certain exchange rates regime. The study of the inter-
conditional relation between the exchange rates regime and international
trade is done using an inter-disciplinary vision that contains knowledge
from four disciplines: economics, history, mathematics and computer
sciences.
The analysis of the complex relation between the exchange rate regime
Romulus-Catalin Damaceanu is a Researcher at 'Petre Andrei'
University ofIa§i, Romania.
Managing Global Transitions 5 (4): 355-369
and international trade is done based on the following methodological
principles:
1.	Analysis of the pure theory of international trade.
2.	Analysis of the main theoretical approaches of international trade
taking into consideration the monetary factor.
3.	A historical analysis of the relation between the exchange rates
regime and international trade.
4.	Mathematical modelling of relation between the exchange rate and
the international trade.
5.	Simulation of the correlation between the exchange rate and inter-
national trade using experiments.
The classical economists were the first to elaborate a theory of interna-
tional trade (Smith 1962; Ricardo 1959). This theory was a reaction to the
mercantilist conception in contradiction with the liberal doctrine that
stressed the importance of individuals and considered the nation just
as the sum of its inhabitants. The theory of international trade was im-
proved by the Hecksher-Ohlin model (Heckscher 1919; Ohlin 1933). Paul
Samuelson and Ronald W. Johnson transformed the classical model of
international trade into one with three factors of production, two goods
and two countries that use neoclassical production functions (Samuel-
son 1971; Jones 1971). The most recent theoretical conceptions are those
that use the notion of intra-industrial trade. In the case of all these the-
ories, there is made an abstraction that international trade is done by
using money.
The connections between the variations of exchange rates and the
international trade flows are described using the following theories:
the elasticity theory, the absorption theory, the J curve theory, the
Mundell-Fleming theory, the monetarist theory and the neoclassical the-
ory (Mundell 1962; 1963; Fleming 1962; Walras 1954; Marshall 1923; Burr
1960).
The hystorical analysis shows us that, over time, the nations have used
the following types of exchange rates regimes:
1.	the fixed exchange rates regime (fix), when the central bank main-
tains the exchange rate between the national currency and the refer-
ence currency in a relatively narrow pegging band of ± 1% in com-
parison with the target level of exchange rate;
2.	the floating exchange rates regime (flt), when the central bank
make no interventions on the foreign currency markets;
table 1 The average rate of growth obtained under the three regimes
Regime	Monetary system	Rate of growth of world trade	Rank
fix	Gold standard	4.1	III
	Bretton Woods	8.1	I
flt	Inter-war period	2.1	iv
ctr	Present monetary system	5.0	I
note Data calculated and updated from Damaceanu 2005.
3. the controlled exchange rates regime (ctr), when the exchange rate
is determined by the interaction between the intervention of the
state and the relation between demand and supply.
The average rate of growth of world trade obtained under these types
of regimes is presented in table 1.
Based on the data of table 1, we can conclude that the highest rate
of growth of world trade was obtained during the fixed exchange rate
regime of the Bretton Woods system; in second place is the rate obtained
for the controlled exchange rates regime; in third place is the rate ob-
tained during the gold standard, and the lowest rate is obtained during
the inter-war period.
The rest of the paper is organized as follows: the second section de-
scribes the macroeconomic model of the world economy used to sim-
ulate the relations between the exchange rate regime and international
trade, the third analyses the simulation results and the fourth section
presents the conclusions.
The Model of the World Economy
The macroeconomic model that we are going to use is associated with a
world economy with m = 2 national economies NE1 and NE2. The objec-
tive of this model is to simulate world trade under the following exchange
rates regimes: the floating exchange rates (FLT), the fixed exchange rates
regime (FIX) and the controlled exchange rates regime (CTRp), where p
is the pegging band of ±p (p ± 0.1) in comparison with the target level
of exchange rates.
Our model takes into consideration the next simplifying assumptions:
•	The equations of the model are stable: the parameters do not change
during the period of simulation.
•	There are no anticipations connected with the evolution of the ex-
change rates and no speculations on foreign currency markets.
•	There are no commercial barriers.
The model is structured in the next objects:
WE NE i FCMi,2
NE2 FCM21,
where WE is the world economy, NEi is the national economy with the
number i e (1,2), and FCMi,j is the foreign currency market of economy
NEi where is traded the currency of economy NEj; i ± j; i, j e (1,2).
The non-linearity of model is given by the variable ICBi,j,t that quan-
tifies the intervention of central bank on the foreign currency market.
the equations of object WE
The object WE contains two variables: the world exports Xt and the
world imports Mt. Thus, the world exports Xt evaluated in the currency
of the economy NE1 are determined by the next equation:
Xt = Xi,t + X2,t • eri,2,t,	(1)
where Xit represents the aggregated exports of economy NEi, and eri,j>t
is the exchange rate between the currencies of economies NEi and NEj,
i + j, i e (1,2).
The world imports Mt evaluated in the currency of economy NE1 are
determined by the next equation:
Xt = M1,t + M2,t • er1,2,t,	(2)
where Mi,t represents the aggregated imports of economy NEi, i e (1,2).
the equations of objects NEi
We can express the variation in time of the average level of prices of econ-
omy NEi using the next relation:
pit = pi,t - 1 + a • (Di,t-1 - Si,t-1),	(3)
where ai > 0 is a parameter that quantifies the elasticity of prices, Di,t is
the aggregated demand of economy NEi, and Si,t is the aggregated supply
of economy NEi.
Dit has four components:
•	the aggregated consumption Ci,t;
•	the aggregated investments Ii,t;
•	the governmental spending Gi>t;
•	the aggregated exports Xi,t.
Si,t has the next elements:
•	the aggregated output Yi,t;
•	the aggregated imports Mi,t.
Equation (4) determines, from the mathematical point of view, the
aggregated demand Di,t as being the sum between the aggregated con-
sumption Ci>t, the aggregated investments Ii,t, the governmental spend-
ing Gi,t and the aggregated exports Xi,t:
Di,t = Ci,t + Ii,t + Gi,t + Xi,t.	(4)
Equation (5) expresses the aggregated supply Si,t as being the sum be-
tween the aggregated output Yit and the aggregated imports Mit:
Sht = Yi,t + Mit.	(5)
We can describe the variation of the aggregated consumption Ci,t in
function of average level of prices pi,t, of available income YDi,t and of
interest rate iri,t using the equation:
Ci,t = Ci,t-1 - cp,i • (pi,t-l - pi,t-2)
+ cyd>i • (YDi,t-i - YDi,t-2)
-	cir,i • (iri,t-i - iri,t-2),	(6)
where cp,i > 0 is the elasticity of consumption in function of price, cyd,i e
[0,1] is the elasticity of consumption in function of available income,
and cir,i > 0 is the elasticity of consumption in function of interest rate.
Equation (7) describes the variation of investments Ii,t in function of
average level of prices pi,t, of the variation of the aggregated demand Di,t
and of the interest rate iri,t:
Ii,t = Ii,t-1 - ip,i • (pi,t-1 - pi,t-2)
+ id,i • (Di,t-i - Dit-2)
-	iir,i • (iri,t-i - iri,t-2),	(7)
where ip,i > 0 is the elasticity of investments in function of price, d e
[0, i] is the elasticity of investments in function of aggregated invest-
ments, and iir,i > 0 is the elasticity of investments in function of interest
rate.
Equation (8) describes the variation of the governmental spending Git
in function of the budgetary surplus or deficit BGi,t:
Gi,t = Gi,t-i + BGi,t-i.	(8)
Equation (9) shows us that the variation of the output Yi,t is deter-
mined by the variation of the aggregated demand Di,t, by the variation
of the aggregated inputs of capital coming from abroad IKit - especially
the direct foreign investments made in the frame of economy NEi, and
by the variation of prices pi,t :
Yht = Yi,t-i + yd,i • (Di,t-i - Di,t-2)
+ yki • (IKi,t-i - Kt-2)
- yp,i • (pi,t-i - pi,t-2).	(9)
where yd,i e [0,1] is the elasticity of output in function of demand,
yik,i e [0,1] is the elasticity of output in function of inputs of capital
from abroad, and yp,i > 0 is the elasticity of output in function of price.
Equation (10) describes the available income YDi,t as being equal with
the difference between the aggregated output/income Yi,t and the aggre-
gated taxes Ti,t:
YDht = Yi,t - Tht.	(10)
Equation (n)describes the variation of taxes Ti,t in function of the
variation of output Yi,t:
Ti,t = Ti,t-1 - ty,i • (Yi,t-1 - Yi,t-2),	(11)
where ty,i e [0,1] is the elasticity of taxes in function of income.
The value of budgetary surplus of deficit BGi,t is determined by:
BGit = BGi,t-1 + Tit - Gi,t.	(12)
Equation (13)describes the variation of the interest rate iri,t in function
of the difference between the monetary demand MDi,t and supply MSi>t:
iri,t = irit-1 + bi • (MDit-1 - MSi,t-1),	(13)
where bi is the elasticity of interest rate.
Equation (14) describes the monetary demand using the simple Key-
nesian specification that specifies the money requested for transactions
and for speculative purposes (Keynes 1936). Under these conditions, the
monetary demand MDit is determined by the variation of aggregated
supply Si,t and of interest rate iri,t:
MDit = MDit-1 + mdsi • (S^-i - S^)
- mdir,i • (iri,t-i - iri,t-2),	(14)
where mds,i e [0,1] and mdir,i > 0 are the elasticity of monetary demand
in function of supply of goods and services and, respectively, of interest
rate.
Equation (15) shows us the way in which the monetary supply MSi,t
variates in function of aggregated supply Si,t and of interest rate iri,t:
MSi,t = MSit-i + mssi • (Si,t-i - Si,t-2)
+ msir,i • (iri,t-i - iri,t-2),	(15)
where mss,i e [0, i]) and msir,i > 0 are the elasticity of monetary supply
in function of supply of goods and services and, respectively, of interest
rate.
Equation (16) shows us that the balance of payments BPi,t is deter-
mined by the sum between the current account balance BCi, t and the
capital account balance BKit:
BPi,t = BCi,t + BKi,t.	(16)
Equation (17) determines the current account balance BCi,t as being
the difference between the aggregated exports Xi,t and the aggregated im-
ports Mi,t:
BCit = Xi,t - Mit.	(17)
Equation (18) determines the capital account balance BKit as being
the difference between the inputs of capital IKi,t and exits of capital EKi,t:
BKi,t = IKi,t - EKi,t.	(18)
Equation (19) determines the value of aggregated exports Xi,t as the
sum of exports Xi,j,t made by the economy NEi to the others economies,
where j ± i:
Xi,t = 2 Xj.	(19)
Equation (20) determines the value of the aggregated imports Mi,t as
being the sum of imports Mi,j,t made by the economy NEi from the others
economies, where j ± i:
Mit = Mi,j,t.	(20)
Equation (21) calculates the value of aggregated inputs of capital IKit
as being the sum of inputs of capital IKi,j>t coming from abroad, where
j + i:
IKi,t = IKi,j,t.	(21)
Equation (22) calculates the value of aggregated outputs of capital
EKi,t as being the sum of outputs of capital EKi,j,t destined abroad, where
j + i:
EKi,t = 2 EKj.	(22)
THE equations of oBJEcTs FCMi,j
The exchange rate eri,j>t represents the price of one monetary unit of
economy NEj evaluated in the currency of economy NEi. The value of
exchange rate eri,j,t is determined by the next factors: the foreign cur-
rency demand CDj; the foreign currency supply CSi,j,t; the value of the
central bank intervention ICBi,j,t - this last factor appears only when the
central bank selects the regimes FIX or CTRp, and the exchange rate eri,j>t
exits from the permitted floating band.
We can express from the mathematical point of view the dynamics of
exchange rates eri,j,t by the equation:
eri,j,t = eri,j,t-i + a,j • (CDi,j- CSjt-i + ICBj),	(23)
where Cj > 0 is a parameter that quantifies the elasticity of exchange
rate.
The foreign currency demand CDi,j,t represents the total value of cur-
rencies bought on the foreign currency market FCMi,j. CDi,j,t is gener-
ated by the next factors: the value of imports Mi,j,t; the value of exits of
capital EKi,j>t. CDi,j,t is expressed by equation:
CDjt = Mi,j,t + EKi,j,t.	(24)
The foreign currency supply CSi,j>t is the total value of currencies des-
tined to be sold on the market FCMi,j. CSj is generated by the value of
exports Xi,j,t and by the value of inputs of capital IKj. CDi,j,t is deter-
mined by:
CSj = Xj + IKjt.	(25)
When the central bank selects the regime FLT of floating exchange
rates and ri,j = 0 then we do not have interventions on the market FCMi,j
and
ICBi,j,t = 0.
When the central bank selects the regime FIX of fixed exchange rates
(ri,j = 1) or the regime CTRp of controlled exchange rates (ri,j = 2)
and the exchange rate eri,j,t has the tendency to exit the floating band
then we have an intervention on the market FCMi,j in order to sell or
buy currencies and to modify the exchange at the target level er*i,j. When
the central bank buys currencies then ICBi,j>t > 0 and when it sells then
ICBi,j,t < 0.
To determine the value of ICBi,j,t, we start from equation (25) and we
fix the exchange rate eri>j,t at the target level er*,j. As a consequence, we
have:
er*i,j = erijt-1 + cij • (CDjt-1 - CSijt-1 + ICBj).	(25')
This is equivalent with:
ICBi>j>t = — • (er\j - er^t-i) - CD^t-i + CSi>j>t-1.	(25')
ci,j
If the exchange rate eri,j,t is being maintained in the floating band then
the central bank does not make interventions on the market FCMi,j and:
ICBi,j,t = 0.
In the case of buying currencies, the reserve Ri,j,t of the central bank is
growing, and, in the case of selling currencies, the reserve Ri,j,t is becom-
ing smaller. In the second case, the reserve Ri,j,t might prove insufficient
to accomplish the intervention on the market FCMi,j. This happens when
we have the next relation:
Ri,j,t-1 + ICBjt < 0.
By using equation (25), we have:
Ri,j,t-1 + — • (er%j - en,j,t-1) - CDy)t + CS^t < 0.
ci,j
In this case, the value of ICBi,j,t is equal with:
ICBi,j,t = -Ri,j,t-1.
Taking into consideration all these possible cases, we can determine
the value of ICBj by the nonlinear equation:
ICBj =
0, if rij = 0.
0, if rj = i and eri,j,t-i e (0.99 • er*,j, i.0i • er*,j).
0, if r(i,j) = 2 and eri,j,t-i e ((i - pi,j)
•	er*i,j, (i + pi,j) • er*i,j).
J- • (er\j - er^t-i) - CD^t-y + CS^t-\, if r^ = 1,
eri,j,t-i e (-m,0.99 • er*j U [i.0i • er*j +m)
and Rjt-i + ICBj > 0.
-Ri,j,t-i,if ri,j = i, eri,j,t-i e (-m, 0.99 • er*,j]	(26)
U [i.0i • er*j, +m) and Ri,j,t-i + ICBjt < 0.
• (er\j - er^t-i) - CD^t-y + CSi>j>t-u if r^ = 2,
eri,j,t-i e (-m, (i -pi,j • er*i,j] U [(i + pij)
•	er*j, +m) and Ri,j,t-i + ICBi,j,t > 0.
-Ri,j,t-i, if ri,j = 2, eri,j,t-i e (-m, (i - pij • er*i,j]
U [(i + pi,j) • er*i,j, +m)
and Rij,t-i + ICBj < 0.
The next equation calculates the value of reserve R
i,j,t:
Ri,j,t = Ri,j,t-i + ICBi,j,t.
(27)
Using the principle of generalized gravitation equation (Bergstrand
1989), we can consider that the value of exports Xi,j,t is determined by the
next factors: the output 7i,t, the output Yj,t, the exchange rate eri,j,t and
the difference pi,t - pj,t • eri,j,t between internal prices and foreign prices.
From the mathematical point of view, the influence of these factors over
Xi,j,t can be described by:
Xi,j,t = Xi,j,t-i + xy,i,j • (Yi,t-i - Yi,t-2) + xyf,i,j • (Yj,t-i - Yj,t-2)
+ xer,i,j • (erijt-i - eri,j,t-2) - xp,i,j • (pi,t-i - pj,t • erj), (28)
where xy,i,j e [0, i] is the elasticity of exports in function of national
output, xyf,i,j e [0, i] is the elasticity of exports in function of foreign
output, xer,i,j e [0, i] is the elasticity of exports in function of the ex-
change rate, and Xp,i,j e [0,1] is the elasticity of exports in function of
the difference between the national and the foreign prices evaluated in
the national currency.
The imports Mj are equal with the exports Xj>i>t multiplied by the
exchange rate eri,j,t:
Mi,j,t = Xj,i,t • eri,j,t.	(29)
In the case of exits of capital EKi,j,t, we will apply the same principle
of generalized gravitation equation, completed with the theory of capital
flows. The origins of this last theory can be found in the time of gold
specie standard, when an increase of internal interest rate was seen as
a way of stimulating the inputs of gold from abroad (Artis and Lewis
1991). The modern theory of capital flows states that in a world with two
countries A and B, the others factors remaining unchanged, we can write
the variation of external liabilities of country A like this:
dFA = ia + fA(irA, m),
where FA is the value of liabilities, dFA is the variation of liabilities (a
capital flow), irA and irB are the interest rates of countries A and B, and
IA is the component of FA that does not depend on interest rates. It is
supposed that dFA/dirA > 0 and dfA/dirB < 0.
Under these circumstances, the exits of capital EKi,j,t are determined
by: the output Yi,t, the output Yj,t, the exchange rate eri,j,t and the dif-
ference iri,t — irj,t between internal interest rate and foreign interest rate.
The influence of these four factors over EKi,j,t can be described, from the
mathematical point of view, by:
EKijt = EKi,j,t—i + eky,i,j • (Yi>t—1 — Yi>t—2)
+ ekyf ,„ • (Y (j, t — 1) — Y (j, t — 2))
—	eker,i,j • (eri,j,t—i — erjt—2)
—	ekir,i,j • (iri,t—1 — irjt—i),	(30)
where eky,i,j e [0,1] is the elasticity of exits of capital in function of na-
tional output, ekyf,i,j e [0,1] is the elasticity of exits of capital in function
of foreign output, eker>i>j e [0,1] is the elasticity of exits of capital in
function of exchange rate, and ekir,i,j e [0,1] is the elasticity of exports in
function of difference between the national and the foreign interest rates.
The inputs of capital IKj are equal with the exits of capital EKj
multiplied by the exchange rate eri,j>t:
IKijt = EKj,i,t • eri,j,t.	(31)
Analysis of simulation results
We make three simulation experiments:
•	EXP1 will simulate the world trade under the regime FLT;
•	EXP2 will simulate the world trade under the regime FIX;
•	EXP3 will simulate the world trade under the regime CTR0 02.
To make such experiments, I used the application lsd - (Labora-
tory for Simulation Development, see Damaceanu 2006) for the imple-
mentation of the mathematical model in the simulation macrolanguage
lsd. This application was developed by Marco Valente in the frame of
the project iiasa, Vienna, conducted by Prof. G. Dosi and upgraded at
druid, Aalborg, in the frame of a research program conducted by Prof.
E. S. Andersen (Valente and Andersen 2002).
In order to make a comparative analysis, all three experiments will
have the same values for the input variables and parameters with the
exception of the parameters ri,j (tables 2,3 and 4). In addition, the period
of simulation will be the same: from t = 1 to t = 90.
In table 5, we have the evolution in time of variables X(t) and M (t)
under the three regimes:
FLT: (n,2 = 0, r2,1 = 0};
FIX: (n,2 = 1, r2,1 = 1};
CTR0.02: {r1,2 = 2, r2,1 = 2,pu = 0.02,p^ = 0.02}.
If we compare the total value of world trade obtained under these
three regimes of exchange rates, we observe that the biggest value ( Xt
= 12672.63 and 2 Mt = 12672.55) was obtained under the regime FIX, in
second place is the world trade (£ Xt = 12649.37 and £ Mt = 12648.13) ob-
tained under the regime CTR0.02 and in the last place is the world trade
(2 Xt = 12562.95 and 2 Mt = 12561.95) obtained under the regime FLT.
The conclusion of these three experiments is that a broader exchange
rate band has a negative impact over the volume of the world trade.
Conclusions
Based on historical and experimental analysis, we can tell that a fixed or a
relative narrow pegging exchange rate regime can assure a faster growth
of international trade with the condition that the national economies
table 2 The input variables and parameters for the objects NE1 and NE2
nei		ne2		nei	ne2
P1,0 :	= 9.83	p2,0 :	= 9.91	yd1 = 0.01	yd2 = 0.01
p1,-1	= 9.84	p2,-1	= 9.92	yp1 = 0.01	yp2 = 0.01
a1 =	0.01	a2 =	0.01	yik1 = 0.01	yik2 = 0.01
01,0	= 487.52	D2,0	= 945.79	y^1,o=355.55	YD2,0 = 812.83
D1,-	1 = 488.69	D2,-	= 946.57	YD1-1 = 356.75	YD2,-1 = 813.62
S1,0 :	= 480.08	S2,0 :	= 946.38	T1,O = 41	T2,O = 94
S1,-1	= 481.25	S2,-1	= 947.14	ty1 = 0.01	ty2 = 0.01
Q,O	= 174.43	c2,0	= 357.03	BG1,O = 9.0	BG2,0 = 6.0
Q,-1	= 174.42	C2.-1	= 357.02	ir1,0 = 1.01	ir2,o = 1.14
cp1 =	0.01	cp2 =	0.01	ir1,-1 = 1.00	ir2,-1 = 1.15
cyd1	= 0.01	cyd2	= 0.01	b1 = 0.01	b2 = 0.01
cir1 :	= 0.01	cir2 -	= 0.01	MD 1,0 = 518.22	MD2,0 = 980.51
I1,0 =	223.53	I2,0 =	407.23	mds1 = 0.01	mds2 = 0.01
l1,-1	= 224.75	l2,-1	= 408.05	mdir1 = 0.01	mdir2 = 0.01
id1 =	0.01	id2 =	0.01	MS1,0 = 518.12	MS2,0 = 980.61
iir1 =	0.01	iir2 =	0.01	mss1 = 0.01	mss2 = 0.01
ip1 =	0.01	ip2 =	0.01	msir1 = 0.01	msir2 = 0.01
G1,0	= 32	G2,0	= 88	IK1,O = 93.52	IK20 = 47.55
YW	= 396.55	Y2,0	= 906.83	IK,,-1 = 93-49	IK,,-1 = 47-51
Yi,-i	= 397-75	Yi-i	= 907.624		
within the world economy are functional in the sense of not having an
economic crisis.
On the other hand, a national economy in crisis should choose a float-
ing exchange rate or a relatively broader pegging regime because, under
these conditions, these regimes proved to assure better economic per-
formances. The experience of Eastern and Central Europe demonstrates
that these regimes helped to pass the critical periods while the experi-
ence of Argentina was eloquent because this country suffered a dramatic
economic crisis under the regime of monetary council anchored to the
us dollar.
It seems that the future international monetary system will be one
in which euro and us dollar will be the pillars of the system. In the
present days, the dramatic variations of exchange rates between these two
table 3 Variables and parameters for the objects FCM1>2 and FCM2i1
FCMh2	FCM% 1	FCMia		fcm2>1
e	= e	xy1,2 =	0.01	xy2,1 = 0.01
r1,2 e {0,1,2}	r2,1 e {0, 1, 2}	xyf1,2 =	0.01	xyf2,1 = 0.01
p1>2 = 0.02	p2,1 = 0.02	xer1>2 =	0.01	xer2,1 = 0.01
er1,2,0 = 1	er2,1,0 = 1	xp 1,2 =	0.01	xp2,1 = 0.01
er1,2,-1 = 1	er2,1,-1 = 1	EK1,2,0 :	= 47.55	EK2,1,0 = 93.52
c1>2 = 0.01	c2,1 = 0.01	eky1,2 =	0.01	eky2,1 = 0.01
CD1,2,0 = 141.07	CD2,1,0 = 141.07	ekyf1,2	= 0.01	ekyf2,1 = 0.01
CS1,2,0 = 141.07	CS2,1,0 = 141.07	eker1,2	= 0.01	eker2,1 = 0.01
R1>2>0 = 500.00	R2>1>0 = 1000.00	ekir1,2 =	0.01	ekir2,1 = 0.01
-£1,2,0 = 47-55	-£2,1,0 = 93-52			
table 4 The parameters regij in the		case of experiments EXP1, EXP2 and EXP3		
EXP 1		EXP2		EXP3
r1,2 =	0	r1,2 = 1		r1,2 = 2
r2,l =	0	>2,1 =1		>2,1 = 2
table 5 The evolution of world trade under the regimes FLT, FIX and CTR0.02				
t	FLT	FIX		CTR0.02
	ZXt IM,	I,xt	IMt	I,Xt IM,
t e [1,10]	1410.63 1410.63	1410.63	1410.63	1410.63 1410.63
t e [11,20]	1412.26 1412.26	1412.26	1412.26	1412.26 1412.26
t e [21, 30]	1413.32 1413.32	1413.32	1413.32	1413.32 1413.32
t e [31,40]	1410.89 1410.89	1410.89	1410.89	1410.89 1410.89
t e [41,50]	1402.94 1402.92	1405.20	1405.19	1402.94 1402.92
t e [51, 60]	1389.88 1389.76	1405.35	1405.34	1400.37 1400.33
t e [61,70]	1375.84 1375.49	1405.11	1405.09	1398.82 1397.93
t e [71, 80]	1368.75 1368.25	1405.06	1405.05	1400.15 1399.99
t e [81,90]	1378.43 1378.11	1404.80	1404.79	1399.98 1399.86
Total	12562.95 12561.64 12672.63 12672.55 12649.37 12648.13
currencies have generated negative effects regarding international trade
transactions. My opinion is that these problems can be solved by select-
ing a controlled exchange rates regime with a relatively narrow pegging
band.
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Trust and Commitment in Professional
Service Marketing Relationships in
Business-to-Business Markets
Barbara (Cater
This paper examines two very important concepts in marketing rela-
tionships - trust and commitment - whereby commitment is regarded
as consisting of three components: affective, calculative and norma-
tive. The context of this study is professional services in a business-to-
business market, more specifically the marketing research industry in
Slovenia. The results show that trust in the marketing research provider
and its work is very high among interviewed clients. The clients also ap-
pear to be affectively committed to the relationship with the provider,
whereas calculative and normative commitment are low. The study's
results confirm the positive influence of trust on affective commitment
and the weak negative influence of trust on calculative commitment.
Key Words: trust, affective commitment, calculative commitment,
normative commitment, business-to-business markets
jel Classification: M31, M39
Introduction
In the last 20 years a significant change has occurred in the way compa-
nies in business-to-business markets approach their suppliers and buyers
(Morris et al. 1998; Hakansson and Snehota 1998; Hakansson et al. 2004).
Firms are increasingly looking to have fewer, yet more intense relation-
ships with their partners (Geyskens et al. 1998). In most exchanges in
the business-to-business market, achieving a sale is not the completion
of a single effort but an event taking place within a broader endeavour
to build and maintain a long-term relationship with the customer and
ensure that sales keep coming. Therefore, the main research question is
what influences the customer's willingness to remain with the existing
supplier and further to advance the relationship by investing in strength-
ening ties with the supplier (Gounaris 2005). Within this broader re-
search stream, trust and commitment are two highly interrelated con-
cepts (Kumar et al. 1995) which stimulate a relational bond between the
supplier and the customer.
Dr Barbara (Cater is a Teaching Assistant at the Faculty of Economics,
University of Ljubljana, Slovenia.
Han et al. (1993) found that both buyers and sellers in business-to-
business markets see trust as being by far the most important factor of a
good relationship. Companies began to realise that in order to be com-
petitive in the market one has to be a trusted co-operator (Morgan and
Hunt 1994). The need for trust arises in any supplier-client marketing
relationship characterised by a high degree of risk, uncertainty, and/or
a lack of knowledge or information on the part of the interacting party
(Mayer et al. 1995). This need for trust is particularly important in service
industries, where risk and uncertainty are increased to the extent that the
client is unable to examine a service before purchase (Parasuraman et al.
1985).
Besides trust, researchers recognise commitment as a central ingre-
dient of establishing and maintaining long-term relationships (Dwyer
et al. 1987; Geyskens et al. 1996; Gundlach et al. 1995; de Ruyter and
Wetzels 1999; Hakansson and Snehota 1995; Kim and Frazier 1997b; Ry-
lander et al. 1997; Tellefsen and Thomas 2005). Commitment is also one
of the most common dependent variables used in buyer-seller relation-
ship studies (Wilson 1995). While researchers agree on the importance of
this construct, there are differences in its conceptualisation. Most pro-
posed relationship models in marketing have conceptualised and op-
erationalised commitment as a global construct. However, researchers
observing relationships in organisational and social psychology have
pointed out three distinct motivations (affective, calculative/continuance
and normative) that underlie the desire for continuity (Allen and Meyer
1990; Adams and Jones 1997) and over the last decade some researchers
(Kumar et al. 1994; de Ruyter and Semeijn 2002; de Ruyter and Wet-
zels 1999; de Ruyter et al. 2001; Gilliland and Bello 2002; Gounaris
2005; Bansal et al. 2004; Berghäll 2003; Kim and Frazier 1997a; 1997b;
Kelly, 2004) have transferred this framework to marketing relationships.
Geyskens et al. (1996) pointed out that using the general expression
'commitment' to describe any of the three very different components
creates confusion in the interpretation of theories, models and empir-
ical findings related to commitment. At the same time, it limits our
understanding of this problem and the variability of relations between
the components of commitment and determinants and consequences
of commitment studied in the literature (Kelly 2004; Kim and Frazier
1997b).
Geyskens et al. (1998) in their meta-analysis of studies about trust
pointed out that the overwhelming emphasis has been on developing
and testing new theory rather than on establishing empirical generalisa-
tions. Thus, despite this extensive research no consensus has been estab-
lished about the relationship between trust and other variables. The pur-
pose of this study is to work towards establishing empirical generalisa-
tions by researching the relationship between trust and the components
of commitment in professional services in business-to-business markets
in a post-transitional economy. Although the relationship between trust
and commitment measured as a one-dimensional construct has been
over-researched and the results are almost unanimous (Geyskens et al.
1999), relatively little attention has been paid to relationships between
trust and the components of commitment. In addition, almost all stud-
ies were conducted in the contexts of developed Western countries and
there is a lack of studies in transitional or post-transitional economies
examining commitment as consisting of three components and relating
it to other relationship variables.
Trust and Commitment in Marketing Relationships
Trust is an essential relationship model building block and has often been
defined as a belief that one relationship partner will act in the best inter-
ests of the other (Wilson 1995). It has also been referred to as the key
element of successful relationship development (Naude and Buttle 2000;
Goodman and Dion 2001). Geyskens et al. (1998, 225) on the basis of
a meta-analysis of studies about trust pointed out that most studies in
marketing build on interpersonal research and define trust as 'the extent
to which a firm believes that its exchange partner is honest and/or benev-
olent' or some variant thereof. Two definitions of trust very often cited
are those by Moorman et al. (1992) and Morgan and Hunt (1994). Moor-
man et al. (1992, 82) define trust as 'a willingness to rely on an exchange
partner in whom one has confidence'. According to Morgan and Hunt
(1994, 23), trust exists 'when one party has confidence in an exchange's
partner reliability and integrity.' Their definition is similar to that pro-
posed by Moorman et al. (1992) except that Morgan and Hunt leave out
'willingness' because they believe it does not add value to the definition.
Doney and Cannon (1997, 36) built on social psychology literature and
similarly defined trust as the 'perceived credibility and benevolence of a
target of trust'.
This study adopts the definition of Moorman et al. (1992) who studied
trust in relationships between suppliers and buyers of marketing research
services. An important aspect of their definition is the concept of trust
as a belief, feeling or expectation about an exchange partner, which can
be judged from the partner's expertise, reliability and intentions. This
definition reflects two components of trust: credibility and benevolence.
Credibility reflects the buyer's belief that the supplier has sufficient ex-
pertise to perform the job effectively and reliably. Benevolence reflects
the extent of the buyer's belief that the seller's intentions and motives are
beneficial to the buyer even when new conditions arise about which a
commitment was not made (Ganesan 1994). Geyskens et al. (1998) also
pointed out trust in the partner's honesty, which is one firm's belief that
its partner is reliable, stands by its word, fulfils its promises and is sincere.
Commitment implies the importance of the relationship to the rela-
tionship partners and their desire to maintain the relationship in the fu-
ture (Wilson 1995). Dwyer et al. (1987,19) defined it as 'an implicit or ex-
plicit pledge of relational continuity between exchange partners'. Moor-
man et al. (1992,316) similarly proposed it is 'an enduring desire to main-
tain a valued relationship'. What is common to the different definitions
of commitment is that commitment is characterised by a disincentive to
replace relationship partners (Young and Denize 1995).
Researchers have used a 'more is better' approach when studying com-
mitment in marketing relationships (Fullerton 2003) and have focused
on the common construct of commitment assuming that it is better
for a company to have more committed buyers. This approach works
if we define commitment as a construct directed at the identification
and attachment that bonds a customer to the company (Morgan and
Hunt 1994). However, marketing academics and practitioners now re-
alise that commitment is a complex multidimensional construct that in-
cludes numerous components. On the basis of findings from the context
of interpersonal relationships and organisational behaviour, Kumar et al.
(1994) noted that (attitudinal) commitment consists of different compo-
nents that have different influences on marketing relationships. These
components are: affective commitment, calculative/continuance com-
mitment and normative commitment. All these components of com-
mitment pertain to psychological states but they originate from differ-
ent motivations for maintaining a relationship (Geyskens et al. 1996).
Allen and Meyer (1990) suggested we should understand affective, calcu-
lative/continuance and normative commitment as components and not
types of commitment because the different levels of each can be present
in the relationship between the employee and the organisation.
Affective commitment in marketing relationships, similarly as in the
employee-organisation relationship, originates from identification, com-
mon values, attachment, involvement and similarity (Bansal et al. 2004;
Fullerton 2003; Geyskens et al. 1996; Gruen et al. 2000). Affectively com-
mitted customers also continue the relationship because they like the
provider and enjoy working with it (Fullerton 2005a; 2005b; Geyskens
et al. 1996). On the other hand, calculative (continuance) commitment
stems from the perceived structural constraints that bind a company to
its partners and reflects some kind of negative motivation for continu-
ing the relationship (Geyskens et al. 1996). It presents some kind of con-
straining force that develops in the presence of high switching costs or
a perceived lack of alternative providers and binds the customer to the
company out of need (Bansal et al. 2004; Fullerton 2003; 2005). Norma-
tive commitment reflects a force that binds a customer to the provider
due to a perceived obligation (Bansal et al. 2004). Hackett et al. (1994)
pointed out that this attitude develops on the basis of the internalisation
of normative pressures that are used before or after entering the rela-
tionship. People who act morally feel they 'have to' act in a certain way
because this is their obligation or duty (Etzioni 1988). Kumar et al. (1994)
stated that a normatively committed firm continues the relationship be-
cause it feels it should do so due to moral imperatives.
Development of the Hypotheses
Several empirical studies have discovered the positive influence of trust
on commitment that was measured as a global construct (Moorman et
al. 1992; Morgan and Hunt 1994; Goodman and Dion 2001; Perry et al.
2002; Friman et al. 2002; Lohtia et al. 2005; Rodriguez and Wilson 2002;
Tellefsen and Thomas 2005; Walter and Ritter 2003). Because many of
the unidimensional conceptualisations of commitment in marketing re-
search contexts have in fact tapped the affective dimension of commit-
ment we already have some evidence that trust might act as a driver of
this type of commitment. Researchers who conceptualised commitment
with two or three components have discovered the positive influence of
trust on affective commitment (Geyskens et al. 1996; Wetzels et al. 1998;
de Ruyter et al. 2001; de Ruyter and Wetzels 1999; Wetzels et al. 2000;
de Ruyter and Semeijn 2002; Gounaris 2005). Studies have also shown
that trust has a positive influence on normative (de Ruyter and Semeijn
2002) and a negative influence on calculative commitment (Geyskens et
al. 1996; Wetzels et al. 1998; Wetzels et al. 2000; de Ruyter et al. 2001; de
Ruyter and Wetzels 1999; de Ruyter and Semeijn 2002; Gounaris 2005).
Trust leads firms to focus on a 'positive' motivation to stay in the rela-
tionship because of a feeling of connectedness and identification with
each other and less on calculative reasons for staying with the supplier
(de Ruyter et al. 2001). With a lack of trust it is unlikely that the part-
ners would be affectively committed (Geyksens et al. 1996). When trust is
low, firms more thoroughly examine and monitor the behaviour of their
counterpart and probably base their decisions as to whether to continue
or end the relationship on the calculation of direct benefits and costs
(Geyskens et al. 1996). When trust increases, there are fewer reasons to
continue the relationship on the basis of calculative commitment (de
Ruyter et al. 2001). Therefore, the following hypotheses are formulated
for the relationships between trust and the components of commitment:
H1 Trust positively influences affective commitment.
H2 Trust negatively influences calculative commitment.
h3 Trust positively influences normative commitment.
In the second step we propose relationships between components of
commitment in order to test if there is any interaction among these
components. Researchers in the area of organizational psychology and
marketing relationships have found a positive and strong correlation be-
tween affective and normative commitment (Bansal et al. 2004; Kelly
2004; Kumar et al. 1994; Meyer et al. 2002) and a moderate positive corre-
lation between normative and calculative commitment (Kelly 2004; Ku-
mar et al. 1994). On the other hand, researchers have found mixed re-
sults regarding the relationship between affective and calculative com-
mitment. While Kelly (2004) found this correlation to be positive, Ku-
mar et al. (1994) found no correlation between these two components. In
this study we build on the results of Kumar et al. (1994) and we propose
that these two components of commitment are not correlated. Therefore,
the following hypotheses are proposed for the relationships between the
components of commitment:
H4 Affective and normative commitment are positively correlated.
H5 Affective and calculative commitment are not correlated.
h 6 Calculative and normative commitment are positively correlated.
Research Design
operationalisation of the variables
and data gathering
Variables for the model were operationalised on the basis of opera-
tionalisations from past research with some modifications and devel-
opments based on nine in-depth interviews with clients of marketing
research providers conducted in the exploratory phase in November
2004-January 2005. Commitment was measured on the scale of Kumar
et al. (1994) for three components of commitment that was developed
on the basis of Allen and Meyer's (1990) scale drawn from organisational
psychology. Trust was operationalised with the modification of scales
proposed by Moorman et al. (1992), Doney and Cannon (1997) and
Gounaris and Venetis (2002). Respondents were asked to express their
agreement with a given statement using a seven-point Likert-type scale
(from 1 - not at all true, to 7 - completely true). All variables except two
were measured in a positive direction. Two variables for trust that had
a negative direction were reversely scored in the further analysis. After a
scale refinement in line with five experts' opinions the questionnaire was
tested on ten members of the population.
The context of this study is the marketing research industry in Slove-
nia. The context of marketing research was chosen because it provides a
good representation of professional services and includes a wide con-
tinuum of marketing relationships from transactions to partnerships,
therefore providing the desired variability of relationships (Tellefsen and
Thomas 2005). Data were gathered from managers who are responsible
for marketing research in each of the client firms. In order to ensure vari-
ability in the marketing relationships included in the survey the respon-
dents evaluated their relationship with the agency that carried out their
most recent research project, as in the Moorman et al. (1992) research.
They were instructed to answer questions about the specific relationship
and to keep in mind not only the last research but also the entire relation-
ship they had experienced with that provider. The sample framework in-
cluded 230 companies that were clients of marketing research agencies.
Data collection started in March 2005, and by the end of July 2005, 150
telephone interviews had been completed so the response rate was 65.2%
(Churchill and Iacobucci 2005).
data analysis
The set of items for each construct was initially examined using ex-
ploratory factor analysis (varimax rotation) to identify items not be-
longing to the specified domain. Items with a loading of less than 0.55
and/or cross-loadings greater than 0.35 were discarded. Exploratory fac-
tor analysis revealed four components (eight variables loaded on the
trust component, four on affective commitment, three on normative
commitment and two on calculative commitment). To present the re-
sults of clients' trust and commitment, univariate statistical analyses of
variables (the calculation of arithmetic means and standard deviations)
were performed (tables 1, 2,3 and 4). Data were analysed using the spss
13.0 statistical package.
Further, to test the proposed hypotheses, confirmatory factor analy-
sis was performed and a structural model (with trust as an exogenous
variable and components of commitment as endogenous variables) was
tested. The analysis was carried out using the lisrel 8.72 statistical pack-
age. During confirmatory factor analysis we trimmed the model by dis-
carding items for each construct where necessary in order to ensure the
best fitting model. In the final model there were four measurement vari-
ables for trust, four measurement variables for affective commitment,
three measurement variables for normative commitment and one mea-
suring variable for calculative commitment. The only problematic vari-
able was calculative commitment, where we decided to use only one in-
dicator that had the highest average value as a representative measure of
this construct. The goodness-of-fit indices for the cfa were within an
acceptable range. The model has a statistically significant value of chi-
square (x2 = 69.38, df = 49, p = 0.029), but the proportion between the
chi-square value and degrees of freedom (x2/df = 1.42) is within an ac-
ceptable range. Other measures of absolute fit (the root mean square of
error of approximation (rmsea) = 0.053, the standardized root mean
square residual (srmr) = 0.065 and gfi = 0.928) indicated an accept-
able fit, as well as incremental fit measures (nfi = 0.944, nnfi = 0.975,
agfi = 0.885) and parsimonious fit measures (cfi = 0.981) (Bollen 1989;
Hoyle 1995). We then tested the item and construct reliability (table 5).
All items were reliable and all values for composite reliability were above
the critical limit. According to a complementary measure for construct
reliability, average variance extracted, all constructs demonstrated good
reliability. Further, both convergent and discriminant validity (assessed
by the procedures proposed by Anderson and Gerbing 1988) were sup-
ported.
Results
sample characteristics
The majority of companies that responded to the questionnaire were
providers of business services (24.7%), followed by manufacturing
(23.3%) and trade companies (22%). The rest were providers of ser-
vices for consumers (12.7%), services for both companies and consumers
(11.3%), while 6% came from other industries. Altogether, 40.7% of the
companies had up to 50 employees; there were 24.7% of companies
with 101-500 employees and 21.3% of companies with over 501 employ-
ees, while there were fewer companies with 51-100 employees (13.3%).
Among the studied relationships (with the agency that performed the
last research project) most relationships are two to four (42.2%) and
five or more (42.2%) years old. There are 15.6% of relationships that
had lasted up to two years. The average duration of a relationship is 4.4
years. We also examined what is the value share of projects done by this
provider among all research projects carried out with outside suppliers
of marketing research. The average value share of research projects con-
ducted by the studied agency is 76.1%. This means that the majority of
respondents had described their relationship with their most important
provider of marketing research.
trust
Respondents on average indicated a high level of trust in the research
agency (table 1). They more than agreed that they can trust that the re-
search agency will execute research with methodological rigour (mean
6.35; standard deviation 0.93), that it will keep their data confidential
(mean 6.32; standard deviation 0.88) and that it will plan research with
expertise (mean 6.05; standard deviation 1.03). These results show that
clients see their provider as credible. They also trust in the agency's hon-
esty (mean 5.93; standard deviation 1.38), that it provides them with cred-
ible information (mean 5.85; standard deviation 1.03) and that it keeps its
promises (mean 5.72; standard deviation 1.25). However, it seems that the
high level of trust is partly a consequence of clients' involvement in the
research process. Respondents indicated somewhat less agreement with
the statements that they would be willing to let the researcher make im-
portant decisions without their involvement (mean 5.56; standard devia-
tion 1.28) and that they trust the researcher would do the job correctly if
not monitored (mean 5.61; standard deviation 1.24). One possible expla-
nation here could be that the clients are not completely convinced of the
providers' benevolence.
components of commitment
The respondents on average rated the variables measuring affective com-
mitment the highest of all the components (table 2). They expressed the
greatest agreement with the statement that they continue to work with
table 1 Descriptive statistics for variables measuring trust
Variable	Mean	Std. dev.
If I or someone from my department could not be reached by our researcher, I would be willing to let my researcher make important research decisions without my involvement (trust1).	5.56	1.28
If I or someone from my department were unable to monitor my researcher's activities, I would be willing to trust my researcher to get the job done right (trust2).	5.61	1.24
I can trust that the agency will plan the research with expertise (trust3).	6.05	1.03
I cannot trust that the agency will execute research with method- ological rigour (r) (trust4).	6.35	0.93
I can trust that the agency will keep our data confidential (trust5).	6.32	0.88
This agency keeps the promises it makes to our firm (trust6).	5.72	1.25
This agency is not always honest with us (r) (trust7).	5.93	1.38
We believe in the information that this agency provides us with (trust8).	5.85	1.03
notes Variables trust4 and trust8 were reversely coded. The results pertain to the re-
versely scored item.
the agency because it is pleasant working with them (mean 5.52; stan-
dard deviation 1.32), followed by staying with this agency because they
genuinely enjoy their relationship (mean 4.83; standard deviation 1.56),
because they are attracted to the things the agency stands for as a com-
pany (mean 4.77; standard deviation 1.54), and because they like working
with the company (mean 4.63; standard deviation 1.58). For all the mea-
sured variables of affective commitment the mean scores are above 4,
which means that the respondents have on average more than a neutral
attitude to the statements.
On the other hand, the calculative commitment in the examined rela-
tionships was relatively low (table 3). Respondents on average rated state-
ments expressing calculative commitment between 'not at all true' (1)
and 'partly not true' (3). Of two calculative commitment variables that
were retained in the analysis they on average indicated the greatest agree-
ment with the statement that they stay with this research agency because
it is too difficult to change it due to a lack of good alternatives (mean
3.02; standard deviation 1.93). To a lesser extent, they agreed that they
continue the relationship due to necessity, since no feasible alternatives
exist (mean 2.31; standard deviation 1.93).
The respondents indicated an even lower normative commitment to
table 2 Descriptive statistics for variables measuring affective commitment
Variable	Mean Std. dev.
It is pleasant working with the agency, that's why we continue to	4.59	1.52
work with them (acom1).
Our decision to remain a client of this company is based on our	3.82	1.60
attraction to the things the agency stands for as a company (acom2).
We want to remain a client of this agency because we genuinely	3.63 1.56
enjoy our relationship with the agency (acom3).
Because we like working with the agency we want to remain their 3.65 1.60
client (acom4).
table 3 Descriptive statistics for variables measuring calculative commitment
Variable	Mean Std. dev.
Right now, staying with the agency is a matter of necessity since no 3.28 2.24
feasible alternatives exist (ccom1).
It is too difficult to switch to another agency because of the lack of 3.10 2.21
good alternatives; therefore we are staying with the agency; other-
wise we'd consider leaving (ccom4).
table 4 Descriptive statistics for variables measuring normative commitment
Variable	Mean	Std. dev.
Employees who work with the agency would feel guilty if we	1.77	1.09
dropped them as a supplier (ncom1).
We feel a sense of duty to remain a client to this agency (ncom2).	2.05	1.24
Even if it were to our firm's advantage, we feel it would be dishon-	1.71	1.10
ourable if we were to leave the agency (ncom4).
their research providers (table 4). On average, they did not agree that
they continue to work with this provider because they feel a sense of duty
to do so (mean 2.34; standard deviation 1.51) and that employees who
work with this agency would feel guilty if they dropped them as a supplier
(mean 2.28; standard deviation 1.54). The lowest level of agreement was
expressed with the statement that it would be dishonourable if they were
to leave the agency even if it were to their firm's advantage (mean 1.79;
standard deviation 1.17).
hypotheses testing
The final structural equation model includes the exogenous latent vari-
able trust and endogenous latent variables affective, calculative and nor-
mative commitment. With the exogenous variable trust we can explain
45.0% of the variance in affective commitment, 5.83% of the variance
in the normative commitment and only 1.15% of the variance in cal-
culative commitment. Affective commitment is therefore relatively well
explained by the independent variable, while calculative and normative
commitment are not. The fit indices for the overall model are within
an acceptable range. Like with the measurement model, the structural
model also has a statistically significant value of the chi-square test (x2
= 79.96, df = 49, p = 0.008), but the proportion between the chi-square
value and degrees of freedom is within an acceptable range (x2/df = 1.63).
All other relevant fit indices are also within an acceptable range (rmsea
= 0.060; standardised rmr = 0.084; gfi = 0.918; agfi = 0.877; nfi =
0.937; nnfi = 0.970; cfi = 0.976). The analysis with lisrel revealed,
that among components of commitment, trust positively influences af-
fective (standardised coefficient 0.67) and normative commitment (stan-
dardised coefficient 0.24), while it has no statistically significant effect on
calculative commitment (standardised coefficient -0.11). h1, h2 and H3
are therefore supported.
Results revealed a positive correlation between affective and norma-
tive commitment (standardised coefficient 0.35), while there was no sta-
tistically significant correlation between affective and calculative com-
mitment (standardised coefficient -0.10) and normative and calculative
commitment (standardised coefficient 0.11). H4 and H5 are therefore
supported, while h6 is not supported.
Conclusions and Implications
The purpose of this paper was to work towards establishing empiri-
cal generalisations by researching the relationship between trust and
the components of commitment in professional services in business-
to-business markets in a post-transitional economy. First, trust and
commitment were examined and then relationships between trust and
components of commitment and relationships among the components
of commitment were tested. The results show that trust in research
providers in the examined context of Slovenia is high. Clients on average
believe their research providers are credible (have sufficient expertise to
perform the job effectively and reliably) and benevolent (the provider's
intentions and motives are beneficial to the client). These results are in
line with findings from the in-depth interviews with clients. Since the
results of marketing research projects are used as an input for decision-
making, and due to the high degree of risk and uncertainty connected
table 5 Overall cfa for the modified measurement model (n = 150)
Construct and indicators	(1)	(2)	(3)
Trust (exogenous variable)		0.85	0.62
I can let my researcher make important research decisions without my involvement (trusti).	0.88 (12.91)	0.78	0.22
I would be willing to trust my researcher to get the job done right without monitoring (trust2).	0.81 (11.31)	0.65	0.35
I can trust that the agency will plan the research with exper- tise (trust3).	0.66 (8.65)	0.44	0.56
We believe in the information that this agency provides us with (trust8).	0.71 (9.56)	0.51	0.49
Affective commitment (endogenous variable)
It is pleasant working with the agency, that's why we con-
tinue to work with them (acom1).
Our decision to remain a client of this company is based
on our attraction to the things the agency stands for as a
company (acom2).
We want to remain a client of this agency because we gen-
uinely enjoy our relationship with the agency (acom3).
Because we like working with the agency we want to remain
their client (acom4).
Calculative commitment (endogenous variable)
It is too difficult to switch to another agency because of the
lack of good alternatives; therefore we are staying with the
agency; otherwise we'd consider leaving (ccom4).
Normative commitment (endogenous variable)
Employees who work with this agency would feel guilty if we
dropped them as a supplier (ncom1).
We feel a sense of duty to remain a client to this agency
(ncom2).
Even if it were to our firm's advantage, we feel it would be
dishonorable if we were to leave the agency (ncom4).
notes Table columns are as follows: (1) completely standardized loading (t-value); (2)
construct and indicator reliability, (3) variance extracted and error variance.
to this kind of purchase, clients stressed trust as the key element of the
relationship with the marketing research provider. They also named the
absence of trust as one of the main reasons for discontinuing a rela-
tionship. Therefore, we can assume that clients continue to work only
with the providers they trust. Moorman et al. (1992) similarly concluded
0.85	0.59
0.76 (10.30) 0.57	0.43
0.72 (9.56) 0.51	0.49
0.85 (12.18) 0.72	0.28
0.76 (10.30) 0.57	0.43
1.00 0.00
1.00 1.00 0.00
0.77	0.54
0.72 (8.66) 0.52	0.48
0.90 (10.78) 0.80	0.19
0.55 (6.54) 0.30	0.70
that trust is one of the most important factors influencing the use of
marketing research because it decreases the perceived uncertainty and
vulnerability connected to the use of marketing information.
Results on commitment revealed that the clients of marketing research
agencies continue their relationship with their providers mostly for affec-
tive reasons (feeling good in the relationship), while calculative (seeing
no alternatives) and normative (feeling obligation to stay) reasons do not
play an important role. The research also shows that calculative and espe-
cially normative commitment levels are very low among the majority of
companies. These results are in line with the findings from the in-depth
interviews. The interviewed clients indicated that they continue relation-
ships due to affective reasons; calculative reasons are less present, while
they feel no normative/moral commitment to their research provider.
These results also coincide with results from other developed Western
contexts where the majority of researchers only studied affective and cal-
culative commitment and did not even include normative commitment
in their models. Meyer and Allen (1997) pointed out that normative com-
mitment could be stronger than affective commitment in collectivistic
cultures that stress strong social bonds and obligations and in cultures
with high uncertainty avoidance and where loyalty is an important value.
The majority of studies of the components of commitment were carried
out in developed Western cultures that do not have these characteristics,
which can explain why this construct does not appear in the majority of
commitment models.
The findings concerning the relationships between the components of
commitment are mostly in line with the results in other contexts. We
supported the hypothesis about positive correlation between affective
and normative commitment; however, in our case this correlation was
weak, while other studies (Bansal et al. 2004; Kelly 2004; Kumar et al.
1994; Meyer et al. 2002) found a moderate to strong correlation between
these two constructs. In line with the proposed hypothesis there was no
correlation between affective and calculative commitment, which is in
line with Kumar et al. (1994), but contrary to Kelly (2004). Lastly, in line
with Kelly (2004) and Kumar et al. (1994) we proposed a positive corre-
lation between normative and calculative commitment, while the results
show this correlation is not statistically significant. Since we measured
only motivation to continue the relationship due to lack of alternatives
(variables measuring calculative commitment based on switching costs
had to be discarded during exploratory factor analysis), our results per-
tain only to that part of calculative commitment and are therefore not
directly comparable to results of those past studies that included both.
The findings concerning the relationships between trust and affec-
tive commitment are in line with the results of studies performed in the
contexts of developed countries that discovered the positive influence of
trust on affective commitment (Geyskens et al. 1996; Wetzels et al. 1998;
de Ruyter et al. 2001; de Ruyter and Wetzels 1999; Wetzels et al. 2000;
de Ruyter and Semeijn 2002; Gounaris 2005) and on commitment that
was measured as a global construct implicitly tapping the affective di-
mension (Moorman et al. 1992; Morgan and Hunt 1994; Goodman and
Dion 2001; Perry et al. 2002; Friman et al. 2002; Lohtia et al. 2005; Ro-
driguez and Wilson 2002; Tellefsen and Thomas 2005; Walter and Rit-
ter 2003). The outcomes also confirm the proposed positive influence of
trust on normative commitment (de Ruyter and Semeijn 2002). On the
other hand, the results do not confirm the proposed negative influence
of trust on calculative commitment that was found by researchers in the
context of developed countries (Geyskens et al. 1996; Wetzels et al. 1998;
Wetzels et al. 2000; de Ruyter et al. 2001; de Ruyter and Wetzels 1999;
de Ruyter and Semeijn 2002; Gounaris 2005). In our research this influ-
ence was too weak to be statistically significant. The reason could again
be in the earlier explained measuring of calculative commitment. The
results of this study therefore add towards establishing empirical gener-
alisations about trust and commitment by indicating that the relation-
ship between trust and the components of commitment in professional
services in the examined post-transitional economy is similar to that in
the cultures of the developed Western economies. The only hypothesis
that was not supported is about the relationship between trust and cal-
culative commitment. Therefore, we cannot claim that a higher degree of
trust in a relationship leads to a lower degree of motivation to continue
relationship due to lack of alternatives.
Besides theoretical implications, this study also offers implications for
marketing research providers. Since clients place a very high level of
importance on the credibility, benevolence and honesty of the research
providers they work with, we could say these factors can literally make or
break a relationship. Marketing research firms should therefore continue
to provide quality and reliable services that clients can trust; they should
be sincere and fulfil promises. Providers should also convince clients of
their benevolence so that clients would not feel they have to monitor the
research process so closely. Regarding the components of commitment,
trust leads to a high level of affective commitment or, in other words, a
strong desire to maintain a relationship. Researchers (Kumar et al. 1994;
Gounaris 2005; Wetzels et al. 1998) found that the consequences of af-
fective commitment are superior to the consequences of calculative and
normative commitment. While affective commitment creates positive
intentions that help to maintain and strengthen relationships, calcula-
tive commitment has just the opposite effects on behavioural intentions.
Creating affective commitment is therefore the most important because
it has the strongest effect on the customers' intentions to continue the
relationship and consequently on the provider's revenues. Managers of
marketing research providers should keep this in mind when crafting
their firms' approach to marketing strategy.
This study shows only one part of the whole picture and many op-
portunities thus exist for future research. Since there are other factors
that influence the development of relationship commitment (e. g. satis-
faction, social ties, co-operation, communication etc.), future research
should relate those factors within the framework and test their relation-
ships with the components of commitment. Special attention should also
be paid to examining the antecedents of calculative and normative com-
mitment because trust, as one of the most important relationship factors
in professional services, apparently does not play a major role in their de-
velopment. In addition, scales for measuring these two constructs should
be further refined. Last but not least, this framework could be tested in
other contexts of professional services in the Slovenian market or in an-
other post-transitional or transitional economy to see if differences ex-
ist compared to developed economies that have not undergone major
changes in the past few years.
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Intercultural Competence in Work: A Case Study
in Eastern Finnish Enterprises
Pirkko Pitkänen
This paper presents the research results of a study that focused on inter-
cultural interaction issues in private sector workplaces in Eastern Fin-
land. The results show that the current challenges caused by the glob-
alisation pressures in the realm of economics behoves work communi-
ties to review their personnel training and management practices: the
work communities as a whole should be helped to deal with increasing
cultural diversity. Although the number of workers with foreign back-
grounds has increased in Eastern Finland, so far, there have been only
a few attempts to restructure the working practices in an effort to take
into account the demands of increasingly diverse working contexts. In
all participating companies the mainstream people were the norm. It
was common that Finnish language proficiency was seen as a necessary
but not yet sufficient qualification for work. In addition, knowledge of
the practices of Finnish working life, as well as training and working
experience acquired in Finland were desired.
Key Words: cultural diversity, intercultural competence, private sector
work, East Finland
jel Classification: f, a
Introduction
It is obvious that the large-scale international movement of labour is one
of the future challenges caused by the globalisation pressures in the realm
of economics. Peter Koehn (2006, 22) writes: 'Looking forward the fu-
ture, the most likely population scenario will involve more people, more
population movement, more displacement - both internally and inter-
nationally...' (see also Helton 2002,14). Labour migration, in particular,
is becoming increasingly global due to the economic restructuring which
is making hanging onto a job everywhere precarious (Portes, Guarnizo,
and Landolt 1999, 227). On the other hand, in many Western countries,
an ageing population means that there will be a shortage of labour. A
cross-border movement of labour provides many opportunities but it
also entails many challenges. In work communities, the emergence of na-
tional and cultural diversity may lead to divergent working practices and
Dr Pirkko Pitkänen is a Professor in the Department of Education,
University of Tampere, Finland.
provoke confusing or even conflicting interaction situations. This paper
seeks to provide empirically validated knowledge that is needed to en-
hance prerequisites for successful intercultural interaction in culturally
diverse workplaces.
The everyday experiences of intercultural work will be reported by
the managers and personnel of ten Eastern Finnish private sector en-
terprises. Eastern Finland represents a traditionally ethno-culturally ho-
mogeneous region currently characterized by increasing multinational
economic collaboration and international mobility of labour: today the
companies are finding themselves more and more involved in situa-
tions where people from diverse national and/or cultural backgrounds
and speaking different languages are working side by side. Demographic
pressures have an important part to play here. It is expected that by the
end of the current decade an insufficient work-force will be a real prob-
lem in Finland as the baby boomer generations born after World War ii
reach the age of retirement (Forsander 2002; Forsander et al. 2004). It is
anticipated that this generational shift will take place in Finland earlier
than in other European countries, and in eastern (and northern) parts of
Finland earlier than in the rest of the country.
Even now, many Eastern Finnish companies are increasingly seeking
qualified professionals from abroad in order to replace ageing employees.
According to a survey focusing on the experiences of intercultural work
among private sector managers (Pitkänen and Atjonen 2002; 2003),1 al-
most half of the Eastern Finnish managers estimate that there will be
a need for targeted foreign labour force recruitment by the end of the
present decade. The survey also revealed that today the Eastern Finnish
private enterprises are typically rather monocultural by nature. It was
quite uncommon for a company to employ foreign personnel. On the
other hand, quite a number of enterprises did have diverse and extensive
international co-operation.
At the same time as the recruitment of foreign labour is seen as a par-
tial solution to finding qualified workers, about 40 percent of the immi-
grants living in the eastern parts of Finland, especially refugees and so-
called ethnic return migrants from the former Soviet Union,2 are unem-
ployed (Pitkänen and Atjonen 2002; Pitkänen and Hacklin 2005). More-
over, it has been observed that if immigrants do find employment, they
are likely to be placed in the lower echelons of the labour market hierar-
chy. Advancing to a job that corresponds to one's education and work ex-
perience is especially difficult for first generation immigrants who suffer
from a lack of Finnish language proficiency and the cultural competen-
cies needed in Finnish working life. (Forsander and Alitolppa-Niitamo
2000; Forsander 2002; Pitkänen and Hacklin 2005.)
Despite the increase in the number of foreign residents in Finland,
very little is known about how to learn to work together with people
from other countries (and cultures), and how the employees of foreign
origin can be helped to adapt to their new work environments. The way
intercultural interaction and collaboration succeeds is of central impor-
tance in striving to alleviate the impending labour shortage by making
use of the human potential, both of the foreigners who are already in the
country and of those recruited from abroad. It has become apparent that
the increase in cultural diversity is giving way to work environments in
which the training and management practices of the past no longer func-
tion. This paper presents a study focusing on the recognition of cultural
diversity in working contexts, and on the current needs for personnel
training in enhancing intercultural competence in work. The key ques-
tion addressed was as follows: What kind of experiences and attitudes
are there among private sector managers, human resource management
(hrm) personnel, and employees of foreign or Finnish background to-
wards cultural diversity in the work community? I will start by introduc-
ing the context of the study and by discussing the different dimensions
of intercultural competence. Then I will introduce the research proce-
dure and the main research results. Finally, the discussion section will
summarise the paper.
The Context of the Study
In order to understand the research context, it is crucial to remember
that when other Western European countries, from the 1950s to the 1970s,
attracted labour migrants to their factories and later on into the service
sector, Finland was virtually untouched by immigration. However, since
the 1990s, the relative number of immigrants has increased in Finland
more rapidly than in any other Western European state. (Paananen 1999,
46; Lepola 2000,23-24.) While in the middle of the 1970s the total num-
ber of foreign citizens living in Finland was around 10,000, at the end
of 2006 the number was almost 122,000. Only eight percent of all the
foreign residents in Finland are living in the eastern provinces (North
and South Karelia, North and South Savo, and Kainuu), whereas around
half of them have settled in or near the Helsinki area. Accordingly, while
the percentage of foreign citizens in the whole population in Helsinki is
eight, in the eastern regions it is only one (in the whole country the per-
centage is almost three). (Pitkänen and Hacklin 2005; see the Population
Register Centre web site, http://www.vaestorekisterikeskus.fi.)
Not only has the number of immigrants changed but also the policy
regarding their reception. Until the late 1990s, the predominant ideol-
ogy underlying the Finnish immigration policy was assimilationist, with
the expectancy that members of ethnic minority groups should become
culturally absorbed and be indistinguishable from the mainstream of
Finnish social and cultural life. In recent years, the general principles
of the Finnish system for receiving immigrants have undergone a signifi-
cant change. In 1997, the Finnish government ratified the Programme on
Immigration and Refugee policy. According to the programme, plural-
ism is being viewed as the goal for integrating foreign newcomers. This
implies that while sharing the values and norms of the mainstream cul-
ture foreign residents should have an opportunity to maintain and de-
velop their own cultural characteristics. At the same time, they should
have equal opportunities to participate in the economic and social life of
the host society. (Matinheikki-Kokko and Pitkänen 2002, 48-73; see the
Finlex web site, http://www.finlex.fi.)
So far, immigration to Finland has mainly come through marriage,
humanitarian reasons, or the so-called ethnic return migration, whereas
labour migrants have made up a significantly smaller group than in most
other industrialized countries. However, an ageing population means
that there are demands for labour force which can partially be met by
work-related migration. This has created a need to revise Finnish im-
migration policy. In October 2006, the Finnish Government approved a
new Immigration Policy Programme. The purpose of the programme is
to actively promote work-related immigration, in particularly from out-
side the European Union and European economic area. The programme
also emphasises the utilisation of the existing labour force in conjunc-
tion with the development of work-related immigration policy. More-
over, politics of difference have been introduced in which people's rights
to their ethnicity, cultural heritage and language are part of everyone's
human rights. The aim is to promote the development of a pluralis-
tic, multicultural and non-discriminatory society (see the Ministry of
Labour web site, http://www.mol.fi).
Likewise in Eastern Finland, targeted foreign labour recruitment is ar-
riving on the public agenda (see the Regional Council of Pohjois-Savo
region web site, http://www.pohjois-savo.fi). All the eastern provinces,
North Karelia, South Karelia, North Savo, South Savo and Kainuu, are
located near the Russian border. Accordingly, the largest group of im-
migrants consists of people of Russian background; more than half of
the foreigners living on the area are Russian-speaking. Most of them
have come to Finland for family reasons, or they are Ingrians and thus
regarded as returnee migrants. Other newcomers are of Estonian and
Swedish origin (mostly returnees), or humanitarian migrants coming
mainly from Iraq, Bosnia-Herzegovina, or Afghanistan. (See the Register
Office web site, http://www.maistraatti.fi; Pitkänen and Hacklin 2005.)
Regarding the forthcoming demographic shift in Eastern Finland, the
age structure among the foreigners living in the area is very auspicious:
the share of working age population (15-64 years) is almost 80 percent.
Besides, their educational background is in many cases very good: many
of them have university degrees or intermediate grade qualifications.
Even so, almost half of them are unemployed. Immigrants of Russian
origin form the largest group of jobseekers: in 2004 more than half of all
job applicants were Russian-speaking immigrants. (Pitkänen and Hack-
lin 2005.)
According to Pitkänen and Atjonen (2002) the main stumbling blocks
in the employment of foreigners can be found at the attitudinal level. The
above-mentioned survey among Eastern Finnish managers showed that,
although the managers' experiences of foreign employees were mainly
positive, negative experiences and attitudes were also expressed, mainly
with reference to Russian-speaking employees. The most favoured groups
of foreigners for employment include migrants from Scandinavian or
Western European countries, Estonia or the us, while employees with
Russian or African backgrounds were the least welcome. (Pitkänen and
Atjonen 2002,37-43.)
Learning to Become Interculturally Competent
In studying the challenges caused by cultural diversity at work, we need
to be able to understand what processes come into play when people with
different cultural backgrounds interact with one another. It is obvious
that intercultural interaction as an everyday experience requires special
competence to manage anxiety caused by cultural differences in inter-
action with people who see the world from perspectives which may be
different or even in conflict with one's own personal values and beliefs.
Firstly, a necessary, though insufficient, ingredient of intercultural com-
petence is the acquisition of cultural3 knowledge. Knowledge is a form
of cultural capital, and its possession empowers. One of the greatest re-
sources and sources of empowerment is access to the kind of knowledge
that is culturally accurate and has instrumental value when put into prac-
tise.
Further, in a culturally diverse environment, there is a need for criti-
cal self-reflection. This entails familiarity with foreign cultures, but also
an awareness of one's own cultural starting points. Culture can be re-
garded as a mental set of windows through which all of life is viewed. It
varies from individual to individual within a cultural context, but shares
important characteristics with its members. In particular, culture is not
something we are born with, but rather it is learned. If culture is learned,
then it is also learnable. Much of what is learned about one's own cul-
ture is stored in mental categories that are recalled only when they are
challenged by something different. But how do the windows differ from
culture to culture? The following question arises: How can an outsider
learn to recognise what is essentially transparent to the individual mem-
ber of a culture? (Beamer and Varner 2001,3.)
Jack Mezirow (1991) states that a process of questioning basic cultural
assumptions and habitual expectations is possible by examining why and
how we constrain the way we see ourselves and other people. This self-
reflection can result in altered meaning perspectives. This kind of change
or revised interpretation of cultural ways is often the result of efforts
to understand different cultures with customs that contradict our own
presuppositions. When we have an experience which cannot be assimi-
lated into our meaning perspectives, either the experience is rejected or
the perspective changes to accommodate the new experience. When we
change significant meaning structures, i. e., our meaning perspectives,
we change the way we view, and act toward, the world. Mezirow believes
that this process may lead to a more inclusive world view. (Mezirow 1991,
168; see also Taylor 1994.)
Although necessary, the awareness of cultural multiplicity and diver-
sity is not yet sufficient for true intercultural competence, but these skills
have to be underscored by ethical consideration and cultural sensitivity.
To achieve all this, there is a need for intercultural dialogue in which the
reasonableness and validity of different life forms are being judged and
examined. (Bennett 1995,259-265.) Intercultural encounters are by their
nature phenomena which contain numerous variables and are difficult
to predict. These often include the ability for managing anxiety caused
by cultural differences in interaction with colleagues who see the world
from perspectives which may be different from or even in conflict with
one's own personal values and beliefs.
Research Procedure
The study presented here focused on ten Eastern Finnish private sector
enterprises with personnel from different ethnic backgrounds.4 The gen-
eral character was a qualitative case study approach to attain an under-
standing of the characteristics of intercultural encounters in work. The
group of respondents consisted of managers and hr managers (n = 13),5
as well as of employees of foreign origin (n = 14) and their Finnish col-
leagues (n = 11). The relations between employees and their supervisors
were a focus of examination, along with peer relations among employees.
The research data were gathered in 2003-2004 through semi-structured
interviews in two large, five middle size and three small companies.6 The
participating workplaces represented industrial and service branch en-
terprises (catering business, supermarkets). The foreigners working in
the companies were mainly of Russian origin. The list of other countries
of origin included mainly European (Poland, Romania, Ireland, Italy,
the Netherlands) and African (Ghana, Somalia) countries. The number
of foreign personnel in the companies taking part in the study varied
between 1 and 7.
The interviewing style was structured when answers were sought to
common questions covering the experiences, attitudinal engagement
and activities of the respondents. The respondents, however, were en-
couraged to express themselves freely while the general direction and
shape of the interviews was maintained. The key questions addressed
were as follows: What are the goals and prevailing practices of the com-
pany's strategy for managing cultural diversity? What are the experi-
enced and expected advantages and challenges related to the increase
in national/cultural diversity? Further, in order to find out how differ-
ent actors in the work environments can learn to become interculturally
competent, I aimed to discover what kind of culturally based concep-
tions and practices the participants of diverse intercultural encountering
situations adhere to. Have they experienced culturally conflicting situ-
ations? What are the origins of these conflicts? How have the conflict
situations been (or should have been) solved? The final aim was to find
out what kind of personnel training would be needed in order to attain
the intercultural competence relevant in culturally diverse private sector
workplaces.
Experiences of Intercultural Work
In this present study, language difficulties and communication issues in
general appeared to be the factors most clearly complicating the daily
interaction and collaboration in culturally diverse companies, especially
in small and middle size customer services. Some managerial respon-
dents were also afraid of intercultural misunderstandings, as customers
had complained of the poor Finnish language skills by employees of for-
eign origin. On the other hand, they appreciated the ability of foreign
personnel to use their mother tongues; e. g., the employees of Russian
background were used as interpreters and translators. Moreover, for the
service branch, questions like politeness, etiquette, hierarchy, and so on,
appeared to be the major challenges (cf. Hofstede, 1997), while in the
large industrial companies used to operating in wide international con-
texts the workers' familiarity with foreign countries was seen as an en-
tirely valuable asset. These companies had lots of experiences of foreign
personnel and were used to dealing with intercultural communication
issues in their day-to-day work. As the following quotation shows, eti-
quette or other formality issues did not cause any major problems:
What comes to mind is that often your first association on
these multicultural issues is the etiquette. Are you allowed to
bow now and nod and shake hands and what kind of flowers
and everything, so all that has like lost its meaning.
Male hr manager, large industrial enterprise
Still, among employees of foreign background, politeness and hierar-
chy were felt to be confusing in the relations between managers and their
subordinates. Knowing when it was appropriate to address the managers
formally was especially difficult for many newcomers; they were not used
to calling their superiors by their first names. A position where the su-
perior was a female person was embarrassing to those male employees
originally from countries with different gender roles than in Finland. In
some cases, male employees had felt it was difficult to work under female
managers.
Although in some cases the use of religious symbols had caused con-
fusion, most respondents estimated that different religious backgrounds
did not have any special effects on the everyday collaboration. Instead,
headaches often mentioned were the adherence to given schedules and
the conceptions of time in general (cf. Hampden-Turner and Trompe-
naars 2000, 295-343; Trompenaars 1995, 21-28). Further, the employees'
attitudes towards hygiene had caused trouble for managerial respon-
dents; in some cases, foreign employees were characterized as untidy. On
the other hand, those managers who had been living abroad might eval-
uate the excessive cleanliness among Finnish personnel very critically. A
manager (catering business) who had been working abroad for several
years was disturbed by the excessive cleanliness of employees of Finnish
origin: 'In Finnish restaurants we have some kind of cleaning mentality.
Like, I should clean this place! So I have said that Finnish people are too
much dish-oriented while they should be client-oriented.'
Almost all the managerial representatives of the participating compa-
nies highlighted the importance of adapting the proficiency of foreign
labour to fit into Finnish working life. Many of them seemed to have
suspicions of foreign qualifications and exams. As a consequence, in al-
most all companies taking part in the study the employees of foreign
origin were over-qualified for their present tasks. Some kind of mistrust
indicates the fact that, in almost all cases, the foreign workers had started
their work as trainees. These research results concur with earlier studies
conducted in Finland. According to the studies carried out by Paana-
nen (1999), Forsander and Alitolppa-Niitamo (2000), Forsander (2002),
and Pitkänen and Atjonen (2002), the market-value of work experience
and education acquired abroad is rather low in Finland. Instead, work-
ing experience attained in Finland is very valuable when trying to con-
vince an employer of the adequacy of a foreigner. Thus, as Forsander and
Alitolppa-Niitamo (2000) stress, training jobs and other 'entry jobs' are
very important first steps in the career of a foreigner: in order to obtain
employment that corresponds to his/her education and previous work
experience a foreigner needs to acquire working experience attained in
Finland.
However, there is a high risk that these 'entry jobs' will become per-
manent. Also in the present study, some employees of foreign origin
reported such experiences. Some of their comments were very critical;
especially employees originally from Western European countries were
very dissatisfied with their careers. These persons had come to Finland
for family reasons, and were not different from Finns in external appear-
ance. Nevertheless they had experienced discrimination or even racism
either in their workplaces or in Finnish society. A male employee from
the Netherlands characterised his experiences as 'racism you cannot see
but you can feel'. His frustration was exacerbated by the fact that the
company had hardly ever utilised his language skills, education or pre-
vious work experience. Another male respondent, originally from Italy,
complained that after working in the same company for twenty years
he advised and counselled his younger Finnish colleagues, but still got a
lower salary than those youngsters who just had graduated. He was bitter
when a Finn, who had been working in the company for a much shorter
time than he, was chosen as his new boss. Actually, it appeared that in
many cases a Finnish worker was seen as a model for a good employee,
and a foreign employee was supposed to be like a Finn (cf. Paananen
1999,127; Alasuutari and Ruuska 1999,199-214; Anttonen 1998). No won-
der that some newcomers tried to be more Finnish than their Finnish
colleagues. This was especially common among Ingrians, who often look
like Finns and can speak Finnish. Further, these respondents believed
that also other foreigners should assimilate into the Finnish way of life.
When the managerial respondents assessed foreign personnel they of-
ten accentuated 'proper' [oikea] personal characteristics and a 'proper'
attitude toward the work. When they used the word 'proper', they re-
ferred to an ethnically Finnish person: to something normal and natural,
to something that required no further explanations:
The attitude must be proper. Must be properly oriented at at-
titudinal level, meaning that you truly want to work.
Male manager, medium-sized department store
Edward Hall points out in his book Beyond Culture (1977) that the
closer something is to seeming true, the less aware we probably are of its
cultural origin. Our own culture seems normal to us; it is just the way
things are. Here seems to be hidden a major challenge for the participat-
ing companies: Finnishness is implicitly seen as a norm. The role of cul-
tural self-evidences is of crucial importance here. It is extremely difficult
for a person who has immigrated to Finland to identify such culturally
based self-evidences. It is also possible that the mainstream personnel do
not see these difficulties at all; they do not understand that people with
different cultural backgrounds may see issues in different ways. As long
as everything goes in a traditional way, the familiar daily routines do not
call for any change and, thus, for additional mental resources. (Lehtonen,
Löytty and Ruuska 2004,142.) The situation is different when cultural di-
versity increases in the work community. Not only newcomers but also
the mainstream people are involved in an acculturation process which
may be felt to be more or less stressful. A common reason for this stress
is that, due to the change, there is a need for both learning and discarding
learning: 'learning off' what one has learned during the initial encultur-
ation process (Pitkänen 2005,141-144).
In fact, one new member of the community with a different cul-
tural background already creates a need to review the traditional work-
ing practices. Some colleagues may consider foreign newcomers trouble-
some for this very reason: the newcomers disturb the easiness which their
cultural self-evidences entail. If these familiarities are shaken one can try
to bear up by clinging to the old and familiar (Lehtonen et al. 2004,142,
175-176). One way of asking questions is to notice that another culture
goes about things differently from the way we expect. Sometimes a new-
comer with a marginal point of view may help the mainstream people to
perceive and interpret a phenomenon in a way which helps to see their
blind spots (see Forsander et al. 2004, 47-48,71; Hall 1997).
In order to intervene in puzzling situations, there is a need to per-
ceive, and maybe anticipate, the circumstances that may cause stumbling
blocks for intercultural interaction. It seems that if the participants in
interaction situations come from very different cultures, there is a high
likelihood that their initial understanding of that event will differ. As a
consequence, the behaviours evoked by these situational representations
are likely to differ, so that the participants' responses to the same be-
haviour setting may disconfirm one another's expectations. Coordinat-
ing behaviour effectively becomes difficult, and attention must be shifted
towards negotiating shared meanings about the situation if the relation-
ship is to continue. (Smith and Bond 1993,176.) The first step in effective
intercultural learning is the understanding and acceptance of differences.
This does not mean we have to agree with another's cultural viewpoint,
or that we have to adopt the values of another culture. Rather, it means
that we need to examine our priorities and determine how we all can best
work together, being different. (Hall 1977; Beamer and Varner 2001, 5.)
Nonetheless, we should not ignore the persons' own responsibility for
their performance. We are both similar and different: we share several
capacities and needs, but different cultural backgrounds as well as indi-
vidual characteristics define and structure them differently. Thus, people
do not fail in their work because of mere cultural differences or succeed
because they share the culture or language of the dominant group. Indi-
vidual factors are also important. Some representatives of the participat-
ing companies pointed out that immigrants or ethnic minorities do not
comprise any homogeneous groups, rather when assessing people's per-
sonal characteristics one should take into consideration the similarities
and differences both between and within the groups (cf. Lehtonen and
Löytty 2003, 7-13). Besides, when talking about national backgrounds
some respondents mentioned that personal characteristics are not deter-
mined by national or ethnic borders. An hr manager of a large industrial
enterprise stated that foreign workers are individuals just like Finnish
workers. He said:
Sometimes they might be considered as personal characteris-
tics. Saying that he is from there, labelling him according to
his background, even if as a Finn he could be the same, who
knows. But if the person is a bit extraordinary, people say that
it's because he is from there.
Some hr managers assumed that the foreign employees have, and
should have capacities and characteristics they felt were missing among
Finnish staff, like a positive attitude and language skills. Asked what kind
of foreigner he should employ, the manager of a supermarket answered:
'Well, I would expect and demand the same qualities as from a Finn, an
employee of Finnish origin. And then, what else he can offer in addition
to that is of course, his language skills.' Ethnically and culturally diverse
personnel could also be seen as a valuable resource. The research showed
that some managers had experienced that an ethnically and culturally
diverse staff can, at its best, function as a primus motor for innovative
processes, as different practices and habits can open their eyes for new
kinds of opportunities. The hr manager of a large industrial company
was convinced that the recruitment of culturally diverse staff had resulted
in an increased number of innovations:
I would see that it's just a big advantage having people who
think in a different way. Automatically it gives like a positive
opportunity to learn something new, to get something devel-
oped or something like that to be done. Already the fact of
calling into question the job we're currently doing. Often these
kinds of things start new development projects.
Especially in those large companies which were operating internation-
ally, multinational personnel was seen as a resource to develop the pre-
requisites for international activities. The managerial respondents also
mentioned other benefits due to the increasing foreign staff. It was men-
tioned that language skills and cultural awareness had improved among
the whole personnel. Some said that service-mindedness had increased
with the growing multinational and multicultural personnel. Especially
in the service branch, the multicultural personnel were primarily as-
sessed from an image-centred perspective. The manager of a middle-size
supermarket which characterized itself as 'youthful, fresh and reformist'
was convinced that, in the eyes of their customers, foreign personnel
were 'such a great asset'. Instead, according to the representative of an-
other unit of the same company the attitude towards foreign staff was
clearly more doubtful. The following quotation shows that the working
context and potential focus groups were seen as crucial points:
If we're thinking about the fact that we are living in an area
with high unemployment rates, one can be thinking that I am
unemployed here and there's a that kind of person working,
a foreigner. Has he taken my hours, my bread [...] What are,
like, the clients' slants on foreigners and so their, like, bitter-
ness towards them, caused by the high unemployment rates of
the area.
It is obvious that the increase in cultural diversity is giving way to new
work environments in which the management practices of the past no
longer function. In their daily work, managers and hrm personnel need
to give additional support to foreign and ethnic minority personnel. This
may be necessary in order to equalise them with the rest and to inte-
grate them into their work organisations as well as into the host society.
Training is also a strategically important sphere in the work of providing
people with equal opportunities for their future. But first of all, success-
ful intercultural collaboration presupposes goodwill: a real motivation to
make the collaboration function. One Eastern Finnish hr manager sum-
marised this philosophy as follows: 'It can be said that a certain philoso-
phy of goodwill is closely linked to our working culture and [...] that we
are trying to create the atmosphere of trust and solidarity. Sometimes it
works, sometimes not.'
Discussion
On the basis of the study presented it can be said that in the most of
the participating Eastern Finnish companies the human resource pol-
icy was rather assimilative while, in Finland, in the last decade the gen-
eral tendency has been towards an integrative policy implying cultural
diversity and pluralism. In no participating enterprise has the increase
in national and/or cultural diversity led to real institutional changes. In
particular, the managers of the small companies estimated that working
in a conventional way is the only real option. Instead, the managerial re-
spondents of the large internationally oriented companies stressed that
an ability to recognize and manage a diverse workforce is a precondi-
tion for successful multinational operations. In those enterprises, it was
estimated that an attainment of intercultural competence is becoming
increasingly indispensable.
Changes in the world economy have made business not just more in-
ternational but also more interdependent. A key issue is how the train-
ing and management practices should be reshaped in response to the
increasing globalisation pressures. It has become apparent that global
companies may play a pioneering role in this process. The research re-
sults show that diversity management issues have remained rather alien
to the realities of Eastern Finnish working contexts (cf. Trux 2002). In
particular, the small and middle size companies are only awakening to
the fact that they could benefit from the foreign employees' competences
on intercultural issues, and that positive diversity management, which
enables each employee to give his or her best, is vital for achieving an
overall productive and competitive workforce (see Richardson 2005, 63-
75). This means that ignoring diversity is no longer an option.
In all working contexts the mainstream people were the norm. It is
evident that this kind of human resource strategy fails to provide the
representatives of minority cultures with equal opportunity and, thus,
to prevent their exclusion. In a culturally diverse environment it is not
enough that all people are to be treated the same, rather the achieve-
ment of equal opportunities for the representatives of ethnic minorities
presupposes culturally responsive treatment. Thus, the management of
diversity should become an issue of concern. A common belief among
the managerial respondents was that equal treatment can overcome the
inequalities that exist in the work organisation. This may be true in a
culturally homogeneous environment where people share broadly simi-
lar norms, motivations, social customs and patterns of behaviour. Equal
rights here mean more or less the same rights, and equal treatment in-
volves more or less identical treatment. The principle of equality is there-
fore relatively easy to define and apply, and discriminatory deviations
from it can be identified without much disagreement. This, however, is
not the case in a culturally diverse context. Equality consists in equal
treatment of those judged to be equal in relevant respects. In a culturally
diverse environment, people are likely to disagree on what respects are
relevant in a given context, what response is appropriate to them, and
what counts as their equal treatment. Thus, once we take cultural differ-
ences into account, equal treatment does not mean identical but differ-
ential treatment, raising questions as to how we can ensure that it is really
equal across cultures and does not serve as a mask for discrimination or
privilege. (Parekh 2000, 242, 261-62; Pitkänen 2003; 2006, 92-115.)
In a culturally diverse work environment, significant culturally based
differences may exist, not only in the relationships between managers
and employees, but also among majority and minority employees. There-
fore, the work communities as a whole should be helped to deal with
increasing cultural diversity. This perspective defines a work organ-
isation as a set of practices which define individuals as more or less
competent community members. In addition to linguistic competences,
intercultural competence includes other dimensions, such as cultural
awareness and cultural sensitivity. Although day-to-day interaction and
collaboration at work can provide a good context for learning for be-
coming interculturally competent, personnel training practices should
also be reshaped. In this present study it was common that, although
Finnish language proficiency and cultural knowledge were seen as nec-
essary prerequisites, they were not yet seen as sufficient qualifications
for work. Training and working experience attained in Finland were de-
sired, whereas qualifications acquired outside Finland were assessed very
critically.
Finally, attitudinal changes are needed: instead of ethnocentric short-
term policy there is a need for rethinking of the ethical basis of today's
world. A change from an ethnocentric worldview to global awareness
requires significant attitudinal changes (Hall 1977; Beamer and Varner
2001, 5). In order to avoid ethnocentrism, we should, in one way or an-
other, step outside our own cultural circle to see our systematic blind-
ness. If we succeed in doing this, it may help in relating our thinking
to the fact that our way of life does not represent the one and only way
of living or world of values and norms, but only one among many. The
ultimate aim is to make an emotional commitment to the fundamental
unity of all human beings and, at the same time, accept and appreciate
the differences that exist between people of different cultures. The fact
however is that intercultural interaction is not easy; we are all cultur-
ally based and culturally biased. Often there is a need for some kind of
intercultural transformation. According to Taylor (1994), a person who
is successful at working through and learning from daily intercultural
interaction experiences has the potential to become interculturally com-
petent (see Mezirow 1991,167). This may lead to an understanding that,
as human beings, we all are both natural and cultural beings, sharing a
common human identity, but in a culturally mediated manner. Compar-
isons between cultures can help one to see different cultural practices as
solutions and answers to the same kind of problems in human life. This
presupposes multicultural awareness and dialogue with others in order
to outline alternative perspectives, and to analyse the interpretation of
one's own standing in different perspectives. (Mezirov 1991,168; 1995, 6;
Taylor, 1994.)
Notes
1	A questionnaire was sent to the managers of 717 private enterprises
employing a minimum of 10 people.
2	Since the collapse of the Soviet Union, around 25,000 Ingrians have
immigrated to Finland. Most of them are descendants of Finnish peo-
ple who were incorporated into the Soviet Union at the end of the
Second World War when part of the eastern district of Finland was
annexed by the ussr.
3	By 'culture' I refer here to the way of life, including the assumptions
and values of which people are not always conscious.
4	This study formed part of a wider research project, Learning Inter-
cultural Competency in the Workplace, which was being carried out
in 2003-2006, and was funded by the Academy of Finland and the
Finnish Work Environment Fund (see www.uta.fi/learn).
5	Except for one foreign manager, all the managerial respondents were
of Finnish origin.
6	In this data collection, I was assisted by Ms Hannele Ojalehto and Ms
Sanna-Mari Pöyry. All interviews were recorded and transcribed.
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Managing Global Transitions
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volume 5 ■ number 4 • winter 2007 ' issn i581-63ii
307 Theoretical Aspects of the Economic Transition:
The Case of Romania
Cezar Scarlat
Eugen I. Scarlat
333 Management Mistakes as Causes of Corporate Crises:
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Drago Dubrovski
355 The Exchange Rate Regime and International Trade
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371 Trust and Commitment in Professional Service Marketing
Relationships in Business-to-Business Markets
Barbara Čater
391 Intercultural Competence in Work: A Case Study
in Eastern Finnish Enterprises
Pirkko Pitkänen
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